18-20 December 2002, London

Wednesday 18 December 2002

Amendments to IAS 32 and IAS 39

This past June, the IASB invited comments on its proposals to amend IAS 32 and IAS 39. The comment period expired on 14 October. The IASB has received more than 170 comment letters. The Board has decided to schedule a public roundtables with the objectives: improve the interaction between the Board and its constituents and to provide mutual education. The sessions will begin with the IASB's Standards Advisory Council on 24-25 February 2003. Then, those who submitted letters of comment will be invited to meet with the Board during the week of 10 March 2003. Exact dates and locations are to be determined.

The Board noted that it believes that it would be useful to integrate the text in IAS 32 and IAS 39 into a comprehensive Standard on financial instruments, along with the implementation guidance. Nevertheless, this project is more a 'packaging' project and is not a priority for the Board.

The preliminary consideration of the comments will focus on:

• Classification of financial instruments as equity or liabilities:
  • economic compulsion
  • contingent settlement provisions
  • a parent's guarantee of a subsidiary's distributions
  • derivatives on interests in subsidiaries, associates and joint ventures
• Derecognition:
  • pass through arrangement
  • financial guarantee derecognition
• Impairment:
  • fair value measurement option
  • reversals of impairment on available for sale financial assets
  • measurement of financial guarantee
• Hedge accounting:
  • Macro hedging (alternative approach)
  • Future transactions - Cash Flow Hedging

Financial Activities

The IASB's advisory committee on disclosure of financial activities has recommended:

• a financial risk disclosure principle and requirements applicable to all entities
• three balance sheet and income statement disclosure requirements
• a plan for moving the project forward.

Financial risk disclosure principle and requirements

Qualitative and quantitative information would be required about:

• credit risk
• quality of assets - past due and impaired financial assets
• liquidity risk
• market risk.

Operational risk disclosure

The advisory committee had recommended certain operational risk disclosures that the Board concluded would better be addressed in the Board's planned narrative reporting (MD&A).

Balance sheet and income statement disclosures

The Board discussed the following proposed disclosures:

• balance sheet amounts based on the measurement basis of the financial asset
• and/or financial liability;
• income statement amounts based on the measurement basis of the financial asset and/or financial
• liability; and
• information about the loan loss allowance account

Project plan

The Board concluded that it is not likely that these proposals can be adopted in time for application in 2005 (when Europe, Australia, and perhaps other jurisdictions will be adopting IFRS for the first time). The plan, therefore, is to develop an Exposure Draft that would be effective after 2005, perhaps with earlier adoption permitted or encouraged. Eventually, the principles and requirements in the Exposure Draft could be merged with IAS 32 and IAS 39 into a single financial instruments standard.

Reporting Performance

The Board discussed a first draft of an Exposure Draft.

The Board agreed to change the title of the IFRS and proposed 'Income Statement'. One of the members noted that some principles were missing, for example, the proposal on per share amounts did not follow from the existing principles. The staff was asked to reconsider the term used for the total (perhaps 'net income' might be more appropriate than 'comprehensive income'). Also, the total column should be presented first (left), rather than last (right).

The Board discussed the following issues:

• the allocation of remeasurement between business and financing;
• the display of tax as a single number; and
• the display of subtotals and per share amounts.

Based on that discussion, the following represents the Board's tentative thinking about the format of the performance statement:

Subtotals within comprehensive income (for example, 'operating profit') will be prohibited except when they are subtotals of other amounts required to be displayed on the face. The Board will consider how to report per share amounts at a future meeting.

Business Combinations (Phase II)

Minority interests issues

At this meeting, the Board considered the accounting and display issues related to the minority interests and the conclusions were the following:

The Board agreed with the Staff's recommendations on the level of details that should be disclosed for the amounts attributable to the controlling and minority interests for individual line items in the consolidated income statement and statement of changes in equity.

The Board agreed that the losses of a subsidiary should be attributed to both the controlling and minority interests on the basis of their ownership interests. The board also agreed that losses in excess of the minority interests' investment will be attributed to the minority interests and that if losses attributable to the minority interests in excess of their investment are instead attributed to the controlling interests, the future income will be attributed first to the controlling interest to the extent of the excess losses previously attributed to the controlling interest.

Recognition and Measurement of deferred tax assets and valuation allowances

The Board considered whether the goodwill should continue to be reduced for the subsequent recognition of deferred tax benefits acquired in a business combination (as presently required under Statement IAS12).

The Board decided that the goodwill should not be adjusted for the subsequent recognition of deferred tax benefits. The acquirer recognises a deferred tax asset and the resulting deferred tax income is recognised in the income statement.

Measurement of Acquired Assets and Assumed liabilities in a Business Combination

In the context of this project the FASB and the IASB, in accepting the working principle, agreed to use fair value as the measurement objective for valuing the assets acquired and liabilities assumed in a business combination. The Board discussed the proposed fair value hierarchy:

• Level 1 - the estimate of the fair value shall be determined by reference to observable prices of market transactions for identical assets or liabilities at or near the measurement date whenever that information is available.
• Level 2 - If observable prices of market transactions for identical assets or liabilities at or near the ….., adjustments for any differences are objectively determinable (Ref IASB's website, observer notes).
• Level 3: if observable prices of market transactions for identical or similar assets or liabilities at or near the measurement date are not available, the estimate of faire value shall be determined …..those that marketplace participants would incorporate in an estimate of fair value (Ref IASB's website, observer notes).

The Board agreed to provide fair value guidance with be developed in conjunction with FASB.

Scope - Identifiable Assets and liabilities that did not satisfy the criteria for recognition separately from the Goodwill

The Board's intentions are to adjust the goodwill and they are thinking of a 12 months window. The Staff has to work further on this issue.

Thursday 19 December 2002

Convergence - Pension Issues

The Board discussed whether to retain the corridor approach in IAS 19 for the return on assets in relation to the performance reporting project. Therefore the discussion is better characterised as a reporting performance discussion IF the proposed changes to pension accounting are decided upon. That is, IF the Board decided to eliminate the corridor, how should the performance statement report the actual return on plan assets? As a result of the tentative decisions to date (removal of the pension corridor and two-column performance statement) any discussion on this matter is dependent upon successful completion of these projects.

The Board tentatively agreed to eliminate the current approach in IAS 19 and require that the actual return on plan assets be recognised in the performance statement. The Board concluded on the following presentation in the performance statement:

As a result of this decision, an entity must decide whether the pension assets are available for sale, held for trading or held to maturity at the purchase date. The change in the value of pension assets would be accounted for similarly to respective assets held outside of the pension plan.

The Board reiterated its earlier tentative decision that pension assets and liabilities shall be reported on a net basis on the balance sheet.

The Board also discussed the definitions of defined benefit plans, defined contribution plans and plan assets. The Board noted that the definition of a defined contribution plan in IAS 19 was open to misinterpretation. The Board tentatively decided to amend the definition of a defined benefit plan to encompass any plan where the employer may have an obligation in the future.

Certain defined contribution plans provide the participants with the opportunity to share in the contributions forfeited by people who leave the plan. In many cases an employer will have the ability to reduce future contributions as a result of the forfeited benefits to date. The Board concluded that the ability to reduce future contributions is an asset that should be recorded at its present value with the offset to pension expense for the period.

The Board discussed, without conclusion, several issues related to defined benefit plans such as non-transferable financial instruments held by the plan, own shares held by the plan, etc. The Board will discuss these issues further at a future meeting.

First-time Application of IFRS

The Board received 81 comment letters on ED 1, First-time application of International Financial Reporting Standards. The Board discussed the comment letters received with specific reference to the following:

• Scope
• Recognition and measurement (other than financial instruments)
• Disclosure and effective date

The Board noted that current IAS requires a statement by management for full compliance with IAS. The Board decided to clarify in the final standard that the auditors' report should not be used as a primary determinant of whether an entity is a first time adopter. The final standard will provide clarification that the audit report may be one factor to look at in addition to management's statement of compliance.

Recognition and measurement

The Board decided to retain the option in ED 1 of a SIC 8 approach (without the impracticability exception) and the approach in the standard with exceptions. The Board confirmed that the modified SIC 8 approach would require reference to historical versions of a standard when the transition requirements of the amendments are prospective.

The Board discussed the following issues related to the exceptions in the ED.

Business Combinations
• An entity should have the choice of restating business combinations under current IFRS or following the exception in the exposure draft. However, if an entity restates a business combination, all combinations after the earliest business combination restated shall also be restated.
• No change to intangible assets
• All finance leases shall be restated. That is, there is no exception for finance leases that are acquired in a business combination. The Board requested that the ED be made clear that an entity would first look to the requirements for recognised assets and liabilities and then determine whether unrecognised assets and liabilities should remain unrecognised as a result of this exception.
• There will be no specific exemption for negative goodwill.
• The entity should perform an impairment test of its goodwill at the date of transition to IFRS. Therefore, the fair value for all assets and liabilities for cash generating units that have goodwill shall be measured at the date of transition. The Board will not require these assets and liabilities be recorded at fair value. The Board acknowledged that the determination of the fair value of goodwill under the final standard may need to be performed prior to the issuance of the business combinations standard (and amendments to IAS 38). The Board did not discuss providing any guidance on performing this impairment test in the mean time.
• There shall be no difference in the accounting for equity method goodwill recorded in a joint venture or an associate.
• Subsequent remeasurement of contingent consideration should not be an adjustment to goodwill, but presumably to income.
• The Board discussed several drafting issues related to IPR&D, minority interest, taxes, etc.

  Other Issues

• There will be no changes to the event driven revaluation as deemed cost exception. The Board clarified that the use of the revalued amount is a requirement of the standard, and not an option.
• The Board decided that the corridor amount should be reset to zero for all entities that are not using the modified SIC 8 approach.
• There were no changes to exception for fixed assets
• The Board decided that the cumulative translation amount resulting from the translation of financial statements should be reset to zero at the date of transition if the IFRS amount can not be determined.
• A subsidiary that reports under IFRS to a parent shall use the parent's date of transition when developing its first set of full financial statements. The Board will discuss this issue further at a future Board meeting.
• There were not changes to the components approach for property.

Disclosure and effective date

The Board reaffirmed its decision that the disclosure requirements in the final standard should cover all comparative information prepared under IFRS. There was concern expressed by certain regulators that will require a second year of comparative information prepared under local GAAP. The Board decided to avoid creating obstacles that may prevent such a presentation for regulatory purposes.

The Board reaffirmed its conclusions on the reconciliations required by paragraph 31 in the ED. The Board agreed to provide illustrative examples of reconciliations in the final standard.

The Board also agreed that an error in the local GAAP financial statements should be accounted for as such and correction in the movement to IFRS should not be allowed.

The Board decided not to change the requirements related to presentation of the cash flow statement or interim financial reports and historical summaries. The board decided to remove the requirement to disclose the denominator of the EPS calculation as part of the first time application of IFRS

The effective dated was moved from 1 January 2003 to 1 January 2004. Early application will be encouraged.

Convergence - Other Issues

The Board discussed whether the option for proportional consolidation in IAS 31 should be eliminated and therefore the equity method of accounting would be required for joint ventures. The Board noted that there is the intention to change or eliminate the equity method of accounting in the future, but in the mean time, the elimination of the proportional consolidation method would make sense. The Board acknowledged, however, that there is a definitional problem between what is a JV and what is an undivided interest in net assets. No decision was made.

The Board identified certain differences between FASB Statement 146, Accounting for Costs Associated with Exit or Disposal Activities and IAS 37 and IAS 19. The staff believes, with the exception of employee termination benefits, the application of SFAS 146 will likely result in a later recognition of restructuring liabilities under IAS 37. This is because SFAS 146 specifically states that an entity's commitment to a restructuring does not result in the entity incurring a liability. In contrast, under IAS 37, an entity's commitment to, and announcement of, a restructuring plan means that a constructive obligation has been incurred and a provision shall be recognised.

The Board clarified that the measurement issues are too difficult to resolve in this limited term project and therefore, the focus should be on recognition.

The Board tentatively decided to amend the definition of a constructive obligation. The proposed definition would require that the other party could reasonably rely on the entity discharging its responsibilities. The Board noted that this definition should be similar to the notion of promissory estoppel noted in SFAS 143-and the basis for the definition in SFAS 146. One member noted that the current requirement for a valid expectation does not seem different from the reasonable reliance notion.

The Board further decided to withdrawal the restructuring paragraphs in IAS 37 (paragraphs 70-83). The Board noted that a plan and announcement do not always create an obligation and therefore, the provisions of IAS 37 should apply. The intent of this change is to move the recognition dates under IFRS and US GAAP closer.

The Board decided to add a rule to the final standard that a obligation related to future payments on a contract for a building, for example, should be recorded once the entity actually exits that building.

The Board discussed the current requirements for the recognition of an obligation under an onerous contract. The Board acknowledged that the current wording may be unworkable. However, such improvements should be deferred to a project on the recognition of liabilities and should not be included in this short-term project.

The Board also decided on the following amendments to IAS 19:

• Recognition of involuntary termination benefits requires the communication of the termination benefits to the employees;
• Involuntary termination benefits are recognised over the future service period when employees are required to render service to be entitled to those benefits;
• Voluntary termination benefits are recognised when employees accept the offer of voluntary termination.

Concepts: Revenue Recognition and Liabilities

The Board discussed accounting for revenue recognition where obligations are performed by a third party.

The staff believed that there were two possible answers namely:
1. That revenue is recognised when the obligation is assumed by the third party; and
2. That revenue is not recognised as one obligation is replaced by another of equal value.

The staff supported the second view.

The Board discussion in general supported the second view and noted that it was based on an activity-based approach to revenue. Considerable concern was however raised that the ultimate conclusion of this approach was to move towards a "value-added" approach with which a significant number of the Board members would disagree. The discussion focused on identifying identifiable differences in transactions that would differentiate the activity-based approach from the value-added approach. The staff was requested to consider this in discussions with FASB staff members and make proposals to the Board.

Friday 20 December 2002

Improvements to IAS

Improvements IAS 27

Exemption from presenting consolidated financial statements

The Board agreed that where a partially owned subsidiary does not prepare consolidated financial statements the approval required from the minority would be worded that it applies where on objection from a minority shareholder is received.

Certain commentators requested clarification of the words "its securities are not publicly traded" and "in the process of issuing securities in public securities markets" used in conjunction with the above exemption. The Board requested the staff to provide more detailed explanations of "securities" and "publicly traded".

Parent Company Financial Statements

The Board agreed to retain the proposed accounting for subsidiaries in parent company financial statements. It was agreed that a requirement to disclose the names of significant subsidiaries would be required in parent company financial statements

Investments in subsidiaries held by venture capital organisations Comment was received requesting that the exemption in IAS 28 for these types of organisations should be extended to include investments in subsidiaries or that the temporary control should be linked to a business cycle where this is longer than 12 months.

The Board did not agree that such an exemption should be provided. They did however note that the fair value of such investments could be used for measurement purposes in the parent-only financial statements. They further noted that it was likely that the amended standard would have an effective date of 1 January 2005 giving entities the time to develop systems to comply with this requirement.

In addition the Board agreed that extending the temporary control exemption beyond twelve months was not appropriate except where the sale of an acquired subsidiary was required by a competition authority and the necessary permission to sell was delayed beyond twelve months.

It was noted that both of the above decisions were subject to a review of the requirements under US GAAP and discussion with FASB where necessary.

Other

A concern was raised regarding the use of the words "undue cost and effort" and "impracticable" in standards. It was agreed that the staff would provide explanations as to the intended meaning of these words and where they should be used in different standards.

Improvements IAS 28

Investments in associates held by venture capital organisations

Comment was received that for such associates the standard should only note that IAS 39 applied and consequently entities could choose to account for the fair value of the investment in the income statement or equity. The Board agreed that any fair value adjustment to an investment in such an associate should be reported in the income statement and that these investments would meet the definition of "held for trading" in IAS 39. The wording in this regard would therefore remain as it was exposed. It was however agreed to drop the reference to "well established practice in those industries" as it was not necessary. Where fair value could not be determined IAS 39 provided adequate exemptions.

Inclusion of long-term receivables within investment in associate

It was agreed that long-term receivables should be excluded from inclusion within the investment in an associate except where the receivable is in substance part of the investment in the associate. It was noted that where the associate incurred losses, these would be used to reduce such receivables, which would then also be subject to the impairment requirements of IAS 39.

Other

Comment was received that the requirement to equity account using information from within the last three months was problematic. The Board believed that this requirement was correct and if information could not be obtained they should consider a requirement to fair value the associate through the income statement. If neither of these could be done it was questioned whether the investment was an associate. This will however be discussed again.

IFRIC

SIC 12, Consolidation of SPEs

The IFRIC discussion regarding SIC 12 was noted. It was agreed that no amendment to SIC 12 was proposed but that wording regarding the assessment of risks should be posted to the IASB website.

Impairment

IFRIC asked the Board to consider the inclusion/exclusion from value in use of cash flows expected to arise from a future restructuring for impairment purposes. The Board agreed that this would be considered.

Income Taxes

It was noted that IFRIC had received a number of queries on the requirements of the initial recognition deferred tax exemption. It was agreed that the Board would consider this as part of the income tax convergence project.

Presentation of Financial Statements

It was noted that IFRIC have been asked to issue guidance on what should be included in operating/ordinary activities. It was agreed that IFRIC should address this issue.

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