Updates on Countries' Progress and Issues

Australia. Australia intends to follow the same timetable as the IASB. The key issues in Australia at present are business combinations, intangibles and financial instruments, and these have had considerable public exposure.

New Zealand. The plan is to plug gaps in the New Zealand standards. They are currently leading the IASB project on revaluation and revenue recognition in the public sector. Unlike Australia though, New Zealand have been avoiding public exposure.

Japan. Japan highlighted stock options, EPS disclosure, impairment of assets, and business combinations.

Germany. Germany highlighted related parties and stock options.

Canada. Enron has been receiving a lot of coverage. Canada is trying to align with the US and use principles rather than rules, however they noted that although the emphasis would be on principles, there would still be rules. There was a growing view that the IASB was not able to settle issues. For example, the public was perplexed as to why the issue of revenue recognition could not be resolved. IAS 39 provides the style and fit of the style of the Canadian Board at present.

USA. The FASB is committed to exploring a principles approach, but is aware that it means different things to different people. They have concerns on the overuse of principle-based standards, and so just wish to have that approach on some and not all financial standards. FASB have tried to produce principle-based standards.

United Kingdom. The UK has issued exposure drafts and a consultation paper as part of a phasing programme to converge UK GAAP with international accounting standards. There are currently ill-advised comments being made in the UK on the principles versus rules debate, and so everyone has a responsibility not to drive towards rules. Post-Enron the UK are looking at revenue recognition, consolidation and leases. They are also looking at management explanations by focussing on the OFR. A paper on this will be issued next month. The UK are committed to Europe and IAS. A question was raised as to how the New Zealand work on revaluations would be integrated into IAS 16, Property, Plant and Equipment. IAS 32 and 39 are being proposed in the UK next month via an exposure draft, but the UK stated that as these are interim standards, what could be expected next. Legal constraints will currently prevent the adoption of IAS 32 and 39 due to the EC, but the ED on hedging has been issued. As with France and Germany, the UK is concerned with the agenda and how many changes are possible before 2005. IAS 18 was deemed as very important. The reply was that the next agenda would not be constrained by EU policy.

Consolidation

The standard-setters discussed a paper based on the replies to a questionnaire issued to the standard setters earlier in the year. The focus of the discussion was on the definition of control and its application in the consolidation decision. The paper suggests that unilateral control is the criteria on which membership of the group as an economic entity should be based, and that control requires both the ability to direct and to benefit. The question was raised as to whether both concepts should be included. For example, in the case of trusts where the ability to direct and to benefit are separate.

The paper recommends that the fully diluted position should be used to establish control. Where rights exist which are exercisable today, whether or not the decision to exercise is taken, these should be taken into account. The paper takes the stance that dilution should be applied in all cases 'unless there is a genuine commercial possibility' that it would not occur. The introduction of the 'genuine commercial possibility' principle led to some discussion. It was determined that simply being out of the money did not mean that there was a genuine commercial possibility that dilution would not occur. It was also suggested that the adoption of such wording could lead to a different answer year on year and that it may not be very practical in that entities could be waiting until the year end date to determine whether or not they should or should not be consolidating.

The group discussed when a minority share holding should result in consolidation. The paper suggests that the minority should have 'something plus the holding' and that it must be able to act unilaterally due to an absolute right and not just an expectation. The apathy of the other shareholders alone is not, in itself, sufficient grounds to say that the minority holder has control. In the view of the paper the 'something else' may, for example, be a technological agreement without which the company could not survive. It would not be enough to hold a minority of the shares and have appointed the majority of the Board membership as this is not a contractual right.

This led to a discussion on de facto control. It was noted that in the southern hemisphere countries the notion of de facto control is followed and in reality this has not led to significant changes year on year. It was also felt that since the introduction of this approach there had been less abuse and manipulation. This approach, according to its exponents, accurately reflects the economic reality at a point in time. The standard setters were then asked to state their preference with reference to whether a de facto approach should be followed. The results were as follows:
Favour de facto approach: Australia, New Zealand, Germany, France
Do not favour de facto approach: Japan, UK, USA

Performance Reporting Project

There is a common interest in Performance Reporting and convergence in this area as well as a common understanding of the difficulties this entails. Therefore there is a need to work together and talk about the issues.

IASB indicated that it expects to publish an exposure draft in third quarter 2002. IASB plans to consult with national standard setters to ensure agreement on definitions and to confirm clarity internally, before inviting comment from the general public.

A two-column approach to the performance statement was discussed. Column one would report revenue, expense, gains, and losses arising in the current period. Column two would present remeasurements of previously recognised items. Japan did not agree with the split between the two columns, for example, the split of impairment. The UK reported that the Board had more areas of agreement than disagreement. It was reminded that the project was on the presentation of the information rather than suggesting changes to other standards.

There was then discussion as to what was allocated to each column. It was important that information was there for investors to use, and so the level of disaggregation should also be looked at.

Canada raised a concern that a clear sense of what is being accomplished is required, and so external users should be brought into the discussion as soon as possible. It was concluded that the project was not yet ready to test with users yet.

It was noted that taxation had not been looked at yet, but it would need to be considered as part of this project.

The Board was then asked to look at the columns and comment after the meeting on the layout. These comments should also include answers to the issues raised.

Convergence - Selecting Prime Candidates

It should be possible to easily identify the areas of convergence, and so provide detailed knowledge on the differences between IAS and the various GAAPs. For example, pensions were looked at, and differences were found between measurement and recognition on the different GAAPs. The SEC has also provided a list of reconciling items between US GAAP and IAS.

Canada asked whether GAAP differences on transactions that were small and frequent were more or less important than GAAP differences on rare but large transactions. It was agreed that both were important. The UK suggested that 'offset' be considered as part of the project as well as revaluations (in particular considering what is included in cost). Other suggestions included equity accounting, joint ventures, borrowing costs, and loan and debt modifications.

21 May 2002

Revenue, Liabilities, and Elements of Financial Statements

IASB member James Leisenring explained that FASB had decided to add a topic on liabilities and revenue recognition to its agenda, approaching the subject from two angles: