19-22 February 2002, London

19 FEBRUARY 2002

Improvements Project [Project Summary]

Amendments to IAS 19 - The Asset Ceiling

At the January meeting, the Board agreed to issue an exposure draft of a limited amendment to IAS 19. The purpose of the amendment is to prevent the interaction of the deferred recognition option and the asset ceiling giving rise to reported gains on the occurrence of actuarial losses and past service cost, and reported losses on the occurrence of actuarial gains.

The Board considered two versions of a draft exposure draft, a long version with an illustrative appendix including four examples and a short version with one simple example and no illustrative appendix. It was agreed that the longer version should be issued as an exposure draft.

Improvements to IAS 27 and IAS 28

Measurement in an investor's separate financial statements - Investments in subsidiaries, associates and joint ventures included in consolidated financial statements (IAS 27/28/31)

It was agreed that where separate financial statements are prepared by the parent, there should be a disclosure that makes reference, in the separate financial statements, to the existence of the consolidated financial statements.

It was agreed that, in the investor's separate financial statements, investments in subsidiaries, associates and joint ventures should be either measured at cost or accounted for as a financial asset under IAS 39, Financial Instruments: recognition and measurement. It was agreed that it was necessary to incorporate words to make it clear that IAS 39 can be used even though investments in subsidiaries, associates and joint ventures are otherwise excluded from the scope of IAS 39. The alternative to use the equity method would, therefore, be removed.

Investments in subsidiaries excluded from consolidated financial statements (IAS 27)

Investments in subsidiaries excluded from consolidation and accounted for under IAS 39 in the consolidated financial statements should also be accounted for under IAS 39 in the separate financial statements. The Board agreed that there was no reason for a change in treatment between the individual and consolidated statements.

Investments in associates by an investor that does and does not issue consolidated financial statements (IAS 28)

It was agreed that all references to consolidated financial statements would be removed from IAS 28, to make it clear that when accounting for associates the equity method should be used, except for in the individual financial statements of the investor where the proposed amendments to IAS 27 will apply (that is, cost method or IAS 39).

Measurement of interests in jointly controlled entities (IAS 31)

All references to consolidated financial statements would be removed from IAS 31, to make it clear that paragraphs 25-37 apply to the financial statements of a venturer whether those statements are consolidated or company-only.

Exemption from consolidated financial statements - wholly owned subsidiaries

IAS 27.8 permits wholly owned (and virtually wholly-owned) subsidiaries to be excluded from the requirements of preparing consolidated financial statements. The Board agreed to modify the exemption in IAS 27.8 along the following lines:

(a) A wholly-owned subsidiary is exempted from presenting consolidated financial statements if and only if:

i. its equity and debt securities are not publicly traded;
ii. it is not in the process of issuing equity or debt securities in public securities markets;
iii. the immediate parent or ultimate parent publishes consolidated financial statements that comply with International Financial Reporting Standards; and
iv. in the case of one that is not wholly owned, the parent obtains the approval of the owners of the minority interest; and

(b) If the exemption is applied, an entity should disclose:

i. the reason for not publishing consolidated financial statements; and
ii. the name of the parent that publishes consolidated financial statements that comply with International Financial Reporting Standards.

It should be noted that reference to a 'virtually wholly-owned subsidiary' has been removed and not-wholly-owned subsidiaries are able to take advantage of the exemption if they have the permission of the minority interest.

Venture Capital Investments

The Board agreed that there should be a scope exclusion in IAS 28 and IAS 31 for investments held by venture capital organisations, mutual funds, unit trusts and similar entities that are measured at fair value in accordance with IAS 39.

Exceptions to Consolidation (IAS 27)

Temporary investment

IAS 27.13(a) excludes a subsidiary from consolidation when control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future. The Board agreed that this exception should be retained, but that there was a need to clarify that the investment should be kept at the fair value on acquisition (subject to any impairment). Also, if there is no likelihood of sale within 12 months, then the subsidiary should be consolidated.

Restrictions on transfer of funds

IAS 27.13(b) excludes a subsidiary from consolidation 'when it operates under severe long-term restrictions which significantly impair its ability to transfer funds to the parent'. A similar exception is included in IAS 28.8(b) and IAS 31.35(b). It was agreed that the exemption should be removed and that there should be a form of words that makes it clear that this is not necessarily a reason for not consolidating. In addition, it was agreed that disclosure of any restrictions was necessary, but that this was probably already caught by IAS 1.

Revision to IAS 21, The Effects of Changes in Foreign Exchange Rates

IAS 21 would be amended to take account of the situation recently experienced in Argentina, where a currency is suspended and this straddles a year end. At present the standard is silent on this issue. The revision states that where there is non-exchangeability of a currency at the year-end, the rate that should be used is the exchange rate at the date when exchangeability is first re-established.

20 FEBRUARY 2002

Improvements Project - Possible Amendments to IAS 21

The Board discussed concerns that have been raised about accounting for net investments in foreign subsidiaries. The Board decided not to propose a specific change to IAS 21 in the Improvements Exposure Draft but, rather, to include a question on this issue in the Exposure Draft.

Discussion of Recommendations of the Standards Advisory Council

SAC has met 18-19 February (click for Meeeting Notes). The Board discussed the following issues that arose in that meeting:

• IAS 16 appears to include concepts for cost capitalisation and measurement of provisions that are inconsistent with the requirements of IAS 37. The Board agreed to clarify that the principles IAS 37 should prevail.
• IAS 8 permits departure from several preferred treatments on grounds of 'impracticability', but impracticability has not been defined. The Board concluded it would be preferable to restrict such departures to circumstances in which compliance with the preferred treatment would cause 'undue cost'.
• Citing the Enron situation, members of SAC had discussed whether IAS 24 on related parties is robust enough with regard to disclosing relationships with special purpose entities (SPEs). The Board felt that SPEs are not related parties, and thus the issue would be better addressed in IAS 1. The Board considered whether to amend IAS 1 to include guidance on disclosing significant accounting policies and judgements, rather than just measurement uncertainties. Disclosure of the reasons for not consolidating an SPE would be required.
• IAS 24 currently does not require management compensation to be disclosed, and SAC members had suggested that this might be an area for amendment. The Board discussed the overlap of such a disclosure with existing legal disclosure requirements in individual countries. The Board decided to invite comment on whether IAS 24 should be amended to require separate disclosure in this area.
• As part of the Improvements Project, the Board had tentatively concluded to delete IAS 24.4(b), which says that disclosure of related party transactions is not required in parent company financial statements that are made available concurrently with consolidated financials tatements. Based on SAC discussion, the Board decided not to delete IAS 24.4(b), thereby continuing the exemption.

Reporting Financial Performance [Project Summary]

The Board tentatively approved a new structural framework whereby one overriding principle for reporting performance is supported by five operational principles and a three 'practical limitation' principles. The limitation principles will initially constrain the format of the performance statement and are subject to further review.

The basic principle is that the primary basis for differentiating components of a performance statement should be enhancement of an investor's ability to predict the rate of change in financial statement items.

The basic principle should be supported by secondary principles that are designed to offer conceptual guidance in implementing the basic principle, including measurement basis, gross presentation vs. offsetting, distinguishing operating performance from financing and investing activities, segment reporting, segregating unusual or unexpected items, and differenting realised items from value changes. The Board concluded that the measurement principle should refer to 'current value' rather than 'present value' as initially suggested by the staff, to cover all types of current valuations (market values, fair values, present values, etc.). Under another principle, the performance statement should try to distinguish among (a) those items that were expected to occur, (b) those that were unexpected and relate to the current period, and (c) those that were unexpected and relate other periods.

The Board was asked to consider reporting of pension costs in the context of the aforementioned principles. The IASB expressed a preference for an unstructured approach (that is, no subheadings) of the information to be presented but splitting the various components into the items considered in principle 3 (expected, unexpected income of the year and unexpected income related to other years). The Board was subsequently asked to consider broadly what approach for presentation of pension related assets and liabilities it would prefer, and indication was given that the approach under the IASB's Concept Paper under preparation would be preferred (as opposed to the approaches proposed under the DSOP prepared by the former Performance Reporting Steering Committee or under ASB FRED 22 (revised)). However, this IASB Concept Paper approach will need considerable tailoring. The intent of the project team was to ascertain from the Board in very broad terms which routes to proceed down rather than approve a specific format.

First-Time Application of IAS [Project Summary]

The Board confirmed its November 2001 tentative decisions and clarified the following:

• An entity shall not recognise in the opening balance sheet internally generated intangible assets that exist at the date of transition to IFRS (that is, the beginning of the earliest period presented in the first set of IFRS financial statements) if it does not have sufficient information and documentation at the date of transition to IFRS to demonstrate that the recognition requirements of IAS 38, Intangible Assets, were met at a previous point in time. However, if an enterprise can demonstrate that it had, in the past, the systems and the documentation in place to assess whether an internally generated intangible asset arising from development costs met the IAS 38 recognition requirements, it will recognise that internally generated intangible asset in its opening balance sheet measured at the amount of the accumulated costs incurred since the IAS 38 recognition criteria were met (less any subsequent accumulated amortisation and impairment loss).
• At the November 2001 meeting, the IASB tentatively agreed that if an entity cannot restate the measurement of an asset or a liability in the opening balance sheet under IFRS without undue cost and effort, it shall measure this asset or liability at its fair value at the date of transition to IFRS. This amount would become the deemed cost for the asset or the liability for subsequent measurement purposes. At the February 2002 meeting, the IASB tentatively agreed to restrict this requirement to items of property, plant, and equipment and investment properties accounted for under the cost model (under the alternative in IAS 40, Investment Property). The reason is that, given the reliefs already granted (such as for business combinations and the new relief indicated below), the IASB could not identify other items in the opening balance sheet, or circumstances, where it could reasonably be argued that remeasurement under IFRS cannot be done without undue cost or effort.
• The IASB tentatively agreed to grant relief from the requirement to restate the initial cost of an asset under IFRS in the opening balance sheet, where determination of the cost under local GAAP resulted from a one-off remeasurement to fair value in the context of, for example, a past privatisation or IPO that established a deemed cost at the time. However, the IASB rejected providing further relief where ad hoc revaluations or ad hoc adjustments for inflation were made.
• Where decommissioning and site restoration costs are recognised in the opening balance sheet under IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and these amounts form part of the cost of a related asset, the amount to be added to the cost of the asset at the date of transition to IFRS shall be equal to the amount of the provision that is recognised. The adjusted carrying amount of the asset will be the basis for subsequent depreciation and impairment tests;
• If an entity adopts a policy of capitalising borrowing costs as part of the cost of qualifying assets in its first IFRS financial statements, the entity shall ensure that all borrowing costs capitalised are determined under IAS 23, Borrowing Costs, retrospectively.
• Consistent with the tentative decisions under the project on Business Combinations, an entity shall not recognise any negative goodwill as a separate item in its opening balance sheet. Any negative goodwill separately recognised under local GAAP shall be eliminated against retained earnings.
• To determine IFRS estimates for any comparative period, an entity shall assess whether the local GAAP estimates were determined in a way consistent with those that would have been required under IFRS. Adjustments to previous local GAAP estimates would be required only if the methodology to determine those estimates would differ between local GAAP and IFRS or if local GAAP did not require those IFRS estimates. In the latter case, the estimates to be recognised shall reflect information available when an entity prepares its first IFRS financial statements unless a change in the estimate can be related to some identifiable adjusting events that occurred during any previous comparative period. Adjustments to local GAAP estimates in comparative periods to bring them into conformity with IFRS should be accounted for against retained earnings in the opening balance sheet.
• An entity shall disclose a reconciliation (and explanation of reconciling items) of net profit or loss of any comparative period determined under local GAAP and IFRS, as well as a reconciliation (and explanation of reconciling items) of equity at the beginning of the latest financial year presented under IFRS;
• The effective date considered for the Standard is 1 January 2003. If the final Standard is approved before that date, earlier adoption would be permitted.

21 FEBRUARY 2002

Amendments to IAS 32 and IAS 39 [Project Summary]

Derecognition

The derecognition provisions of IAS 39 will clarified by establishing as the guiding principle a 'continuing involvement' approach that disallows derecognition to the extent to which the transferor has continuing involvement in an asset or a portion of an asset it has transferred.

A transferor has a continuing involvement when:

• It could, or could be required to, reacquire control of the transferred asset (for example, if the financial asset can be called back by the transferor, the transfer does not qualify for derecognition to the extent of the asset that is subject to the call option); or
• Compensation based on the performance of the transferred asset will be paid (for example, if the transferor provides a guarantee, derecognition is precluded up to the amount of the guarantee).

• The notion that the transferor must not retain substantially all of the risk and returns of certain assets in order for any portion of those assets to qualify for derecognition; and
• The transferee 'right to sell or repledge' condition for derecognition.

Guidance will be provided dealing with pass-through arrangements. When the transferor continues to collect cash flows from the transferred asset, additional conditions must be met for a transfer to qualify for derecognition, including:

• The transferor has no obligation to pay cash flows to the transferee unless it collects equivalent cash flows from the transferred asset;
• The transferor cannot use the transferred asset for its benefit; and
• The transferor is obligated to remit on a timely basis any cash flows it collects on behalf of the transferee.

Valuation Techniques

The Board discussed valuation techniques, which is a major issue following the collapse of Enron. The Board agreed that more guidance is needed on fair value but was unsure of what else to include as the objective was felt to be very clear. Additional disclosure regarding the valuation technique was decided to be the best solution.

Impairment of Investments and Equity Carried at Fair Value

All impairments are permanent by definition. Impaired investments and equity instruments should be written down to the impaired amount with the write down going through the income statement. No reversal of the impairment is allowed, as it is permanent. This treatment is in line with the current US treatment. All temporary changes must go through the equity statement. It was also agreed that debt and equity must be treated in the same way.

Hedging of Firm Commitments

The US treatment was considered but the board concluded to make no change to the current IAS 39 treatment.

Transition

The old paragraph 39.172(h) will be replaced. It was agreed that if the financial instrument qualified for derecognition under the old rules but did not qualify for derecognition under the new rules, the financial instrument must be re-recognised on the balance sheet.

Grandfathering

A question will be included in the exposure draft as to whether there should be any grandfathering.

SIC 5

SIC 5, Classification of Financial Instruments - Contingent Settlement Provisions, will be incorporated into IAS 32.

Share-Based Payment [Project Summary]

A total of 281 replies were received in response to the re-issued G4+1 Discussion Paper. It was noted that 116 identical replies had been received from companies in the US, which broadly did not support the proposals. Responses were received from users in the UK, US, Canada, including fund managers, pension fund investors, and the Comptroller of the State of New York.

Replies from users of accounts said that they support an accounting standard on share based payments and that they would welcome more transparency in accounts. Preparers who responded were on the whole opposed to the recognition of share based payments and generally critical of the discussion paper. They preferred the US GAAP approach (disclosure of the value at grant date with expense recognition only if the exercise price is below market price at grant date).

Most preparers of accounts disagreed with the proposals on practical grounds, specifying the difficult of measurement. The actual basis of measurement put forward was agreed with, but some respondents asked why the IASB could not simply adopt US GAAP. It was noted that US GAAP theory does require measurement, but in practice the measurement always equals zero in order to get around this issue. Most respondents did not mention non-employee options.

The majority of respondents supported grant date as the correct measurement date. (The G4+1 paper had proposed vesting date.) This is because they considered that the contract was entered into at that date. Service date and vesting date were not well supported. Vesting date was not supported either, as it was deemed to cause volatility in the results.

An advisory group with 18 members has been formed to serve in a consulting role to the project. Members have been drawn from around the world and came from a very broad base including users, preparers, academics, auditors, regulators, valuation specialists, and company directors.

The Board also considered a conceptual issue raised by some of the respondents to the paper -- whether recognition of an expense arising from some share-based payment transactions is consistent with the definition of an expense in the IAS Framework. It was agreed to consider this further and to write a Basis for Conclusions to assist in resolving this issue. It was concluded that it might be necessary to modify the Framework to resolve this issue.

Improvements Project [Project Summary]

IAS 1, Presentation of Financial Statements

The true and fair view was considered. There is a requirement to comply with all IAS; however, this may be an issue in some countries due to their legal framework.

The Board unanimously agreed to amend IAS 1 to retain a true and fair override provision and to limit its use to two cases:

• Compliance with certain provisions of an IAS is prohibited by law in a particular country, so a true and fair override is needed to permit departure from those provisions, with disclosure; and
• Compliance with certain provisions of an IAS would result in financial statements that do not give a true and fair view, so a true and fair override is needed to permit departure from those provisions, with disclosure, to present the information in a more meaningful way.

Additional disclosures will also be added to IAS 1 for key assumptions and any management judgements made with regards to measurement issues.

Business Combinations - Phase I [Project Summary]

A paper setting out all Board proposals for a revised standard on business combinations (replacing IAS 22), and consequential amendments to other IAS, will be presented at the March meeting. It is approximately 100 pages long, and this will be the Board's last opportunity to discuss any issues and make final changes before the exposure draft of the new IFRS is issued. The Board will be provided with a decision summary to review before the March meeting. They were asked to raise any issues they would like to discuss before the next meeting.

Entities under Common Control

The Board has agreed that business combinations involving entities under common control should be excluded from the scope of the revised standard. Accounting for such transactions will be addressed in phase II of the business combinations project.

The Board agreed on the proposed definition of business combinations involving entities under common control and the guidance that was under development by the SIC, which will be incorporated in the revised standard, has been amended to reflect the revised definition.

Minority Interests

The Board agreed that IAS 27 should be amended as part of the improvements project to require minority interests to be presented in the consolidated balance sheet within equity, separately from the parent shareholders' equity. It was also clarified that this amendment does not prejudice issues regarding minority interest transactions; nor should it lead to entities changing their current practices for recognising and measuring minority interests.

Acquisitions of some or all of the minority interests in a subsidiary by the parent, by the subsidiary itself, or by another entity within the group will not be included in the scope of the revised business combinations standard. The accounting for such transactions will be addressed as part of the joint IASB/FASB project on issues related to application of the purchase method (Phase II of IASB's business combinations project).

Disclosure - IAS 38

• Paragraph 107(a) to be amended to allow intangibles to have an indefinite life. No comparative information will be required.
• Paragraph 110 - minor wording changes to be made.
• Paragraph 111(a) and (e) to be amended similarly to 107(a).
• GAAP comparison to be included within the standard.

Disclosure - IAS 36

• One major change to be made is to add some FAS disclosure regarding shuffling of assets across segments and the change of allocation across CGU's for impairment test purposes.
• No changes to the disclosure paragraphs up to and including 116.
• Paragraphs 117-119 will have minor changes, for instance, materiality reference to be removed as this is covered in IAS 1, 'main' to be removed, as it added no value.

Disclosure - IAS 22

• Additional disclosures to be included, three coming from FRS 6 and two from the relevant FAS.
• SIC 28 and SIC 22 to be incorporated, in part, into IAS 22.
• Negative goodwill to be dealt with. It is to be assumed that no negative goodwill will exist on the balance sheet when the revised standard is adopted. The removal of negative goodwill will be dealt with in the transitional provisions.
• An extra paragraph is to be included regarding small business combinations which are material as a whole. Extra disclosure will be required.
• The profit or loss for the year must be disclosed for a new combined entity as if the business combination had occurred at the start of the year, as an aggregate amount.
• With regards to the measurement issue that arises from the incorporation of SIC 28, disclosure is needed of the price used if it is different to market price, and quantify this difference.
• No comparative information will be required in relation to the amortisation of goodwill, to be consistent with the changes made to IAS 38.
• IAS 10 to be amended to refer to the revised IAS 22 disclosure relating to post-balance sheet events.
• The UK FRS 6 fair value table to be included.

22 FEBRUARY 2002

Insurance Contracts [Project Summary]

Chapter 6 - Discount Rates

Principle 6.1: The starting point for determining the discount rate for insurance liabilities and insurance assets should be the pre-tax market yield at the balance sheet date on risk-free assets. That starting point should be adjusted to reflect risks not reflected in the cash flows from the insurance contracts. The currency and timing of the cash flows from the risk-free assets should be consistent with the currency and timing of the cash flows from the insurance contracts. Risk-free assets are those assets with readily observable market prices whose cash flows are least variable for a given maturity and currency.

The Board agreed with this principle. They felt that there should be no market override allowances (e.g. as in paragraph 16, when there is reliable and well-documented evidence that current market experience and trends will not continue), but that allowances should be made when there is no market.

It was decided that no guidance should be given on extrapolating yield curves when there are no observable market interest rates.

Principle 6.2: Estimated cash flows in foreign currency should be discounted using the appropriate discount rate for the foreign currency. The resulting present value should be translated into the measurement currency using the spot rate at the reporting date.

The Board agreed with this principle.

Chapter 8 - Reinsurance

Principle 8.1: A reinsurance contract should be defined as an insurance contract issued by one insurer (the reinsurer) to indemnify another insurer (the cedant) against losses on an insurance contract issued by the cedant.

The Board agreed with this principle.

Principle 8.2: Reinsurers and cedants should apply all the recognition, derecognition and measurement requirements in principles 2.1-7.6 to all reinsurance contracts.

The Board agreed with this principle. Whilst it was acknowledged that sometimes reinsurers have less information than insurers, it was felt that enough information was available to price the contract, therefore insufficient information should not preclude treating reinsurance contracts in the same way as insurance contracts.

Principle 8.3: If a reinsurance transaction doesn't qualify for derecognition of the related direct insurance liability under principle 2.3, a cedant should present:

• an insurance asset arising under reinsurance contracts as an asset, not as a deduction from the related direct insurance liability; and
• reinsurance premiums as an expense and the reinsurer's share of claim expense as income.

The Board agreed with this principle.

Chapter 9 - Measurement of Direct Insurance Contracts by Policyholders

Principle 9.1: A policyholder should apply principles 3.1 - 7.6 in measuring its contractual rights and obligations under a direct insurance contract.

The Board rejected this principle. Paragraph 9.6 of the DSOP offered acceptable approximations to measure contractual rights and obligations under direct insurance contracts that are not material to the policy holders financial statements. The Board felt that this would be the case in the majority of situations. Therefore it was decided that these approximations should always be used, rather than introducing arbitrary dividing lines. It was decided that more work and research needed to be done in this area, especially with regard to any investment components of the contracts.

Chapter 10 - Other Assets and Liabilities

Principle 10.1: An entity whose primary business is issuing insurance contracts should measure its:

• investment property using the fair value model in IAS 40; and
• owner-occupied property using the allowed alternative treatment in IAS 16 .

This principle was rejected. It was felt inappropriate to single out insurance entities and remove their choices of accounting treatment. (Better to remove the choices from the standards.) This was especially true in light of the DSOP being drafted for insurance contracts rather than insurance entities.

Principle 10.2: An entity whose primary business is issuing insurance contracts should use discounting in measuring its deferred tax assets and deferred tax liabilities.

This was not discussed.

Chapter 11 - Reporting Entity and Consolidation

Principle 11.1: The insurer, comprising both policyholder and shareholder interests, is a single reporting entity which should prepare a single set of financial statements. In consequence:

• its financial statements should include the assets, liabilities, income and expenses of any separate statutory funds associated with its insurance contracts; and
• the effect of transactions between separate policyholder funds of an insurer should not be recognised in the financial statements as assets, liabilities, income or expenses. Income and expenses from transactions between policyholder funds and shareholder funds should be eliminated. However, where such transactions affect the relative interests of policyholders and shareholders in the assets held in the respective funds, their effect should not be eliminated in determining the balance sheet effect.

Principle 11.2: An insurer should not recognise goodwill when it acquires a block of insurance contracts in a transaction that is not a business combination as defined in IAS 22, Business Combinations. The insurer should recognise any difference between the entity-specific or fair value of the block of contracts at the transaction date and the amount paid as income or expense in the income statement.

This principle was rejected. It was decided that an intangible should be recognised (whether positive or negative), although it was agreed that the intangible is not goodwill as there has been no business combination.

Principle 11.3: The Standard should not prescribe whether a horizontal group that includes an insurer should prepare combined financial statements covering all the entities under unified management.

The Board agreed with this principle.

Chapter 12 - Interim Financial Reports

Principle 12.1: The Standard should not contain guidance on the application of IAS 34 to insurance contracts.

The Board agreed with this principle.

This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.