Extractive Industries

A project team from the Australian Accounting Standards Board (AASB) is developing background material to assist the IASB in deciding whether to develop an IFRS for the extractive industries (mining and oil and gas). The AASB reviewed its work to date and asked the Board for instructions for the next steps of the project. The project team noted the wide range of accounting treatments currently used for pre- production costs, cost centres, allocations, impairment recognition, and disclosures. Even in those countries that have accounting standards for mining and oil and gas companies, none of those standards deals with the industry comprehensively.

The project team presented various approaches for addressing the issues. Among the questions is whether the existing scope exclusions in IAS 16 and IAS 38 should be retained, how other IAS/IFRS should be applied by companies in the extractive industries, and whether the IASB should develop implementation guidance.

After discussion, by vote of 9 to 5, the Board proposed that the project team come back to them before the end of this meeting with specific proposed amendments to IAS stating:

• These industries will remain scopeed out of IAS 16 and IAS 38.
• The definition of pre-production costs includes exploration and developments costs.
• Extractive industries should apply existing IAS/IFRS in accounting for pre-production costs and for identifying their cash generating units.

Joint Ventures

The AASB is conducting preliminary research for a re-examination of IAS 31. The project focusses on two major issues:

• The definitions of joint ventures and jointly controlled entities.
• The method(s) of accounting by investors in such entities.

The project team proposed to remove 'contractual arrangement' from the definition, arguing that some joint ventures could exist by taking a 50% equity interest without a specific contract. The Board disagreed, and re-affirmed that the contractual arrangement is essential because it establishes joint control and all of the other attributes of the joint venture. The Board proposed that the project team should focus its work on the distinction between joint venture and shared interests.

Regarding the method(s) of accounting by investors, several points were noted:

• Proportionate consolidation leads to a conceptual problem on the balance sheet side, because the investor reports in its balance sheet assets that it does not control.
• On the other hand, if proportionate consolidation is prohibited, the equity method will be applied for two very different types of investments: associates (in which the investor has only significant influence) and joint ventures (in which the investor has joint control).

As this project cannot be finished by March 2004, the Board suggested that the project team work on accounting for associates in parallel with joint ventures. The Board agreed (by vote of 10 to 4) that proportionate consolidation should be eliminated from IAS 31 and that the project team should go further with the expansion of equity method, considering in particular presentation on the balance sheet and in the income statement.

Business Combination Phase II

Attributing a partially owned subsidiary's excess of losses to the controlling and minority interests

The Board agreed that a guarantee or other type of arrangement should not change the way losses are attributed between controlling and minority interests. The allocation should be based on the ownership interests.

Business Combination Diclosures

The Board asked its staff to review the wording of the disclosure requirements for contingent liabilities and assets. The issue is whether they should be measured at fair value (as in IAS 39) or at the best estimate of the expenditure required to settle the present obligation at the balance sheet date (as in IAS 37).

Comment Period, Effective Date, and Transition

The Board agreed to propose prospective application for business combinations that take place between the issue date and the effective date, consistent with the proposal in ED3. The Board also agreed to propose an effective date of 1 January 2006.

Convergence Issues

The Board noted a potential difference with US GAAP regarding whether assets and liabilities that arise as a result of acquisition (such as pension obligations and golden parachute obligations) should be reccognised. The Board re-affirmed that all assets and liabilities should be recognised including those that arise at the date of acquisition but asked its staff to explore this further.

Consequential Amendments

The Board agreed:

• Gains or losses on a subsidiary that have been recognised in equity should be included in calculating gain or loss on disposal of the subsidiary.
• Gains and losses on a subsidiary that have been recognised in equity should be 'recycled' (recognised in net profit or loss) when the parent increases or decreases its ownership whether or not the parent losses control.
• Measurement of a deferred tax asset should take into account the tax consequences applicable to the combined entity, with a corresponding adjustment of goodwill. To illustrate, if the estimated amount of a deferred tax asset on the acquired company's books is 80 at the date of acquisition and will be 100 after acquisition because of different assumptions, it should be recognised 100.

Wednesday 30 April 2003

Amendments to IAS 39, Financial Instruments: Recognition and Measurement

Fair Value Measurement Option

The Board agreed:

• to retain the fair value measurement option for all financial instruments as proposed in the exposure draft of amendments to IAS 39 and to clarify that the election of fair value is irrevocable;
• to clarify that demand deposits may be recognised at fair value, which is the amount payable on demand today;
• to require disclosure, for financial assets held for trading or designated to be measured at fair value, of the amount included in net profit or loss; however, disclosure will not be required of the criteria used to select the items; and
• not to permit exclusion of the effects of an entity's own credit risk in measuring fair value; separate disclosure of the fair value effect of an entity's own credit risk will not be required.

Basis Adjustment for Hedges of Forecasted Transactions

The Board discussed the proposal in the ED to prohibit basis adjustment for forecasted transactions that resulted in the recognition of an asset or liability. After discussion, the Board agreed to allow an option for basis adjustment for non-financial assets. This adjustment would, however, be considered as an indicator of impairment. It was noted that the staff should consider in a future paper the effect of this option on the definition of 'cost of an asset' particularly in IAS 16.

Firm Commitments

The Board discussed the proposal in the ED to treat hedges of firm commitments as fair value hedges, rather that as cash flow hedges. The Board agreed to retain the proposal of the ED even for a foreign currency firm commitment.

Reversal of an Impairment Loss on Available-for-Sale Financial Assets

The Staff reported that 87% of respondents to the ED disagreed with the proposal in the ED to prohibit all reversals of impairment losses on AFS financial assets. The Board agreed (by vote of 8 to 6) that AFS equity instruments should be measured above cost in equity and below cost in the income statement. The Board agreed to go back to the requirement in the existing IAS 39 (by vote of 10 to 4) that an impairment loss on an AFS debt instruments should be reversed if the impairment event reverses.

The Board will consider whether this change needs to be exposed. Some Board members believed this to be necessary as they considered the decision in respect of equity instruments to be a fundamental change in accounting for AFS equity instruments.

Treatment of Hedges of Forecasted Transactions

The Board reaffirmed (by vote of 13 to 1) that hedges of forecasted transactions should be treated as cash flow hedges, as proposed in the ED (and as is in the existing IAS 39).

Amendments to IAS 32, Financial Instruments: Presentation and Disclosure

Puttable Instruments

The Board agreed to retain a liability classification for puttable instruments (whether conditional or not) and to emphasise alternative presentations that would be consistent with IAS 1. Consequential amendment to IAS 1 may be needed.

Treasury Share Transactions

The Board agreed not to change the classification of a commitment to repurchase an entity's own shares as a liability, but the final standard will clarify that this does not apply to agency transactions for clients.

Separating the Liability and Equity Components of Compound Instruments

The Board agreed that the method of separation should not be prescribed in a revised IAS 32.

Disclosure

The Board discussed two issues:

• Risk disclosure.
• Fair value disclosure.

The Board agreed to retain the proposals in the ED regarding risk disclosure but noted that this is being discussed, with respect to financial institutions, as part of the IAS 30 project. The Board also agreed to retain the fair-value-related disclosures proposed in ED paragraphs 77B(a), (b), (c), and (e), and to check the US requirements (both SEC and FASB) before finalising the sensitivity disclosure proposed in paragraph 77B(d).

Derivative and Non-Derivative Contracts on Own Equity

The Board discussed various examples of contracts on an entity's own equity and agreed that the answers provided under the ED were appropriate. The staff proposed to amend the definitions and clarify the ED to identify the principles more clearly. The Board expressed concern that if no re-exposure is planned the changes could lead to major unintended consequences. Consequently, the Board asked the staff to submit proposed changes for consideration at future meeting at which a decision will be made.

Economic Compulsion

The ED proposed to eliminate the notion in existing IAS 32.22 that an instrument that the issuer is economically compelled to redeem because of a contractually accelerating dividend should automatically be classified as a financial liability. The Board agreed to retain the proposal in the ED but to clarify that, in most cases the instruments are liabilities.

Contingent Settlement Provisions

The ED proposed to require liability classification for any financial instrument that the issuer could be required to settle by delivering cash or other financial assets, depending on whether uncertain future events occur or depending on the outcome of uncertain circumstances, without regard to the probability of those events or circumstances occurring. The Board agreed to review the drafting regarding the effect of clauses that have no realistic possibility of occurring. The staff proposed that if the contingent settlement is dependant on an entity's own equity, the instrument should be assessed to determine whether it is a compound instrument. The staff proposed to remove paragraph IAS 32.19 (probability of settlement).

Parent Guarantees of Distributions

The Board discussed whether additional terms (such as a guarantee of payments or redemption) agreed directly by a parent entity with the holders of its subsidiary's equity instrument should result in a liability classification of those instruments in the consolidated financial statements. The Board agreed to liability classification in the consolidated financial statements at the amount of the guarantee.

Treatment of Derivatives on Interests in Subsidiaries, Associates, and Joint Venture

The Board agreed that such derivatives are within the scope of IAS 32 and IAS 39.

Offsetting of Financial Assets and Liabilities

The Board agreed that management intention should be a factor in offsetting financial assets and liabilities.

First-Time Adoption of IFRSs

The Board discussed whether an entity should be allowed to use the exemptions on first-time adoption set out in the revised draft of the Standard for its individual entity-only financial statements (i.e. in the parent-only financial statements or subsidiary-only financial statements) when that entity has in fact already prepared IFRS-compliant information for the purposes of group reporting in the consolidated financial statements.

This issue arises because some exemptions in the latest draft Standard on first-time adoption result in measurements that depend on the date of transition to IFRSs. If an entity is a member of a group, the use of those exemptions could lead to some assets or liabilities being measured at two different amounts if the group adopts IFRSs for the first time in one period, but the entity adopts IFRSs in its separate financial statements for the first time in a different period.

The Board discussed whether, to avoid those differences in amounts, if a first-time adopter has an asset or liability that was already included in the opening IFRS balance sheet of its group (or another member of its group) at an earlier date, it should be able to elect to apply the exemptions in the Standard to that asset or liability in the same way as the group (or the other member of the group) and based on the same date of transition to IFRSs. This would mean that both entities could use the same measurements for that asset or liability.

The Board first discussed this issue for first-time adoption in the separate financial statements of the parent and the subsidiary, and then for those of associates, joint ventures, and venturers.

The Board decided as follows:

• If the subsidiary has adopted IFRS in its entity-only financial statements before the group to which it belongs adopts IFRS for the consolidated financial statements, then the subsidiary's first-time adoption date is still the date at which it adopted IFRS for the first-time, not that of the group.
• If the group adopts IFRS before the subsidiary adopts IFRS in its entity-only financial statements, then the subsidiary should have the option to elect that either the group date of IFRS adoption is its transition date or to first-time adopt in its entity-only financial statements.
• If the parent has adopted IFRS in its entity-only financial statements before the group adopts IFRS for the consolidated financial statements, then the parent's first-time adoption date is still the date at which the group adopted IFRS for the first time.
• If the group adopts IFRS before the parent adopts IFRS in its entity-only financial statements, then the parent's first-time adoption date is still the date at which the group adopted IFRS for the first time.
• If the group adopts IFRS before its associate or joint venture adopts IFRS in its entity-only financial statements, then the associate or joint venture should have the option to elect that either the group date of IFRS adoption is its transition date or to first-time adopt in its entity-only financial statements.

The Board also discussed two issues arising from the fatal flaw review of the revised draft first-time adoption Standard by IFRIC and concluded as follows:

• Previously recognised intangibles from past business combinations should be measured at the amount measured in the acquiree's separate financial statements on acquisition. The purchase price allocation on acquisition should not be revisited.
• Additional explanatory information will be needed in the interim financial statements that precede the first set of IFRS annual financial statements, most notably information about expected changes in accounting policies, so that financial statement users will be aware of the changes ahead. The Board discussed whether to add these additional disclosure into the first-time adoption Standard. The Board decided to add a cross-reference in the first-time adoption Standard to IAS 1 (paragraph 12 in the exposure draft of revised IAS 1), which states that additional disclosure should be provided when the requirements in IFRS and Interpretations of IFRS are insufficient to enable users to understand the impact of particular transactions or other events on the entity's financial position and financial performance.

Improvements to IFRS – IAS 16

Depreciation

The Board discussed how an entity should handle an asset's depreciation at the point at which the asset's carrying amount is found to be below the amount of the asset's reassessed residual value. The Board decided that, when residual value exceeds net carrying amount for an asset (cost less depreciation) the entity should cease to depreciate the asset, on the basis that an asset should only be depreciated when there is a depreciable amount.

Thursday 1 May 2003

Insurance Contracts Phase I

The Board discussed the following:

• Assets backing insurance contracts.
• Insurance against credit risk and financial guarantees.
• Disclosure.

Assets Backing Insurance Contracts

Several participants at the financial instruments roundtables expressed concerns about volatility if assets backing insurance liabilities are measured at fair value while insurance liabilities are measured on a cost basis. The Board discussed various remedies proposed by the roundtable discussants, including:

• Relaxing the criteria for classifying held-to-maturity financial assets.
• Creating a new category of financial assets to be held at amortised cost, being assets backing insurance liabilities. The Board was noted that these assets would generally be fixed income securities.
• Creating a new category of 'available-for-settlement' liabilities measured at fair value with changes in fair value recognised in equity.
• Permit fair value hedge accounting when a non-derivative is used as a hedging instrument to hedge interest-rate risk.

After discussion, the Board agreed not to pursue any of the above alternatives (by vote of 10 to 4).

The Board considered whether an entity should be permitted to redesignate financial assets to another IAS 39 category. The Board agreed to allow an entity, on initial adoption of the insurance contract Standard, to redesignate any financial assets to the new proposed category of 'designated at fair value through income'. The Board further agreed to allow redesignation of any financial assets in a similar fashion if an entity changes its accounting policies for insurance contract liabilities. In both cases the cumulative effect of the change in the financial assets would be treated in the same manner as a change to an accounting policy.

The Board considered whether an entity should be permitted to use a fair value model for assets such as investments in associates and owner-occupied property if those assets are held to back insurance liabilities. The Board agreed allow the fair value model for investments in associates backing insurance liabilities but did not agree with respect to owner-occupied property. This question will be reconsidered at such time as IAS 40 is re-examined.

Credit Risk and Financial Guarantees

The Board discussed the treatment of insurance against credit risk and financial guarantees. The Board agreed that if these items meet the definition of a financial instrument they will be dealt with under IAS 39. If, however, they meet the definition of an insurance contract, they will be accounted for under the entity's existing accounting policy. If they are neither insurance contracts nor financial instruments, current proposals in the Improvements project would require them to be initially accounted for under IAS 39 and subsequently under IAS 37. The Board agreed that the effect of this needed to be clarified.

Disclosure

The Board noted the following principles:

• An insurer shall disclose information that identifies and explains the insurance-contract-related amounts reported in its balance sheet, income statements and, if it presents its cash flow statement using the direct method, in the cash flow statement
• An insurer shall disclose information that helps users understand the estimated amount, timing and uncertainty of future cash-flows from insurance contracts
• An insurer shall disclose the fair value of its insurance assets and insurance liabilities from 31.12.2006, and disclose information about their principal characteristics that are pertinent to their value from 31.12.2005

The Board agreed to add implementation guidance in respect of the disclosures. Also, the Board agreed to change the effective date from 31 December 2005 to 31 December 2006. The Board indicated that it intends to provide additional guidance before the fair value disclosures are required and that the disclosures for claims development should be required for the previous 5 years.

The Board intends to publish the exposure draft around the end of the second quarter of 2003.

Improvements to IFRS – IAS 16, Property, Plant and Equipment

Property Acquired in an Exchange of Assets - Initial Measurement

The Board previously agreed that an entity would measure an item of PP&E acquired in exchange for another asset at fair value unless either:

• The exchange transaction lacks commercial substance, or
• The fair values of both the inbound and outbound assets are not reliably measurable.

In these cases, the acquired PP&E would be measured at the carrying amount of the asset given up in exchange.

The Board discussed how the 'commercial substance' requirement should be applied. The staff proposed two steps:

• Firstly, consider whether the transaction changes future cash flows. These could be the cash flows of the asset, the cash generating unit, or the entity.
• If the cash flows have not changed as a result of the transaction, the entity should determine whether the overall value of the entity has changed as a result of the transaction.

If after these two steps, no change in the future cash flows or on the value of the entity has been noted, then the acquired asset should be measured at the carrying amount of the asset given up in the exchange.

The Board further agreed that the fair value measurement principle would apply to exchanges assets covered by IAS 16 (PP&E), IAS 38 (intangible assets), and IAS 40 (investment property). The Board noted that the FASB intends to expand the scope of this principle to all non-monetary exchanges. The Board agreed to consider expanding the scope at a later stage.

Convergence: Short-term Project – IAS 12, Income Taxes

The Board discussed the following issues arising from a comparison of IAS 12 and FASB Statement 109, Accounting for Income Taxes, with a view to determining what changes could be made to move closer to convergence:

• Exceptions to the basic principles.
• Measurement criteria for deferred tax assets.
• Recognition criteria for deferred taxes.
• Allocations to shareholders' equity ("backwards tracing").
• Balance sheet classification of deferred tax assets and liabilities.

Exceptions to the Basic Principle of Recognising Deferred Taxes for All Temporary Differences

General exemption. The Board agreed to remove from IAS 12 the general exception to the basic principle of recognising a deferred tax liability or asset for taxable temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not (i) not a business combination, and (ii) at the time of the transaction affects neither accounting profit nor taxable profit. The Board noted that the staff would provide further details at a later date as to how these resultant deferred tax assets or liabilities should be accounted for.

Leveraged lease. The Board noted that FASB Statement 109 contained an exemption to the basic principle for leveraged leases. The Board agreed that IAS 12 should not contain a similar exemption.

Goodwill. The Board agreed that IAS 12 should not be amended to remove the exemption in respect of goodwill and negative goodwill.

Investments in subsidiaries, branches, associates, and interests in joint ventures. After discussion the Board generally leaned toward retaining the exemption in respect of subsidiaries but removing it respect of associates and equity accounted joint ventures. The Board agreed that the staff should draft various examples detaining the various options for further discussion at a later meeting. The Board agreed to clarify the meaning of branches within the exemption and to specify that it is a separate taxable entity.

Measurement Criteria for Deferred Tax Assets

The Board agreed to clarify that 'substantially enacted' in respect of tax rates means 'virtually certain'. The Board further agreed to retain the use of the undistributed profit rate in measuring deferred tax balances.

Recognition Criteria for Deferred Tax Assets

The Board agreed that probable means 'more likely than not' and does not intend to go to the valuation allowance approach of SFAS 109.

Allocations to Shareholders' Equity ('Backwards Tracing')

The Board agreed to retain the provision in IAS 12 that requires the allocation of current and deferred taxes directly to equity where the tax relates to items that were taken directly to equity in the current or a previous period.

Balance Sheet Classification of Deferred Tax Assets and Liabilities

The Board agreed to amend IAS 12 to converge with FASB Statement 109, which classifies deferred taxes and liabilities as either current or non-current based on the balance sheet classification of the related non-tax asset or liability.

Friday 2 May 2003

Extractive Industries

The Board discussed a tentative first draft of an exposure draft based on the principles discussed previously at the meeting. The Board agreed to move forward based on the proposed principles (by vote of 12-2). The approach does not involve developing a separate standard but rather exemptions to certain requirements of existing standards, in particular IAS 16, 36, and 38. There was general support for this proposal.

Share-Based Payment

The Board discussed an analysis of responses to the first five questions contained in ED 2. The Board re-affirmed their support for the general principle of recognising share-based payments in the financial statements and for recognising an expense (by vote of 14-0). In addition the Board confirmed their support for the general principle of measuring share-based payments at fair value.

The Board noted that various exceptions to these general principles arising from the comment letters would be discussed, for instance, the use of minimum value for unlisted entities.

The staff proposed, as a result of comments made, that the concepts project should amend the IASB Framework to clarify the meaning of an expense in line with the discussion contained in the US Concepts documents.

The Board agreed to post the comment letters on its website.

IFIRC Update

As six Board members previously objected to the IFRIC's conclusions on Emission Rights, this issue was discussed again at this meeting. As a result of the discussions, some of the Board members who had previously disagreed with IFRIC's conclusions did not object to the revised draft based on the fact that the IFRIC has no other choice but to interpret current guidance.

Three members continue to object to the draft interpretation. Two members believe that emission rights are not assets to be recorded separately from the liability for emissions, unless those rights are sold. If by next Tuesday, 5 Board members still object to the current draft, this issue will be brought back to the May 2003 IASB meeting with the intention of providing specific guidance to the IFRIC.

Business Combinations Phase II

The staff presented the Board with a decision summary of the IASB and FASB joint projects to ensure that the staff had appropriately captured the decisions to date. Several Board members noted concern with the practical application of the full goodwill method. Two Board members indicated potential dissents to the current draft exposure draft. No decisions were made.

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