Discussion focussed on the key determinants of the format of the performance statement. Two questions were raised for discussion:
1. Should the performance statement make a distinction between 'operating' (or 'business') and 'financing' (or 'treasury') and, if so, what should be the conceptual basis for this distinction and what are the implications for financial instruments?
2. In what ways should value changes in financial instruments be disaggregated in the performance statement? This includes consideration of different valuation methods (historical cost and fair value), different instruments (such as bonds vs. derivatives), different causes of value change (such as interest rates and currency exchange rates), and different designated uses of the instruments (such as held for trading vs. held to maturity).
The Board had previously agreed that a distinction should be made, and the performance statement will show the appropriate sub-totals. The discussion therefore focused on characteristics for distinguishing the items that should be included in each category. The Board was presented with two methods of making the distinction. The first approach was based upon the nature of the activity in which any given asset or liability is employed. The second approach was based on whether the intrinsic nature of the asset or liability is financial (nature of the item).
Some Board members felt that the nature-of-the-item approach was more simple and made comparison of entities easier. However, the nature-of- the-activity approach was favoured by a majority of the Board members on grounds that it is more representative of the way the assets and liabilities are managed.
The Board then considered what should be included in the definition of 'debt' for the purpose of making an operating vs. financing split. Three alternatives were proposed:
All liabilities.
Discussion focused on whether pension obligations, provisions, and bank depositor liabilities are operating or financing. The definitions of debt and, hence, financing transactions were not resolved. It was agreed that a definition would be proposed and discussed at the next meeting.
The Board also felt that it would be helpful to define working capital. This is particularly important with reference to financial institutions to determine the distinction between operating and financing transactions. The proposed definition should pay particular attention to the more contentious areas such as derivatives.
Disaggregation in the performance statement
The Board discussed the proposal that the performance statement is presented as three columns:
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| Current Period | Revisions to Expectations about Future Periods | Total |
The Board discussed an illustration of this split concerning income components for a fixed interest bond held at fair value. In this example the interest on the bond was shown in column 1 and the change in fair value in column 2. This is meant to demonstrate the split between income and capital.
This led to a discussion about expected and unexpected changes in fair value (volatility). The Board concluded that reported value changes should not be divided into expected and unexpected. It was noted that the determination of the split would be particularly difficult in the case of fixed assets. It was suggested that depreciation would be shown in column 1, whereas impairment would be in column 2. The justification for this is that depreciation represents the consumption of the assets during the period whereas an impairment represents a decrease in the expected future benefits. The distinction may be blurred, however, if the impairment recognition was caused by an incorrect prior estimate of the useful economic life.
The Board did not reach decisions and, in fact, suggested that the proposed three column headings will be reconsidered at a future meeting.
18 April 2002
Meeting with UK ASB. During the morning of 18 April, IASB held a joint meeting with the United Kingdom Accounting Standards Board. Performance Reporting and Share-Based Payment were the two principal topics discussed at the joint meeting.
Share-Based Payment:
1. Features of employee share options:
a. There is usually a vesting period, during which time the options are not exercisable. The Board agreed that for European type options, where a Black Scholes type of model is used, no adjustment is necessary for a vesting period as that was already built into the model. For US type options, where a binomial model is used, an adjustment would be necessary as a vesting period is not a component of the model.
b. There are conditions attached to vesting, such as continued employment. If those conditions are not satisfied, the options are forfeited. Board discussion centred mainly on determining the value of an option at grant date, when the option is issued. It was suggested that the value is the cost to the entity. Three methods were put forward to consider how to build forfeitures into the valuation of options. They were:
--anticipate estimated vesting at grant date and do not revise;
--the number of options expected to vest is constantly revised after grant date;
--the number of options granted is reduced as employees leave, but any expense already recognised is deemed to reflect employee service previously provided and is not revised.
The Board concluded that it could not reach a conclusion at this stage and requested that the project manager provide a range of worked examples showing different scenarios, including more or less options being forfeited.
c. Employee options are usually not transferable. The Board agreed that if the estimate is made at grant date, then the expected life rather than the option life should be used in the option-pricing model, so as to account for non-transferability.
d. The option term is often significantly longer than traded options. The Board agreed that the fact that the option term is often longer than that of traded options means that estimation errors are more likely to occur. However, option pricing models can be modified to reflect the longer term.
2. Capital structure effects:
Option pricing models are generally based on the assumption that the option is written by a third party, and so is not dilutive in nature. However, share options are usually written by the company and therefore may be dilutive in nature. The Board agreed that the Standard should contain guidance with regard to making appropriate adjustments to the share option-pricing model used.
3. Measurement date:
The Board discussed which measurement date was the most appropriate. It was agreed that the objective is to measure the value of services received. It was concluded that grant date is the most appropriate measurement date. A vote was taken with only one Board member dissenting (this member preferred vesting date, or possibly exercise date).
17 April 2002
Preface to IFRS: The Board approved (vote 11 yes and 3 no) to approve publication of a revised Preface to International Financial Reporting Standards. In approving the Preface, the Board agreed that:
--Presenting fundamental principles in bold face type and other guidance in non-bold type (the 'black-letter' / 'grey-letter' distinction) should be used in IFRS.
--Black-letter and grey-letter standards have equal authority, and both will be written using 'shall'.
--IFRS will be designed to be applied to the general purpose financial statements of business enterprises, but not-for-profit and public-sector entities that want to publish financial statements labelled as conforming to IAS must also follow all of the Standards.
--The Board's involvement in IFRIC draft and final Interpretations will be clarified in the Preface to IFRIC Interpretations (currently being developed), and the IFRIC Preface will be included in the annual IASB Bound Volume.
Business Combinations: The Board deliberated certain transition issues relating to its revised Standard on business combinations as follows:
- The Board agreed to issue an IFRS to replace IAS 22 and to issue revised versions of IAS 36 and IAS 38.
- The effective dates of all three would be for business combinations that are consummated (agreed to) after the Standards are issued and, in all other respects, for financial years beginning after the Standards are issued.
- An entity electing early adoption would have to adopt all three Standards at the same time.
- Amortisation will stop for any goodwill pre-existing at the time the Standards are aodpted. Instead, impairment testing will be requjired. This would apply also to goodwill implicit in an investment accounted for by the equity method.
- Any negative goodwill pre-existing at the time the Standards are adopted should be credited directly to retained earnings. This would apply also to negative goodwill implicit in an investment accounted for by the equity method.
- An intangible asset acquired in a business combination before the Standards are adopted and that does not meet the recognition criteria in the revised IAS 38 would be reclassified as goodwill.
- The revisions to IAS 38 would apply to intangible assets recognised at the time the Standards are adopted. Any resulting change in estimated useful life (including a change from a finite life to an indefinite life) would be accounted for prospectively as a change in estimate.
The Board voted in principle to approve all of the provisions of three exposure drafts that would revise IAS 22, IAS 36, and IAS 38. IASB Staff were instructed to prepare ballot drafts for Board consideration.
Additional agenda projects: The Board agreed that its staff should develop detailed project proposals for the following six projects for consideration as additional IASB agenda projects:
--Convergence topics: areas in which fairly limited changes to IAS could bring IASB standards in line with those of its partner standard-setters. Two topics mentioned were the smoothing mechanism for pensions in IAS 19 and accounting for income taxes under IAS 12.
--Business combinations - phase II
--Small and medium sized enterprises and enterprises in emerging economies
--Consolidation, especially Special Purpose Entities (SPEs)
--Financial Instruments - next steps, including approach to the Joint Working Group recommendations.
--Conceptual Framework, including definitions of the elements of financial statements and liability and revenue recognition.
16 April 2002
IAS 19: Asset Ceiling Test
--Summary of Responses: 34 responses were received to the Exposure Draft. 21 of the responses agreed with the limited amendment. Seven were strongly against the amendment and they highlighted the need for a broader review of IAS 19 to look at the more underlying issues. A large proportion of all responses received requested that a more in depth review be performed on IAS 19. Many respondents felt that a 30-day comment period was not long enough for detailed responses to be given.
--Decision: The Board concluded that this is a quick fix for a major issue that had been identified and the amendment would result in the improvement of IAS 19. The Board agreed to proceed with the amendment although they did recognise the need for a future review of other issues that existed within IAS 19 (namely the asset ceiling and smoothing of profits). The Board has agreed to make one change from the exposure draft, which was to add an extra paragraph clarifying the recognition of past service cost. Effective date will be the date of publication.
Other Matters
Improvements Project: The exposure draft went to the printer on 17 April and will be posted to the IASB website shortly for a 90 day comment period.
Amendments to IAS 32 and IAS 39: The exposure draft of amendments to IAS 32 and IAS 39 is expected to be published some time in May.
This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.
