Thursday 24 April 2003

Amendments to IAS 32 and IAS 39, Financial Instruments

The Board reviewed the principal issues discussed at the public roundtables that the Board had held 10-14 March 2003 with over 100 commentators on the exposure draft of proposed amendments to IAS 32 and IAS 39. The Board then sought the reactions of the national standard setters (NSS) on these issues.

Derecognition

The Board reported that the no-continuing-involvement model was criticised during the roundtables and used the following example to illustrate the different views:

Entity A transfers to entity B a financial instrument carried at 100. Entity A guarantees a loss on this investment up to 20. The expected loss is 2, and the fair value of the guarantee is 5. How should A should account for this transaction? During the roundtable discussions, the following answers were presented:

• Since A keeps 100% of the risk, no derecognition.
• Derecognition of 100.
• Derecognition of 100 and concurrent recognition of a liability, with various proposals for the amount of the liability including 20, 2, and 5.

The NSS representatives expressed a range of views as to the appropriate answer without a clear consensus. Some suggested that the Board continue to explore the no-continuing-involvement model. Others encouraged the Board to seek convergence with US GAAP.

Derivatives and Hedge Accounting

All the NSS representatives agreed on the following principles:

• Derivatives create assets and liabilities that should be recognised on the balance sheet.
• Derivatives should be measured at fair value.
• Only items that meet the definition of assets and liabilities should be recognised. Deferred gains and losses are not assets or liabilities.
• Hedge accounting is a special exception to the normal accounting for derivatives, provided that the hedging relationship is designated at inception; at inception the hedge is expected to be effective; and any ineffectiveness is recognised immediately.

Some of the NSS representatives supported the position taken by many banks that hedge accounting treatment is appropriate for macro-hedging and encouraged the Board to have further discussions with bankers. The Board noted that at the roundtables banking industry representatives said they are working on a proposal to resolve the issue of accounting for macro-hedges. The Board has scheduled a meeting with some of bank representatives.

Impairment

The NSS representatives agreed that:

• The model exposed in IAS 39 is an incurred loss model.
• Clarification of the wording and details is needed.

Equity vs. Liability Classification

The NSS representatives expressed no major concerns about the model proposed in the amended IAS 32.

Fair Value Option

The approach proposed in the amendments to IAS 39 would give companies an option to measure any financial asset or financial liability at fair value, with value changes recognised in the income statement. This would be an irrevocable designation at initial recognition of the financial asset or liability.

The two major concerns expressed during the roundtable discussions were the allocation of changes and "cherry-picking". The NSS representatives generally supported this option, but some asked that the hierarchy of fair value sources be revised and more guidance added.

Income Statements (Performance Reporting)

The staff reviewed the Board tentative conclusions for a multi-column income statement that separates Income and Expenses Other than Remeasurements from Income and Expenses Resulting from Remeasurements. They noted that a small number of field tests have begun in the United Kingdom. The Board asked the NSS representatives to solicit feedback from companies in their countries. All agreed that such a fundamental change to the traditional income statement will require a broad educational effort by the IASB.

Research Project Reports

Accounting for Service Concession Arrangements

Standard setters in Australia, France, Spain, and United Kingdom are working on this issue. They have identified a number of difficult issues and have sent them to IFRIC. They working group believes that resolution of the matter is urgent and that the appropriate way to do this is an IFRIC interpretation.

Management Discussion and Analysis Report (MD&A)

This project is being led by New Zealand. The major concern is the scope of an MD&A. The New Zealand standard setter has prepared a working paper that was discussed. Among the comments:

• Specific forecasts should be prohibited
• There should not be duplication of information in the notes and in the MD&A.
• Some NSS representatives felt that an IASB exposure draft should be limited to basic principles, while others favoured more detailed guidance.

Revaluation of Tangible Fixed Assets

This project is being led by New Zealand with participation of the United Kingdom and IASB Staff. The working group has concluded that while revaluation under IAS 16 is based on an asset's fair value, there is a need for guidance for determining fair value. The group proposed that IFRIC issue implementation guidance. The working group also reported that the Canadian standard setter is working on a broad measurement project.

Small and Medium-Sized Entities (SMEs) and Emerging Economies

The IASB staff reported that an Advisory Group has held its first meeting and that several meetings have been held with SMEs. Among the issues being considered are (a) whether to add special standards for SMEs to existing IAS and IFRS or to publish a separate comprehensive IFRS for SMEs; (b) which disclosures might be simplified or eliminated for SMEs; and (c) whether differential recognition and measurement standards are appropriate.

Friday 25 April 2003

Research Project Reports (continued from the previous day)

Extractive Industries

This research project is being led by Australia. The NSS representatives noted a wide divergence of accounting practices around the world and generally felt that the IASB should begin to address the issues in the near future. The Board noted that the extractive industries project is on its agenda of the Board's April 2003 meeting (to be held next week).

Measurement Objectives

This research project is being led by Canada. The IASB discussed a draft of the research paper during its March 2003 Board meeting (March 2003). The paper addresses, among other things:

• Measurement criteria
• Relevant provisions of the IASB Framework
• Limitations of the Framework
• Recent developments
• Special measurement issues that arise at initial recognition of an asset or liability.
• Tterminology and definitions

Among the points raised by the NSS representatives:

• Canadian Accounting Standards Board staff should review the definitions of replacement cost and historical cost of a liability.
• Add a definition of exit value and entry value (further research is needed).
• Develop a clear hierarchy of measurement bases.
• Consider special measurement issues for self-constructed assets.
• Consider special impairment measurement issues.

Project Priorities and Planning

The Board noted that its current highest-priority projects in the planning stage are:

• Additional work on financial instruments
• Consolidations and Special Purpose Entities
• Leases

The NSS encouraged the Board to stick to its timetable.

Convergence Topics

The Board noted that its short-term convergence project has effectively been divided into two phases:

Phase 1

The first phase of the IASB project is currently dealing with the following issues:

Phase 2

This phase of the IASB project will address other differences between US GAAP and IFRS, including:

• Income tax issues
• Construction contracts (FASB will take the lead)

The FASB staff reported on their short-term convergence project. They expect to finish their phase 1 (non-monetary assets at fair value, commercial substance, depreciation, and accounting changes) by the end of May 2003. FASB expects to issue an exposure draft by the end of August 2003.

The IASB staff reported that they are working on some common projects with the FASB staff, including segment reporting.

Insurance Contracts – Phase 1

The IASB staff reported on progress of phase 1 of IASB's insurance contracts project. The two objectives of phase 1 are:

• Provide guidance on how existing IAS should be applied to insurance contracts.
• Introduce disclosure requirements with Fair Value (2006)

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