NOTES FROM THE IASB MEETING WITH THE STANDARDS ADVISORY COUNCIL
18-19 FEBRUARY 2002
18 FEBRUARY 2002
Reporting of Banking Activities
The board is planning to issue a revision to IAS 30, the IAS statement on Banks. There has been pressure from Bank regulators and Basle Committee to amend the standard. The IASB feel that the definition contained in the current standard is too narrow.
The three objectives of this project are to: -
- Remove redundancies between the current standards and the proposed standard
- Bring the requirements of the standard up to date with all current regulatory issues (Basle Committee)
- Enhancing risk exposure information (capital adequacy, other risk disclosure)
The activities that an entity carries out will define whether the enterprise is included in the scope of the standard. There was a suggestion that model disclosure should be looked at. It was noted that model disclosure might be included in the standard, but that the IASB did not want to have a fixed format. Because of the expanded scope of the standard, the current advisory committee will be expanded. The expanded advisory committee will include members from the insurance project committee.
Insurance Contracts
The Board is currently drafting a statement of principles. The steering committee is investigating links between the accounting for insurance contracts and the Joint Working Group paper on financial instruments. The statement of principles will cover the definition of insurance contracts, recognition and measurement of insurance contracts, an asset and liability approach (rather than a deferral and matching approach), and fair value (this will be consistent with IAS 39). An issue yet to be resolved is measurement of catastrophe provisions. It has been agreed that all input into insurance model calculations should be current values.
Reporting of Financial Performance
This project is considering potential changes to the income statement, statement of changes in equity, and the cash flow statement. The project is being done in partnership with the UK Accounting Standards Board. Some of the core issues include the distinction between 'return on total capital employed' and 'return on equity', corrections of errors, reporting of onc-off events, and gains or losses that do not arise in a specific period. The discussion emphasised the importance of segment reporting. Other key issues include the concept of realisation, recognition, the distinction between core and non-core activities, and the distinction between trading and non-trading activities. IASB believes that convergence on this matter is important, and to this end IASB is working with the US FASB. The financial analyst members of the SAC stressed that this standard should be expedited. Analysts need to know the different components of performance.
Share-Based Payment
Approximately 280 comment letters were received on this discussion paper. 200 letters were from the United States and 116 were identical. The overall position is that the preparers of the financial statements were not in favour, but the users were. 19 users of financial statements responded to the exposure draft. Most supported measuring share-based payments on the grant date, rather than (as proposeD) on the vesting date. The comment letters will soon be made available. The IASB is looking for possible convergence in this area.
Timetable
Work to Be Completed by the End of 2002
- First time application (working with the European Commission)
- Improvements projects (14 standards - with the aim to eliminate alternatives)
- Revisions to IAS 39: Financial Instruments : Recognition and Measurement (increase convergence)
- Revisions to IAS 30: Reporting by Banks and Similar Financial Institutions
- Business Combinations Phase I (Exposure Draft by the end of June)
- Share Based Payments (exposure draft in the fourth quarter)
- Reporting Financial Performance (release date is uncertain)
- Revision to IAS 19 (accounting for pension fund surpluses). This is seen as a necessary 'quick fix' to the standard.
Work Plan for 2003
- Part II of Business Combinations: This will be done in partnership with the FASB. It will deal with the 'nuts and bolts' part of the standard.
- Small and medium sized enterprises (SME)
- Convergence of accounting standards in the following areas: pensions, income taxes, and impairment
- Definition of assets and liabilities in the conceptual framework.
- Consolidation policy - when to consolidate: This will involve reconsideration of SIC 12 on Special Purpose Entities.
- Leasing: Does an asset remain off balance sheet?
- Emerging markets: this project is different from the project on SME.
Amendments to IAS 32 and IAS 39
IASB asked SAC for feedback on the following issues.
Derecognition
The derecognition provisions of IAS 39 are complex. The IASB's current proposal is that if a transferor has any continuing involvement, it will not derecognise all or a portion of a financial instrument. This will include guarantees. Guarantees often will result in 'failed sale' treatment. Also, if there is a total return swap in the agreement, this too will result in a 'failed sale' for accounting purposes. Significant disclosure is envisaged around transfer of assets to bankruptcy-remote vehicles.
Measurement
The current proposal before the IASB is to allow an enterprise to measure any financial instruments (assets or liabilities) at fair value. Designatioin would be at acquisition or issuance, and the asset or liability will have to be carried at fair value throughout its life. An enterprise will be required to explain its reasoning for choosing fair value measurement. The Board is also studying whether impairment losses may be reversed. Members of the SAC are concerned about the volatility in earnings caused by selectively stating financial instruments at fair value.
Impairment Losses
The IASB has agreed that historical data should be used as the basis to determine the amount of impairment losses. This historical data will however be required to be adjusted for changes in circumstances, but not for forecasted future changes in circumstances. Impairment recognition will only apply to those assets that are not stated at fair value.
Presentation
It was noted that the FASB is considering requiring companies to split debt and equity components of compound financial instruments.
Improvements
The improvement project is seeking to eliminate alternatives and promote convergence. Fourteen standards are currently affected by the improvements project. Initially the project sought to address the option to capitalise or expense borrowing cost under IAS 23, but the Board has decided to include this matter in a project on the initial recognition of assets.
The Board plans to release an omnibus exposure draft in early April 2002, with a 90-day comment period. The amended standard will be published before December 2002 and will have an effective date for all financial periods commencing on or after 1 January 2003.
The following issues were specifically discussed by the SAC:
Voluntary changes in accounting policies (IAS 8)
There was general agreement within SAC that accounting policies should be consistent across all reporting periods and, therefore, retrospective restatement is appropriate. There was no consensus on eliminating 'extraordinary items' and 'unutual items'.
Exchanges of similar assets
The Board's tentative view is that gain or loss should be recognised on all exchanges of items of property, plant and equipment, including similar items. There was no consensus within SAC as to whether these transactions should be recorded at fair value.
Reporting currencies
The Board expressed concern at 'convenience' translations that were used by entities. The current proposal is that all 'convenience' translations should be performed only after application of IAS 21, The Effect of Changes in Foreign Exchange Rates. This was no consensus that was reached on this matter.
Exemption of wholly owned subsidiaries from preparing consolidated financial statements
The Board is proposing that the exemption contained in IAS 27, which allows wholly owned subsidiaries from presenting consolidated accounts be withdrawn. The majority of the SAC members opposed withdrawing this exemption.
First-Time Application of IFRS
This project is being done in conjunction with the French standard setter. Currently, SIC 8 requires full retrospective application of all accounting standards. SIC 8 does not deal with the inter-relationship between the transitional requirements of specific standards and SIC 8. The draft proposal in front of the Board is getting the opening balance sheet correct under the current accounting standards. The revised SIC 8 will set out the transitional rules that will be followed.
The proposal that fair value be used if cost cannot be ascertained 'without undue cost and effort' was debated by SAC. It is the view of the Board that this threshold is high. This would only be for items such as inventory and property, plant, and equipment. SAC members expressed concerns about the relationship of this proposal to the standard on business combinations, particularly regarding comparability of financial statements.
19 FEBRUARY 2002
Business Combinations
The IASB is planning to finalise the first phase of this project at its March Board meeting. An exposure draft is expected to be issued in the second quarter of 2002. The new standard will be an IFRS replacing IAS 22. Amendments will also be made to IAS 36 for changes proposed to goodwill amortisation, and IAS 38 for changes on identifying purchased intangible assets.
The board asked 4 questions of the SAC members in relation to the project:
1. Is the level at which goodwill is to be tested for impairment too high/low?
The new standard would require companies to assign goodwill to the smallest cash generating units in the acquired entities on acquisition. There was support for the assigning of these at acquisition, but the general feeling was that the level currently proposed was too low and would be impractical to implement in large multinational companies. There were also concerns over the departure from US GAAP practice in this area.
2. What are the potential causes of negative goodwill?
The board is debating the accounting for negative goodwill and asked the SAC for situations where they have found negative goodwill in practice. Various reasons were offered, as discussed in the SAC Agenda Paper 2 (available on www.iasb.org). Some members were of the opinion that bargain purchases never happened in practice and that negative goodwill arose due to incorrect fair valuing of assets, or unrecorded liabilities. Others gave examples of where these had happened in practice.
3. Would the omission of the benchmark treatment for the initial measurement of identifiable assets and liabilities under IAS 22 cause a significant change in practice?
Various countries had various practices in this regard, as discussed by members. The conclusion appeared to be that there are many countries where this would represent an significant change, but most members were supportive of the proposed change.
4. Are the proposed disclosures for assessing the reliability of the recoverable amount estimates supporting goodwill and intangibles with indefinite useful lives reasonable?
The board has not yet completed its discussions on these disclosures, but aims to address them in March. The general feeling was that these disclosures were onerous and could give competitive information away. The preparers in the group voiced an objection to detailed disclosure in this area.
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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