The Board agreed with the methods the staff proposed but asked the staff to converge with the FASB wording to simplify the understanding and convergence of the two Standards. The staff should come back with redrafting paragraphs but the Board did not change its March meeting position.

The Board considered the allocation of the goodwill impairment losses between the controlling and the minority interests in a cash generating unit that includes a partially owned subsidiary or is a stand alone partially owned subsidiary. The staff proposed that the allocation should be based on the relative carrying amount. The Board agreed with this.

Acquired non-identifiable assets without physical substance

The Board considered whether a non-identifiable asset without physical substance, that does not meet the criteria for recognition separately from the goodwill at the acquisition date, should be subsequently reclassified from the goodwill and recognised separately as an intangible asset if it meets the criteria for separate recognition as a result of an event after the acquisition date in the following limited circumstances:

• The asset meets the criteria for separate recognition within 12 months of the acquisition date, and
• Its fair value at the acquisition date is reliably measurable.

The following examples might fit the above description:

(a) Technology-based items

• Technology developed by the acquiree and nearing the final stage of certification at the date of the acquisition.
• Pending patent for a new drug that has, at the acquisition date, cleared all preliminary clinical trials.

(b) Contract-based items

• Rights arising from a pending operating licence (when the application for the licence was made before the acquisition date) that is granted to the acquiree after the acquisition date.
• Rights arising from a pending broadcasting licence nearing the final stage of approval at the acquisition date.
• Rights arising from the franchise agreement, the terms of which are agreed in principle by the acquiree and the counter party before the acquisition date, but which is finalised and signed soon after the acquisition date.
• Rights arising from a construction, management, service or supply contract, the terms of which are agreed in principle by the acquiree and the counter-party before the acquisition date but which is finalised and signed soon after the acquisition date.

The staff proposed to not separate the intangible asset from the goodwill even if after subsequent events the intangible asset meets the criteria for separate recognition. Some Board members noted that assets would be not amortised, others that it would be caught by an eventual depreciation through the impairment test. Some Board members also noted that this might be affected by the recognition of contingent assets. The Board did not conclude on this subject and the topic will be brought back on the next agenda.

Improvements project

IAS 33

The Board confirmed its February decision regarding mandatory redeemable preferred stock, namely that they should be included in the basic EPS calculation.

IAS 16

The Board decided to clarify (as questions are being received) that property, plant, and equipment related to agricultural and extractive industries are in the scope of IAS 16.

The staff came back with a new wording regarding the commercial substance, and the Board agreed that a definition of 'an entity specific value' should be added as well.

The Board agreed (8-6) that incidental income that arises from incidental operations that are necessarily undertaken to arrive at the final asset or process should be deducted from the cost of the asset but that income from other incidental operations should be taken to income.

IAS 2

The Board confirmed that all entities that do not meet the fair value measurement scope exclusion should record their inventories at the lower of cost or net realisable value and that there is no further exemption for entities operating in high inflation economies.

They agreed that the standard would not require the disclosure of the amount of inventories held at net realisable value but that the amount of the writ down would be disclosed.

IAS 27

The Board agreed to extend the exemption for intermediate parents to not prepare consolidated financial statements, under the circumstances specified, to include equity accounting and proportionate consolidation of associated and joint ventures.

IAS 28

The Board agreed to retain the requirement that associates financial information used for equity accounting may only differ from the investor by a maximum of three months.

The Board agreed to retain the requirement that equity accounted results should be prepared using uniform accounting policies with the group.

Thursday, 18 September 2003

Consolidation (including SPEs)

Definition of control

The Board discussed the concept of control as a basis for consolidation. They considered if the definition of control should require satisfaction of the following three tests:

• i. the ability to direct financing and operating policy (the 'power criterion'); and
• ii. the ability to access benefits (the 'benefit criterion'); and
• iii. the ability to use such power so as to increase those benefits.

The Board agreed that the test should follow the three steps (i), (ii), (iii). The staff stated that the control notion is used to recognise assets. The Board agreed that the control notion should be used to determine whether an entity is a subsidiary. The Staff noted that the concepts used are either control or ownership and that each needs to be coupled with other criteria which are set out above (i), (ii), (iii).

It was also noted that the concept of benefit also needs to exist in order to decide whether or not control exists.

One Board member noted that the notion of control and the notion of risks and rewards benefits should not be dissociated.

The Board agreed to continue with the definition stated in (i) above but to add the concept of strategic control.

The Board agreed that control is not linked to ownership of an entity and can arise where there is either a minority interest or no ownership. It was noted that the case of a consolidation of a 49% holding where the remaining shares are widely held can occur.

The Board agreed that the ability to control and not the actual exercise of control should be considered to determine whether or not the entity should consolidate.

It was noted that situations of economic dependency such as research and development, franchises, and single source suppliers need to be considered in the deliberations. The staff will consider this in a next paper.

The Board agreed that concept of being able to access benefits should be widely interpreted and that they do not have to flow directly from the controlled entity. However, some Board members expressed some concerns as to the implications of this statement and how widely it should be interpreted.

The staff recommended that no minimum benefit should be required in order to consolidate. Some Board members expressed concern as to this issue. However, they did not believe a minimum should be specified (specific percentage or number). It was noted that the time element (cash flows) should be added as the benefits could come in 10 years.

Regarding (iii), it was noted that the controller must have the ability to protect benefits flowing from the group and to improve the benefits flowing in from outside the group. It was agreed to add some illustrations to clarify this issue.

Application of the control definition

Effective control

The Board considered whether parties with current effective control (being those who are able to dominate decision making in practice, in the absence of legal control, such as a holder of a significant voting interest when the balance of voting interests are widely dispersed and disorganised) should be required to consolidate.

There was a general support for the Staff proposal. However, some concerns were expressed as to flip flopping of consolidation and how this statement will affect the assessment of joint venture situations.

One Board member noted that the power to direct was more important that the notion of actual and unexercised effective control. However, the Board agreed that both actual and unexercised effective control should be a sufficient basis for consolidation.

The Board agreed that guidance should be added on effective control, in particular the following:

i. that the holder of the majority of votes usually cast, be explicitly included as a form of control;

ii. that it be stated that it is possible for the holder of less than 50 percent of voting rights to be a controller; and

iii. that there be further discussion of factors that may indicate that a minority owner is able to exercise control such as the size of the ownership interest relative to others, the level of organisation of other holders, the previous holding of a controlling interest by the minority owner, evidence of the ability to appoint board members and evidence of the ability to control the proxy process.

Holdings

The Board discussed whether the holdings of certain other parties be considered in assessing whether an entity controls another (being the holdings of so-called ‘strawmen'). This will include consideration of whether there should be a rebuttable presumption that the holdings of certain parties such as related parties as defined in IAS 24, Related Party Transactions, parties that receive their interests in an entity as a contribution or loan from a potential controller and parties that are unable to sell, transfer or encumber their interests in a potential subsidiary without the prior approval of a potential controller, be included in assessing an entity's control.

The Board generally agreed that the holdings of others should be considered in assessing control. These would include the holdings of related parties, parties that receive their interests in an entity as a contribution or loan from a potential controller and parties that are unable to sell, transfer or encumber their interests in a potential subsidiary without the prior approval of a potential controller.

These would be divided into those that would always be included, such as subsidiaries, and those that should be considered.

Latent control

The Board discussed whether latent control (being the holding of potential voting rights such as presently exerciseable but unexercised options over voting shares or convertible notes) is relevant in assessing current control of an entity on the basis that such a holder has the ability to dominate policy determination.

Regarding this matter, the Board did not disagree with the concept but were concerned as to its application and implications and pointed that it might result to differences between its application on shares and individual assets. (e.g. Scenario 1: Entity A holds a presently exerciseable call option over a block of land owned by Entity B. Scenario 2: Entity A holds a presently exerciseable call option over 100 percent of the shares in Entity C which holds a single block of land. Entity B holds 100 percent of the shares in Entity C).

The staff will consider this comment and will come back with a new paper.

Control as the basis for consolidation – other issues

The Board discussed in what circumstances veto rights may be sufficient to negate apparent control. The staff proposed that in order to negate apparent control those veto rights:

i. may be limited to the ability to block actions;

ii. must relate to decisions in relation to operating and financing policies;

iii. must not be limited to vetoing fundamental changes in the organisation but relate to decisions in the ordinary course of business.

The Board agreed with the principle but expressed concern as to the application and wording. The staff will come back with a new paper, which might include a flowchart.

The Board agreed with the following:

IFRIC

The IFRIC Agenda was presented to the Board:

Share-based Payment

The staff proposed a revised project plan, which the Board agreed to. The Board will have to conclude deliberations at the October meeting and should publish the final Standard during the first quarter of 2004. Any significant issues arising from FASB's deliberations would be considered by the Board at the December meeting.

Definition of grant date

The Board redeliberated the grant date definition and used the two following examples:

Example 1

On 1 March an entity, a wine producer, offers all of its employees the opportunity to participate in the grape harvest in late summer, for additional remuneration. The employees will be given 24 hours notice prior to the harvest date, and must then decide whether to accept or reject the offer. Each employee who accepts the offer and participates in the harvest will receive 30 fully vested shares. The entity's shares are priced at $10 per share on 1 March; $15 per share on 21 August, when the entity telephones each employee to (a) advise that the harvest will take place on the next day and (b) establish whether the employee accepts the offer to participate in the harvest; and $15.50 per share on 22 August, when the harvest takes place.

Example 2

Enterprise B hires a CEO. As part of the employment contract, Enterprise B agrees to give 100,000 fully vested stock options at the end of each of the next 5 annual periods (500,000 stock options in total); however, the exercise price of the stock options will be the average market price for the 12 months preceding each separate delivery of options . . . [B]oth Statement 123 and the Proposed IFRS define grant date as the date when both the employer and employee have “a mutual understanding of the terms” of the award. The employer and the employee understand the formula that will establish the exercise price at the date of each individual grant; however, the exercise price is a key term of the options granted over the five-year period and is not known. Consequently, the day the agreement is signed is not the grant date for the award under both Statement 123 and the Proposed IFRS. [FASB Invitation to Comment, Accounting for Stock-Based Compensation, Paragraph A17; footnote reference omitted.]

The Board concluded that the grant date is when the employee accepts the commitment. The Board asked the staff to provide further narrative clarification of the definition.

Measurement of transactions with parties other than employees

The staff proposed a general principle of measuring goods and services directly and only if this cannot be reliably measured to use the fair value of the financial instrument. Both valuations to take place at grant date.

The following example was proposed for discussion:

The entity, a manufacturer of clocks and watches, enters into an agreement with an antique dealer, whereby the entity agrees to issue 10,000 shares to the antique dealer, conditional upon the antique dealer delivering a rare antique clock to the entity within the next five years. The antique dealer is not firmly committed to delivering the clock—if the clock is not delivered during the agreed period, the agreement will lapse, without the antique dealer incurring any penalty. No consideration was exchanged between the entity and the antique dealer upon entering into the agreement. Therefore, the only asset that the entity will receive in respect of the agreement is the antique clock, if and when the antique dealer delivers it. The entity is unable to estimate reliably the fair value of the clock, because such clocks hardly ever come onto the market. The entity must therefore recognise the asset received (the clock) by measuring the fair value of the shares issued. The entity's shares have a fair value of $15 per share at the agreement date. The antique dealer delivers the clock two years later, when the share price is:

• Scenario A: $20 per share.
• Scenario B: $10 per share.

One Board member emphasised that when the non-employee is not committed, the measurement should take place at date of commitment, usually the date of exchange. In addition, where the direct value cannot be determined, then the date of exchange value should be used.

This proposal was not accepted by the other Board members. The Board finally supported the staff proposal.

Liabilities and equity: ED 2 and IAS 32

The Board agreed the differences regarding the classification under IAS 32 and ED2 should be retained with one exception. The Board agreed that where the entity has the choice of settlement, the entity should use the IAS 32 proposed answer and not the ED2 answer.

One Board member expressed concerns regarding written puts and stated that in accordance with the IGC guidance for IAS 39 these could not be considered to be normal purchase and sale transactions and would thus be accounted for as derivatives under IAS 39 and not as share-based payments under ED2.

The Board acknowledged that this could be a problem, but it was agreed to consider this matter outside the meeting.

ESOPs, ESPPs, and broad-based employee share plans

The staff presented these plans to the Board and noted the divergence with US GAAP, which allows an exemption. The Board agreed not to provide an exemption or further guidance on these plans. They will however ask IFRIC to consider removing the exemption in SIC 12 for equity compensation plans and to determine whether further guidance for these plans is needed.

Valuation issues, including restricted stock and unlisted entities

General

The Board agreed to allow entities to use intrinsic value (which would be adjusted to exercise date) when the fair value of the goods or services or the financial instrument cannot be determined at grant date. This would apply to all entities whether listed or unlisted. Once this exemption is used for a particular transaction that transaction would need to be accounted for on this basis even if the fair value could subsequently be determined.

Restricted stock

The Board agreed that there should be a very small discount, if any, for issues such as restricted shares.

Option pricing models

The Board agreed to provide guidance on the circumstances in which particular types of option pricing models are more appropriate than others.

Transition and effective date

The Board agreed that the effective date of the standard should be 1 January 2005.

The Board agreed to retain the transition proposals of ED 2 but to allow retrospective application to the extent possible if the fair values were determined and publicly disclosed , and to require modifications for those transactions that were excluded as a result of the transition provisions after 7 November 2002 to be treated as modifications.

Friday, 19 September 2003

Extractive Industries

Exploration and evaluation costs

The staff presented a pre-ballot draft and asked to the Board to vote on three specific issues:

• impairment test,
• continuation of previous GAAP, and
• nature of the amendments -- IAS 16, IAS 38, or both?

Impairment test and continuation of previous GAAP

The staff proposed an extractive industry cash generating unit for the purpose of applying the impairment test under IAS 36. The Board expressed some concerns that it would be unlikely that exploration-only entities will be able to capitalise exploration costs or that they would be impaired. One Board member reported that under the current practice in this industry, it appears that exploration costs are deferred until more information is available or expensed and reinstated as assets if the exploration is successful.

The Board agreed to allow current practice in the extractive industries to continue, and this should be applied to both current IFRS appliers and first-time adopters.

Nature of the amendments -- IAS 16, IAS 38, or both

The Board agreed to include exploration costs in the scope of IAS 16 and to cross-reference them to IAS 38, but the current practice of deferral (as explained above) would still be permitted. This proposal was supported by 9 in favour and 5 against.

Business Combinations Phase 1

Definition of intangible asset

The staff proposed to not change the definition of an intangible asset as defined in ED3. The Board agreed but this is subject to a discussion of inter-relation of certain legal rights and contingent assets (for example, ability to participate in a bidding process).

The Board agreed to provide additional guidance where prior exchange transactions outside of a business combination have taken place.

IAS 38: Question 2 - Criteria for recognising intangible assets acquired in a business combination separately from goodwill

The majority of commentators and field visits disagreed on this matter, as not sufficient information is always available. The staff proposed that where there are individual assets that can be identified, but they can only be measured together with one, and only one, other asset, these assets should be viewed as a package and should be recognised as one asset. The other asset could include tangible but not financial assets. The Board agreed with this proposal, and they also agreed to include a presumption that where there is a finite life the fair value can be reliably determined.

IAS 38: Question 3 - Indefinite useful life of an intangible asset

The Board agreed to retain the ED 3 approach but further clarity will be provided.

IAS 38: Question 4 - Useful life of an intangible asset from contractual or other legal rights

The Board agreed to retain the ED3 approach.

IAS 38: Question 5 - non-amortisation of intangible assets with indefinite useful lives

The Board agreed to not change ED 3.

IAS 36: Question 2 - Measuring the recoverable amounts of intangible assets with indefinite lives, and accounting for impairment losses and reversals of impairment losses

The Board agreed to not change ED 3.

Small and Medium-sized Entities (SMEs)

The staff provided the Board with considerations arising from statutory financial reporting and proposed that the project should develop a simplified version of the current Standards.

The Board expressed concerns as to the Framework under which the proposals would be prepared and stated that the users of these financial statements need to be borne in mind when preparing the proposals.

The Board agreed to continue with a project to develop standards appropriate for SMEs (13-1).

How to tackle the project?

The Board tentatively agreed the following:

• Development of IASB standards for SMEs should involve an extraction of principles from existing IFRS and Interpretations. The Board agreed to generally maintain recognition and measurement principles but with guidance as to application. However, the Board may decide to amend recognition and measurement when appropriate.
• Modification of disclosure and presentation principles should be based on the needs of users of SME financial statements.
• If IASB SME standards do not address a particular accounting question, full IFRS would be a mandatory fallback.
• IASB SME standards will be published as a separate volume, sequenced in the order of IAS and IFRS numbers.
• The IASB will decide in the future how IASB SME standards should be labelled.

The Board asked the staff to come back with a 'road map' and an example of an extraction of IAS 19.

Financial Instruments: IAS 32 and IAS 39

The staff asked the Board to clarify some points regarding the discussion on 17 September.

Effective interest rate issues

The Board confirmed that its prior decision (see Wednesday minutes) that the effective interest would be determined over the period until prepayment. They re-affirmed that this means that the related costs will be taken to account over the same period. Where the instrument is reset to a market rate the costs are taken to account over the period to the next reset.

Share-based Payment

Scope

The Board re-debated the scope issues between ED2 and IAS 32-39. The Staff proposed three views:

Alternative 1 - All employee transactions are in the scope of Share-based Payment (SBP). Non-employees transactions are only in SBP scope if the transaction is considered as a normal transaction (under SBP definition) and if the value of the goods or services can be reliably valued, otherwise the transactions are in the scope of IAS 39.

Alternative 2 - All employee transactions are in the scope of SBP. For non-employees transactions, if the transaction is not normal (under IAS 39 definition) then it should be recognised as defined under IAS 39 unless it is a forward then it falls in SBP scope.

Alternative 3 - SBP should apply to all transactions that would otherwise be normal (normal for these purposes means other than speculative).

The Board agreed to decide at the next meeting. However, there was tentative support for alternative 1.

Transition

The Board agreed:

• for options affected by the 7 November 2002 date, the pre-comparative amount is adjusted through opening retained earnings,
• the fair value of liabilities will be determined on 7 November 2002 and accounted for from that date with adjustments to opening retained earnings of the comparative amounts, and
• full retrospective application is permitted for liabilities.

IFRS 1 will be modified based on the above.

The Board considered the taff's proposals for disclosure. These were generally accepted with additional disclosures for the vesting 'true-up'.

Revenue Recognition

The Board considered a paper prepared by the UK Accounting Standards Board staff. This paper considered three views for revenue recognition: the US EITF approach, the wholesale approach, and the retail approach.

The Board discussed how to account for revenue in contracts where a customer pays but the supplying entity does not perform or only partially performs at the time the payment is made. The presented paper states that there is a liability and that this liability should be measured at fair value. It concludes that the fair value should be determined on the retail approach being the price that a purchaser would pay to purchase the goods or services in a retail market (rather than the price that the seller would have to pay another entity to provide the contracted goods or services).

The Board gave comments but 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.