20-24 October 2003, London
Monday, 20 October 2003 (Afternoon)
 Share-based Payment
The Board redebated the ED 2 approach to classifying arrangements by which an entity has a stated policy or past practice of settling a share-based payment obligation in cash. At the September meeting the Board had agreed to make certain changes including removal of the past practice and stated policy allowances. However, the Board has now agreed to revert to the ED 2 approach (vote of 12-2).
The Board discussed various types of modifications of equity-settled arrangements and agreed the following:
- A modification that results in a decrement in fair value should not be recognised, and any increase should be recognised over the remainder of the vesting period.
- A decrease in the number of equity instruments granted is a partial cancellation of the grant, and any unrecognised expense related to the change should be recognised immediately. The increase in fair value resulting from an increase in the number of equity instruments should be spread over the remainder of the vesting period.
- A change in service conditions that changes the length of the vesting period but does not decrease the probability of vesting should continue as if the modification had not occurred. Where the probability of vesting is increased the modification is accounted for via the truing up method under the modified grant date method.
- A change in performance conditions would be accounted for in the same manner as a change in the vesting period.
- A change in the classification of the grant from equity to liability should continue to be expensed based on the grant date values but the change in fair value of the liability between modification date and settlement date should be recognised.
The staff proposed adding explanatory guidance to clarify the purpose of the business combination scope exclusion as follows:
- Equity instruments issued in a business combination in exchange for control of the acquiree are not within the scope of share-based payments.
- Equity instruments granted to employees of the acquiree in their capacity as employees are within the scope of share-based payments.
- The cancellation, replacement or other modifications to share-based payments because of a business combination or other equity restructuring should be accounted for in accordance with the requirements of share-based payments.
The Board agreed with these clarifications.
Business Combinations – Phase II
The Board discussed various convergence issues.
The Board agreed that in respect of transitional provisions for minority interests held by the entity that were previously controlled the standard should apply on a retrospective basis to:
- The classification and presentation of these minority interests.
- Accounting for decreases, before the effective date of the proposed standard, in a parent's controlling interest in a subsidiary without losing control in that subsidiary: any such losses previously recognised in profit or loss would be reclassified directly to equity.
- Accounting for losses, before the effective date of the proposed standard, that were attributable to minority interests but which exceeded the carrying amount of those interests: any such losses would be reclassified to the minority interests.
The Board agreed that the following should apply on a prospective basis:
- Accounting for a parent's retained ownership in a subsidiary that was disposed of before the effective date of the proposed standard.
- Accounting for acquisitions of minority interests before the effective date of the proposed standard.
The Board previously agreed that deferred tax assets that subsequently met the recognition criteria should be recognised as an adjustment to goodwill. The FASB concluded in these circumstances the adjustment should go to the income statement unless it occurred within one year after the acquisition date and does not relate to a discrete event or circumstance that occurred after the acquisition date and that could not have been foreseen at the acquisition date. The Board agreed to move to the FASB approach.
Revenue Recognition
The Board had previously agreed the following:
- Conditional rights and obligations do not meet the definitions of assets and liabilities.
- Unconditional rights and mature rights meet the definition of an asset if they are enforceable and give access to future economic benefits.
- Unconditional obligations and mature obligations meet the definition of a liability if they are enforceable and oblige the entity to make a future sacrifice of economic benefits.
- Unless a contract is enforceable, the obligations that it imposes on the contracting parties will not meet the definition of liabilities, and the corresponding rights that it conveys to counterparties will not meet the definition of assets.
- Contracting rights and obligations that qualify for recognition as assets and liabilities should initially be measured at their fair values.
The Board discussed the application of these principles in relation to revenue recognition in long-term construction contracts. The Board appeared generally supportive of the approach but expressed some reservations which needed to be further considered.
Tuesday, 21 October 2003
No meeting
Wednesday, 22 October 2003 – Tripartite IASB/FASB/AcSB Meeting
Disclosure Framework
The purpose of the discussion was to determine whether a research project on a disclosure framework is necessary. This would potentially result in criteria that could be used to determine the disclosures required in a particular area.
It was agreed that AcSB should continue developing the project for future consideration as a research project.
Measurement Objectives
AcSB staff provided a background to the project and detailed the definitions of the alternative measurement bases as follows:
Historical cost – Assets are recorded at the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the fair value of the consideration received in exchange for the obligation.
Reproduction cost – The current acquisition cost of replacing an existing asset with an identical one. On a current cost basis, a liability is recorded at the fair value of the consideration that an entity would receive if the liability had been incurred on the measurement date.
Replacement cost – The most economic current acquisition cost of replacing an existing asset with an asset of equivalent productive capacity or service potential. On a current cost basis, a liability is recorded at the fair value of the consideration that an entity would receive if the liability had been incurred on the measurement date.
Net realizable value – The estimated selling price of an asset in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The equivalent for a liability is the estimated settlement amount in the ordinary course of business plus estimated costs of settlement on the measurement date.
Value in use – The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. A liability equivalent is the present value of the estimated cash outflows expected to be incurred in satisfying the contractual provisions of a liability.
Fair value – The amount for which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.
Deprival value – The loss that an entity would suffer if it were deprived of an asset. It is the lower of replacement cost and recoverable amount on the measurement date, with recoverable amount being the higher of value in use and net realizable value. The liability equivalent, known as relief value, is the lowest amount at which an entity could divest itself of the obligation involved.
The staff proposed a tentative conclusion that fair value has more relevance for decision-making than the alternative measurement bases and constitutes the preferrable basis for measuring assets and liabilities on initial recognition when it is reliably measurable.
Various members expressed concerns as to this conclusion. It was agreed that the document should include a discussion on impairment and on fall-back positions where fair value cannot be determined. It was agreed that the document should be issued as a discussion paper or research report with a request for public comment focusing on implications on initial measurement in certain areas.
The AcSB staff will prepare a draft of the proposed paper for review by the partner standard setters and final discussion by no later than the April 2004 meeting.
Revenue Recognition
At previous meetings the Boards have agreed or tentatively concluded that fair value is the relevant measure of assets and liabilities on initial recognition.
The staff proposed that the fair values should be determined based on 'wholesale' fair values. They noted that these might not be available in all circumstances. In these cases fair value estimates based on market-based information such as:
- Prices that its existing subcontractors charge for identical or similar products and services.
- Prices that marketplace participants would charge for identical or similar products and services if the entity decided to outsource its performance obligations
- Prices that the vendor charges when it sells identical or similar products and services to prime contractors (if it acts in a subcontracting capacity) or to resellers.
If the 'wholesale' fair values cannot be estimated with sufficient reliability alternative measures may be used such as:
- Retail prices of identical or similar products and services when sold separately by the vendor (vendor-specific prices)
- Retail prices that the vendor's competitors charge for identical or similar products and services (third-party prices).
A number of IASB Board members expressed concern as to the use of the wholesale fair value approach. It was noted that they agreed to use the approach as a working principle.
The Boards agreed with the use of a hierarchy as set out above. Some concern was expressed that the hierarchy allowed default measures that had different measurement objectives than the 'wholesale' method and that a principle of what the objective is should be expressed and how it should be achieved when there is no direct measure, or observable price of similar items, should be left silent. It was agreed that the staff should further explore this.
Share-based Payment
The Boards discussed various convergence issues arising from the projects.
Classification of share-based payment arrangements as liabilities or equity
There are some differences between the classification of contracts on own shares as
liabilities and equity differs under the proposals in ED 2 and the revised IAS 32 Financial Instruments: Disclosure and Presentation. Except for arrangements with cash alternatives (which the IASB will discuss later), the IASB has agreed to retain the differences between ED 2 and IAS 32, pending the outcome of the Board's concepts project, which includes reviewing the distinction between liabilities and equity.
The FASB recently considered the debt/equity classification in FAS 123, which differs from
that applied in FAS 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The FASB agreed that the exposure draft to revise FAS 123
should incorporate the debt/equity distinction applied in FAS 150. The FASB also has a project to review the definitions of liabilities and equity in its conceptual framework.
The debt/equity distinction applied in IAS 32 is not the same as that applied in FAS 150. For example, the debt/equity classification in IAS 32 does not consider whether the financial instrument is indexed to the entity's own shares, unlike the debt/equity distinction in FAS
150.
Ultimately, therefore, convergence of the definitions of liabilities and equity in the two Boards' conceptual frameworks should enable convergence in the standards on share-based
payment (equity-based compensation).
Transactions with parties other than employees
The IASB standard on share-based payment will deal with both transactions with employees and with parties other than employees. The FASB has recently decided to defer consideration of the treatment of transactions with parties other than employees until the second phase of its equity-based compensation project, to enable it to focus on developing an.exposure draft on employee transactions. In the interim, existing guidance in FAS 123 and EITF 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services will continue to apply.
The IASB deliberations of transactions with parties other than employees have not
concluded at the time of writing these notes. However, it seems likely that there will be differences between the IFRS and current US GAAP. Whether those differences will remain depends on outcome of the FASB deliberations in the second phase of its equity-based compensation project. If the FASB decides on an approach that differs from that applied in the IFRS, the IASB will consider whether to revise the IFRS.
The IASB and FASB staff recommend that after the FASB has completed its project to revise US GAAP on accounting for equity-based compensation, including the requirements relating to both employees and parties other than employees, the IASB and FASB consider undertaking a convergence project with the objective of eliminating all remaining differences between international and US standards.
The Boards agreed with the staff recommendations.
Tax effects of share-based payment transactions
ED 2 proposed that all tax effects of share-based payment transactions should be recognised in the income statement. This differs from the approach taken in FAS 123, which requires any realised tax benefits in excess of the tax benefits on the total amount of remuneration expense recognised to be credited direct to equity as additional paid-in capital. Conversely, if the tax deduction is less than the total expense recognised for accounting purposes, under FAS 123 the write-off of the related deferred tax asset in excess of the benefits of the tax deduction is recognised in the income statement, except to the extent that there is remaining additional paid-in capital from excess tax deductions from previous share-based payment transactions.
Recently, both Boards reconsidered this issue. The IASB agreed to retain the approach proposed in ED 2, while the FASB agreed to retain the approach applied in FAS 123. In essence, the two Boards have reached different conclusions about the transaction(s) or event(s) to which the tax effects relate:
The IASB view is that the tax effects relate to an income statement item, remuneration expense, and therefore all of the tax effects should be recognised in the income statement.
The FASB view is that the tax effects relate to both an income statement item and an equity item, and therefore the tax effects should be allocated between the income statement and equity.
The IASB and FASB voted on who could accept:
- All to the income statement.
- A split between equity and the income statement.
A majority could accept the split approach. A further vote of IASB members indicated a majority could accept the split approach.
In addition to discussing these two views, the Boards will also discuss a related issue, concerning the allocation method that should be applied where the tax effects should be allocated between the income statement and equity.
The IASB staff has developed an alternative allocation method from that applied in FAS 123, under which all tax benefits are recognised in the income statement, except for, and to the extent that, any tax benefits arise from the application of a later measurement date for tax purposes, which are recognised in equity. For example:
A share option has $2 intrinsic value, $4 time value (= $6 fair value) at grant date. The tax deduction is based on the intrinsic value at exercise date, which is $8. The tax rate is 40%.
Tax benefits received: $8 x 0.40 = $3.20
Tax benefits credited to equity: $(8 – 2) x 0.40 = $2.40
Tax benefits credited to the income statement: $(3.20 – 2.40) = $0.80 (or $2 x 0.40)
Note: in the above example, the option has an intrinsic value of $2 at grant date. However, for options granted at-the-money, with no intrinsic value, all tax benefits will be credited to equity.
In developing this alternative allocation method, the following issues arose:
- The treatment of tax shortfalls, that is, when the tax deduction turns out to be less than the recognised expense.
- How to calculate the deferred tax asset between the period in which the expense is recognised and the period in which a tax deduction is made.
In considering the first issue, the IASB staff identified three alternative approaches:
- Recognise the shortfall in the income statement, so that the total amount of tax benefits recognised in the income statement does not, in the end, exceed the total tax benefits ultimately received.
- Recognise the shortfall in equity, to ensure symmetry between the treatment of excess tax benefits and shortfalls.
- Recognise the shortfall in equity, but only to the extent that excess tax benefits on other share-based payment transactions were recognised in equity.
The IASB staff developed an allocation method that applies the approach in the first bullet above, and the FASB staff developed an allocation method that applies the approach in the second bullet.
An indicative vote indicated 10 in favour of any reversals going through the income statement and 11 in favour of equity.
It was agreed that the staff should develop the positions for consideration at future meetings of the respective Boards.
In considering how to calculate the deferred tax asset between the period in which the expense is recognised and the period in which a tax deduction is made, the allocation methods developed by the IASB and FASB staff would both require the recognition of a deferred tax asset that is based on a current estimate of the future tax deduction. However, the allocation method developed by the IASB staff limits the deferred tax asset to the tax benefits relating to the cumulative recognised expense, so that a deferred tax asset is not recognised for the portion of the expected future tax benefits that relates to an equity item. The allocation method developed by the FASB staff does not include this limitation.
This issue will be included in the paper to be prepared by the staff and redebated by the Boards.
Reload features
ED 2 proposed that for options with a reload feature, the reload feature should be taken into account, where practicable, when an entity measures the fair value of the options granted. However, if the reload feature is not taken into account in the measurement of the fair value of the options granted, then the reload option granted should be accounted for as a new option grant. In contrast, FAS 123 requires that, in all cases, the reload feature should not be included in the grant date valuation and therefore all reload options granted should be accounted for as a new option grant.
The IASB recently agreed to retain the proposal in ED 2, while the FASB recently agreed to retain the approach in FAS 123.
The IASB and FASB staff believe there are a number of alternative approaches to this issue:
Incorporate the fair value impact of a reload feature at grant date into the estimate of the grant's fair value unless it is not deemed practicable (ED 2 approach)
Treat all reload grants as new awards (FAS 123 approach)
Treat reload grants dependent on non-market-based performance conditions as new grants and incorporate the fair value impact of a reload feature dependent on market-based conditions into the award's grant-date fair value
The IASB staff supports the first approach. One FASB staff member supports this approach while another supports approach the second approach.
It was noted that FASB members considered practicality and simplicity in reaching their view. The majority of IASB members agreed to move to the FAS 123 approach.
Thursday, 23 October 2003 – Joint IASB/FASB Meeting
Reporting Comprehensive Income (Performance Reporting)
The staff gave details of significant decisions to date and where the FASB and IASB agreed.
Differences between the decisions of the two Boards include:
- Definitions of the business category where FASB staff has proposed it relates to core business. (Each entity would have to define their core business and apply it consistently.)
- Definitions of the finance category where FASB allows the inclusion of income from cash and cash equivalents only.
- FASB has an 'other' category.
- FASB is debating the inclusion of an 'other comprehensive income' category. (IASB members questioned whether this gave rise to recycling. This is still under debate at FASB.)
FASB staff noted that various IASB tentative decisions were still to be debated by FASB in particular remeasurement and disaggregation.
It was agreed to set up a joint working party to consider the project and propose a joint solution for consideration by the Boards.
Convergence – Short-term Issues
The staff listed the IASB and FASB exposure drafts that have been issued or that will soon be issued that intend to converge.
The Boards discussed what issues could be added to the short-term convergence project. The topics discussed were:
components approach to depreciation of fixed assets: IAS 16 requires components of an asset that have different useful lives to be accounted for separately, including the costs of a major inspection. When the scope of the short-term convergence project was originally determined last year, US GAAP was silent on the question of components but there was a draft Statement of Position issued by the AICPA that proposed a components approach. However, under those proposals the costs of planned major maintenance activities could not be regarded as a separate component. The scope of the AICPA project has since been reviewed, so this issue could become a candidate for the Boards to consider in the short-term convergence project.
It was agreed to monitor the AICPA project and reconsider the issue at a later stage.
equity accounting for associates: differences on (i) associates acquired and held for disposal and (ii) conformity of accounting policies. These issues were originally excluded from the short-term convergence project because the IASB was considering whether to review proportionate consolidation (for joint ventures) and equity accounting (for associates) in general. The focus of the IASB's immediate concern has narrowed to proportionate consolidation only. Issues on equity accounting could, therefore be looked at within the short-term convergence project, although the staff is aware of continuing concern over the equity method in general.
pensions and other employee benefits: FAS 87 and IAS 19 are broadly similar at present. However relatively small differences (such as transitional arrangements and past service costs) can create large and lasting reconciling items. Further, the IASB has developed a draft exposure draft of amendments to IAS 19, the main aspects of which would create substantially greater divergence with US GAAP. The IASB is currently considering the timing and possible additions to the content of that exposure draft. The question is whether it is possible to improve some aspects of IAS 19 relatively quickly, for example by removing the options for deferred recognition and prohibiting the presentation of an expected return on assets separate from other changes in the plan assets' value, without reconsidering other major issues such as the measurement of the plan liabilities and in the absence of a revised statement of comprehensive income.
It was noted that certain aspects of this would not be a short-term project and that the staff should reconsider what can be done in the short-term.
disclosures: various disclosure differences were identified but excluded from the short-term convergence project because the priority was on removing recognition.and measurement differences that cause reconciling items. The staff believes that a general convergence project on disclosures would now be helpful to the Boards' constituents.
The staff were requested to consider which EITF and IFRIC or SIC pronouncements could be converged in the short-term.
Short-term convergence - Liability Classification
The Boards have previously come to divergent conclusions as to how to classify debt that would be callable at the balance sheet date because of a violation of the debt agreement if not for the existence of a grace
period.
Tentative FASB decisions would allow liabilities due on demand because of a breach of a debt covenant to be classified as noncurrent if at the time that the financial statements are issued, either the breach has been rectified during the period of grace, or it is probable that the breach will be rectified during the period of grace.
Tentative IASB decisions would require that a liability that is in breach of a covenant at the balance sheet date be classified as current unless the grace period extends at least twelve months beyond the balance sheet date (or within one operating cycle, if longer). The proposed IASB approach would consider the curing of the breach during the grace period but after the balance sheet date, whether before or after financial statement issuance, to be a post balance sheet date event that is not relevant to conditions existing at the balance sheet date.
A general vote indicated a preference for the IASB approach (17-4). All 4 votes were FASB members and 3 indicated they would object to exposing the IASB approach.
Convergence – Income Taxes
The IASB staff identified the following general areas where differences exist between IAS 12 and Statement 109:
- Scope - exceptions to the basic principle
- Measurement criteria for deferred tax assets and liabilities
- Recognition criteria for deferred tax assets
- Allocations to shareholders' equity ("backwards tracing")
- Balance sheet classification of deferred tax assets and liabilities
- Disclosure requirements
- Deferred tax on equity instruments
The IASB has reached the following tentative conclusions which still need to be debated by FASB:
| Category
| Description of difference
| Standard
| Tentative IASB decision
|
|---|
| Scope – exception to the basic principle
| Initial recognition of an asset or liability
| IAS 12
| Amend IAS 12 to eliminate the initial recognition exception
|
| Scope – exception to the basic principle
| Positive and negative goodwill
| IAS 12 and FAS 109
| Retain the exception of goodwill
|
| Scope – exception to the basic principle
| Investments in subsidiaries, branches and associates, and interests in joint ventures
| IAS 12 and FAS 109
| The IASB tentatively decided that an entity should recognize the income tax consequences of all temporary differences arising in the
consolidated financial statements. It concluded that, in principle, no exception should exist for temporary differences on investments in subsidiaries and associates or interests in joint ventures – domestic or foreign. The IASB also decided to amend IAS 12 to eliminate the notion of 'branches'.
|
| Scope – exception to the basic principle
| Special transitional procedures for temporary differences related to deposits in statutory reserve funds by U.S. steamship enterprises for this exception.
| FAS 109
| Do not amend IAS 12 to provide for this exception.
|
| Scope – exception to the basic principle
| Leveraged leases
| FAS 109
| Do not amend IAS 12 to provide for this exception.
|
| Scope – exception to the basic principle
| Intercompany transfers of
inventory or other assets
remaining within the group
| FAS 109
| Do not amend IAS 12 to provide for this exception. Ask FASB to
consider amending Statement 109 to eliminate this exception.
|
| Scope – exception to the basic principle
| Foreign nonmonetary assets that are remeasured from the
local currency into the functional currency using historical exchange rates:
temporary differences that result from (1) changes in exchange rates or (2)
indexing for tax purposes
| FAS 109
| Do not amend IAS 12 to provide for this exception. Ask FASB to
consider amending Statement 109
to eliminate this exception.
|
| Measurement criteria for deferred tax assets
and liabilities Substantively enacted' rate vs. Enacted rate
| IAS 12 and FAS 109
| Use of 'substantively enacted' rate is appropriate.
| Do not amend IAS 12 to converge
with Statement 109. Ask FASB to consider amending Statement 109
to converge with IAS 12.
|
| Measurement criteria for deferred tax assets and liabilities
| Undistributed rate vs. Distributed rate
| IAS 12
| US GAAP - Use of undistributed rate is appropriate. However, if there is
an obligation to distribute a portion of those profits, any deferred taxes on that portion would be measured at the distributed rate. Do not amend IAS 12 to converge
with Statement 109. Ask FASB to consider amending Statement 109 to converge with IAS 12.
|
| Recognition criteria for deferred tax assets
| 'Affirmative judgment approach' vs. ‘Impairment approach'
| IAS 12 and FAS 109
| 'Affirmative judgment approach' is consistent with IASB Framework.
Do not amend IAS 12 to converge with Statement 109. As the difference results primarily in
presentation and disclosure differences, the IASB did not believe that convergence on this
issue was essential.
|
| Recognition criteria for deferred tax assets
| 'Probable' vs. 'More likely than not'
| IAS 12 and FAS 109
| The threshold for recognition should be ‘more likely than not'. Amend IAS 12 to clarify that, consistent with Statement 109, 'probable' means 'more likely than not' for purposes of this standard.
|
| Allocations to shareholders' equity ('backwards tracing')
| Allocation of current year deferred taxes related to an item that was credited or
charged directly to equity in a prior year: Directly to equity vs. Current year income
| IAS 12 and FAS 109
| The IASB believes that the allocation should be to equity, to the extent determinable. It was sympathetic to practical considerations and directed the IASB staff to work with the FASB staff to develop a joint paper that addresses practical considerations.
|
| Balance sheet classification of deferred tax assets
and liabilities
| Non-current vs. Current or non-current based on the classification of the related nontax asset or liability for financial reporting.
| IAS 12 and FAS 109
| Amend IAS 12 to converge with Statement 109.
|
Business Combinations – Phase II
The Boards noted the following issues where each Board had reached tentative conclusions:
Measurement Period
Issue: Whether the measurement period applies to components of the consideration paid.
FASB Decision: The FASB agreed that the measurement period would include components of the consideration paid.
IASB Decision: In the IASB's proposed guidance in paragraph 61 of ED 3 (Phase I), the measurement period applies to the acquiree's identifiable assets, liabilities, and contingent liabilities as well as the cost of the combination.
Overpayments
Issue: Whether an excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (i.e., an overpayment) should be recognised in profit or loss at the date of acquisition.
FASB Decision: The FASB decided that overpayments should not be expensed on the acquisition date. Therefore any excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired would be subsumed into goodwill and subsequently tested for impairment.
IASB Decision: At its March 2003 meeting the IASB agreed that when there is evidence to suggest that the business combination transaction is not an exchange of equal values, the excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (i.e., any overpayment) should be recognised in profit or loss at the date of acquisition.
Transitional Provisions for Minority Interests Decisions
Issue: Whether the transitional provisions for the proposals on minority interests issues should state specifically which proposals should be applied retrospectively and which prospectively.
FASB Decision: The FASB agreed to state specifically which proposals should be applied retrospectively and which prospectively.
IASB Decision: The IASB agreed to an overall statement of principle that all of the proposals related to minority interests should be applied retrospectively, unless retrospective application would not be practicable.
However, both Boards agreed with the staff's assessment as to whether retrospective application is generally practicable for specific financial statement display requirements and minority interests transactions.
Subsequent Recognition of Deferred Tax Benefits
Issue: Whether goodwill should be adjusted for the subsequent recognition of deferred tax benefits acquired in a business combination that did not satisfy the criteria for separate recognition when the combination was initially recognised, but that are subsequently realised.
FASB Decision: The FASB affirmed its decision that deferred tax benefits recognised subsequent to the acquisition should be recognised as a reduction of income tax expense. The FASB also decided:
a. To include a rebuttable presumption that acquired deferred tax benefits recognised within one year following the acquisition date (that is, by reduction of any valuation allowance for acquired deferred tax assets) be reported as an adjustment to goodwill, rather than as a reduction of income tax expense. However, if the rebuttable presumption is overcome, the deferred tax benefit would be reported as a reduction of income tax expense for that period. The rebuttable presumption is overcome if the recognition of the acquired deferred tax benefit results from a discrete event or circumstance that occurred subsequent to the acquisition date, and, thus, was appropriately excluded from the acquirer's assessment in arriving at the valuation allowance at the date of acquisition.
b. To require disclosure of the events or change in circumstances that resulted in the subsequent recognition of deferred tax benefits.
IASB Decision: The IASB agreed that the acquirer should reduce the carrying amount of goodwill to the amount that would have been recognised under IAS 12, Income Taxes if the deferred tax asset had been recognised as an identifiable asset at the acquisition date.
Disclosure of an Additional Schedule If an Entity Is Partially Owned
Issue: Whether to require disclosure of an additional schedule that illustrates the effects of transactions with minority interests on the controlling interest's equity attributable to common shareholders and an additional per share metric that includes in the numerator the effects of equity transactions with minority interests.
FASB Decision: The FASB agreed:
1. To require that entities with one or more partially owned subsidiaries disclose an additional schedule in the notes to the consolidated financial statements that illustrates the effects of transactions with noncontrolling shareholders on the controlling interest's equity attributable to common shareholders
2. To require that entities that present earnings per share also disclose in that schedule an additional per share metric that includes in the numerator the effects of equity transactions with noncontrolling shareholders.
IASB Decision: The IASB previously considered whether premiums and discounts on purchases of equity instruments from, and sales of equity instruments to, minority interests by members of the consolidated group without a change in control should be displayed on the face of the consolidated income statement, and rejected such a presentation. The information about the effects of such transactions on the controlling interest's equity will, under IFRS, be provided in the statement of changes in equity or in the notes to the financial statements.The IASB also previously considered whether the numerator in the earnings per share calculation should be adjusted for premiums or discounts on purchases of equity instruments from, and sales of equity instruments to, minority interests by members of the consolidated group. The IASB agreed that the effects of such equity transactions should not be treated as adjustments to the numerator.
The Boards provided details as to the reasoning behind the decisions for the other Board to consider.
The Boards discussed the issue of determining which assets and liabilities should be included in the business combination accounting (versus post-combination)
The Boards have expressed different preferences on which assets and liabilities should be included as part of the business combination accounting. The IASB supports View A outlined below. The FASB has expressed a preference for View B.
View A: The objective of business combination accounting is to reflect the economic condition of the acquiree (including the effects of the acquiree's past actions) the moment before the business combination. Under this approach, the accounting for the business combination would include the assets, liabilities, and contingent liabilities of the acquiree immediately prior to the business combination.
View B: The objective of business combination accounting is to reflect the assets and liabilities that are acquired and assumed as part of the business combination. Under this approach, the accounting for the business combination would include the items acquired and assumed directly from the acquiree that met the conceptual definition of an asset or liability at the date of acquisition, as well as other assets acquired and liabilities assumed from the owners (seller) of the acquiree or third parties that are included as a condition of the combination and are essential to the business combination (for both the buyer and the seller).
No consensus could be reached and it was agreed that the staff should research the issue further including a view that all assets and liabilities of the acquired entity and that are legally imposed as a result of the combination should be recognised.
The Boards discussed whether certain business risks (contingencies) resulting from the acquiree's past actions constitute an obligation to stand ready when acquired. Two views were discussed in relation to the following example:
An entity contaminates a river adjacent to its land in a country where there is no legislation requiring it to clean up (and the entity has not created a constructive obligation to clean up). There is, however, a possibility that a new law will be enacted in due course that will require the entity to clean up its past contamination. The likelihood of the new law being passed is assessed to be approximately 75%.
View A: The entity had incurred a present obligation because it is left with little or no discretion to avoid the consequences of its past contamination. In other words, although there are no immediate consequences of the contamination, the entity is still obliged to address the consequences of its contamination, whenever they may occur.
View B: The entity does not have a present obligation until the law changes because there are two things required to create a present obligation: the entity must have contaminated and that contamination must be the subject of cleanup legislation (or a constructive obligation must exist).
The IASB has previously tentatively agreed with view B. FASB has still to conclude in this area. No decisions were made.
Agenda Planning
The Boards discussed proposals to develop the agendas so as to achieve maximum future convergence. A proposal to establish a joint working party was accepted.
Friday, 24 October 2003
Business Combinations – Phase I
The Board discussed responses to the proposal that an entity should disclose a variety of information for each segment, based on the entity's primary reporting format, that includes within its carrying amount goodwill or intangible assets with indefinite useful lives.
The staff proposed the following disclosures:
An entity shall disclose the information required under (a) to (f) for each cash-generating unit for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit is significant in comparison to the total carrying amount of goodwill or intangible assets with indefinite useful lives:
- (a) The carrying amount of goodwill allocated to the unit.
- (b) The carrying amount of intangible assets with indefinite useful lives allocated to the unit.
- (c) The basis on which the unit's recoverable amount has been determined (value in use or net selling price).
- (d) The amount by which the unit's recoverable amount exceeds its carrying amount. If the entity determines a range of values for the unit's recoverable amount and does not proceed to agree a single value within that range because the lowest value exceeds the unit's carrying amount, that fact shall be disclosed together with the range of amounts by which the recoverable amount values exceed the unit's carrying amount.
- (e) If the unit's recoverable amount is based on value in use:
— A description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit's recoverable amount is most sensitive.
— A description of management's approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.
— The period over which management has projected cash flows based on financial budgets/forecasts approved by management and, when a period used for a cash-generating unit, an explanation of why that longer period is justified.
— The growth rate(s) used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts, and the justification for using any growth rate that exceeds the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit is dedicated.
— The discount rate(s) applied to the cash flow projections.
- (f) If the unit's recoverable amount is based on net selling price, the methodology used to determine net selling price. If net selling price is not determined using an observable market price for the unit, the following information shall also be disclosed:
— A description of each key assumption on which management has based its determination of net selling price. Key assumptions are those to which the unit's recoverable amount is most sensitive.
— A description of management's approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.
If some or all of the carrying amount of goodwill or indefinite life intangible assets is allocated to multiple cash-generating units, and the amount so allocated to each unit is not significant in comparison to the total carrying amount of goodwill or indefinite life intangible assets, that fact shall be disclosed, together with:
- (a) The aggregate carrying amount of goodwill or indefinite life intangible assets allocated to those units.
- (b) The number of those units.
If, in the circumstance described above, (1) the aggregate carrying amount of goodwill or indefinite life intangible assets allocated to some or all of those units is significant in comparison to the total carrying amount of goodwill or indefinite life intangible assets, and (2) the recoverable amounts of those units are based on the same key assumption(s), that fact shall be disclosed, together with:
- (a) The aggregate carrying amount of goodwill allocated to those units.
- (b) The aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units.
- (c) A description of the key assumption(s).
- (d) A description of management's approach to determining the value(s) assigned to the key assumption(s), whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.
If this is accepted the following disclosures proposed in the exposure draft would not be required:
- (a) The value assigned to each key assumption on which management has based its cash flow projections or its determination of net selling price.
- (b) The amount by which the value assigned to each key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit's recoverable amount to be equal to its carrying amount.
- (c) The change in the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts that would cause the recoverable amount of the unit to be equal to its carrying amount.
The Board agreed with the disclosures except that (d) would be amended to require disclosure of a key assumption where there is a reasonable possibility of a change in that assumption that would give rise to an impairment. In these cases the assumption, the value assigned and a description of the change possibilities would be required.
The Board discussed the transitional provisions of the draft standard and agreed that the requirements should be applied prospectively from the effective date of the standard and that retrospective application would be permitted provided the necessary information was obtained at the time of the combination and that the retrospective impairment tests could be performed. It was noted that the draft standard would be effective for all combinations after it is issued.
The staff proposed that goodwill previously written off directly to equity would not be recycled to the income statement. The Board agreed.
The staff proposed adding undue cost and effort exemptions together with disclosures of this fact and explanations of why this is the case for paragraphs 66(f), 66(i), 69 and 70. The Board agreed.
The staff proposed amending paragraph 67 of IAS 12 as follows:
"As a result of a business combination, an acquirer may consider it probable that it will recover its own deferred tax asset that was not recognised prior to the business combination. For example, the acquirer may be able to utilise the benefit of its unused tax losses against the future taxable profit of the acquiree. In such cases, the acquirer recognises a deferred tax asset, but does not include it as part of the accounting for the business combination, and therefore does not take into account in determining the goodwill or the amount of any excess over the cost of the combination of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities."
The Board agreed.
The Board agreed that any goodwill impaired in an associate would be reversed prior to determining the investor's share of profit. The investor would then test the investment in the associate for impairment.
Business Combinations – Phase II
The Board agreed to require disclosure of gains and losses on obtaining or losing control of subsidiaries.
The IASB had previously agreed that when a business combination is not an exchange of equal values, any excess of the consideration paid over the fair value of the acquirer's interest in the net assets acquired (ie any overpayment) should be recognised in profit or loss at the date of acquisition.
The disclosure of an overpayment would implicitly be required by the following disclosure objectives in ED 3, Business Combinations:
- "An acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations" (paragraph 65).
- "If in any situation the information required to be disclosed by this [draft] IFRS does not completely satisfy the objectives set out in paragraphs 65, 71 and 73, the entity shall disclose such additional information as is necessary to meet those objectives" (paragraph 76).
The Board agreed to explicitly require entities to disclose the amount of any such overpayment, the income statement line item in which the overpayment is recorded, and the reasons for the overpayment.
The Board agreed to revise the disclosure in paragraph 66(i) of ED3 to also include a requirement to disclose revenue of the acquiree since the acquisition date.
The staff proposed that:
- The term contingent asset and the existing guidance for such assets are withdrawn from IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
- Phase II should require the recognition of non-monetary assets without physical substance separate from goodwill, if those assets have a separate fair value that can be measured reliably, irrespective of whether those assets satisfy the identifiability criterion in the proposed IAS 38.
The Board had previously tentatively concluded that definition of a contingent asset should be: "a present right that arises from past events that may result in a futu cash inflow (or other economic benefits) based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity."
The staff noted that this definition defines an asset and consequently the term contingent asset is misleading.
The Board agreed that this is not a definition of a contingent asset but that the contingent asset is the underlying on which the present right depends. The contingent asset would be excluded from assets recognised in a business combination. The present rights referred to above would, however, be intangible assets but may not meet the criteria for separate recognition. In these cases they would be subsumed in goodwill in the business combination. Certain Board members expressed concern that they would not be separately recognised. It was agreed that the staff would investigate this further.
Improvements - Remaining Issues
IAS 21
The Board discussed:
The level to which goodwill should be allocated for foreign currency translation purposes; and
The guidance that should be provided on goodwill allocation issues.
The staff recommended the following wording to be added to the Basis for Conclusions:
"The Board was persuaded by the reasons set out in paragraph BC29 and decided that goodwill is treated as an asset of the foreign operation and translated at the closing rate. Consequently, that goodwill should be allocated to the level of each functional currency of the acquired foreign operation. Accordingly, the level to which goodwill is allocated for foreign currency translation purposes may be different to the level at which the goodwill is tested for impairment. Entities should follow the requirements in IAS 36 Impairment of Assets to determine the level at which goodwill should be tested for impairment."
The Board agreed and consequently no additional guidance will be provided on goodwill allocation.
IAS 32 and 39
The Board considered a proposal that a financial instrument be classified as an equity instrument rather than a financial liability only if both conditions (a) and (b) are met:
- (a) The instrument includes no obligation:
- (i) to deliver cash or other financial assets; or
- (ii) to exchange financial assets or financial liabilities under conditions that are potentially unfavourable to the entity.
- (b) If the instrument will or may be settled in the entity's own equity instruments, it is:
- (i) a non-derivative that includes no obligation for the entity to deliver a variable number of its own equity instruments; or
- (ii) a derivative that will be settled by the entity exchanging a fixed amount of cash or of other financial assets for a fixed number of its own equity instruments (other than its own equity instruments that are themselves contracts for the future receipt or delivery of equity instruments)
The Board agreed subject to some points of clarity. It was noted that similar amendments would be made to the definitions of financial assets and financial liabilities.
The Board had previously tentatively agreed to clarify guidance for determining fair value in inactive markets by stating that the best evidence of the fair value of a financial instrument at initial recognition is the transaction price (that is, the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison to other observable, current market transactions or is based on a valuation technique whose variables include only data from observable markets.
This decision has been questioned but the staff recommended that the decision be confirmed. The Board agreed to converge the wording in this regard to US GAAP.
The Board considered whether to stipulate the requirement for prospective effectiveness testing in the Standard by:
- emphasising that a hedge qualifies for hedge accounting only if it is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk; and
- specifying that 'the highly effective' prospective effectiveness test is passed if expected effectiveness is in the range of 80 to 125 percent (that is, the same test that IAS 39 requires for assessing whether a hedge has been effective retrospectively).
A number of Board members disagreed with allowing an expectation of 80 to 125 percent effectiveness for the prospective test, arguing that it is not sufficiently regorous to justify hedge accounting. The Board agreed to revert to the exposure draft wording – an expectation that the changes in the fair value or cash flows of the hedged item will be "almost fully offset" by the changes in the fair value or cash flows of the hedging instrument.
The staff noted that there is no guidance on the recognition of income on a financial asset that either fails to obtain derecognition or is measured under continuing involvement. Similarly, there is no guidance on the recognition of interest or other expense on the associated liability.
The staff proposed guidance based on the premise that the entity is continuing to recognise (all or some of) the asset. The logical extension of this principle is that the entity should also continue to recognise the income arising from (all or some of) the asset, and simultaneously recognise an expense for the associated liability. The Board agreed.
The Board agreed to clarify that where individual items have been tested for loan impairment, the individual items have a different weighting when tested as part of a portfolio.
The Board also agreed that retrospective application of derecognition on initial recognition would be permitted provided the necessary information is available.
IAS 16
The SEC has expressed concern that there is potential circularity between the commercial substance provisions of IAS 16 and the 'business purpose' doctrine applied for tax accounting in the United States. Under the valid business purpose doctrine, a transaction is not to be given effect for tax purposes unless it serves a legitimate business purpose other than tax avoidance. The SEC's concern is that an entity may assert that the business purpose for structuring a transaction is to get commercial substance treatment (ie fair value accounting) under financial reporting even though the only thing supporting the commercial substance is the change in tax cash flows. In other words, the financial reporting and tax treatments are co-dependent.
FASB agreed to include wording in the Basis for Conclusions to APB 29 that would prohibit commercial substance from being predicated on tax cash flows that arise solely because the tax business purpose is based on achieving a specified financial reporting result.
The staff believes that this co-dependence is a tax jurisdiction-specific issue that needs to be addressed by the respective tax authority. The fundamental question is whether the respective tax authority is going to grant the tax treatment - a question that a global financial reporting standard cannot answer. It should be noted that the staff does not necessarily believe that excluding from IAS 16 language similar to that which was agreed to by the FASB would result in a different accounting treatment for entities that operate in the US tax jurisdiction. The Board agreed that no change should be made in this regard.
IAS 1
The Board concluded in ED 4 that non-current assets should not be reclassified as current under IAS 1 merely because they are held for sale.
The staff proposed that the definition of current assets in the improved IAS 1 include the word 'normally expected', and 'Assets of a long-term nature are not reclassified as current assets when they are held for sale.' The Board disagreed with the staff proposal to change IAS 1 but, instead, concluded that the point be addressed specifically in the standard that results from ED 4.
The staff recommended that paragraphs 54(d) and 60-63 of the exposure draft be amended to consistently apply the principle that the period for identifying assets or liabilities as current is the longer of twelve months after the balance sheet date and the entity's normal operating cycle. The Board agreed with the staff's recommendations.
Some who commented on the Improvements exposure draft said that by removing the 'results of operating activities' from the mandatory line items in the income statement, information about most expenses will only be required to be presented within the profit or loss. It was suggested that, for symmetry with the line item 'revenue' in the income statement, a line item like 'expenses other than finance costs and tax expense' should be added. The Board did not agree with adding this line item.
Small and Medium-Sized Entities
At its September 2003 meeting, the Board decided that it should develop accounting standards appropriate for small and medium-sized entities (SMEs) and that development of IASB SME standards should start by extracting the fundamental concepts from the IASB Framework and the principles and related mandatory guidance from IFRSs and related Interpretations. Any modifications to these concepts or principles must be based on the identified needs of users of SME financial statements. The Board felt that it was likely that disclosure and presentation modifications will be justified based on user needs, but there would be a rebuttable presumption that no modifications would be made to the recognition and measurement principles in IFRSs.
At this meeting, the staff presented, for discussion, a proposed implementation of the foregoing approach with respect to IAS 19, Employee Benefits. The staff extracted all black-letter principles from IAS 19 plus some material from the non-black letter sections that were identified as matters of principle. The extraction reflected the following modifications of the recognition and measurement principles in IAS 19:
- Discounting for all employee benefits payable beyond one year from balance sheet date.
- Measurement of non-monetary benefits (cars, housing, and similar) at cost.
- Allowing an actuarial method that results in measurements that are consistent with the Projected Unit Credit method (IAS 19 requires strict adherence to the Project Unit Credit method).
- Allowing SMEs to choose between two of the methods of recognising actuarial gains and losses that are allowed by IAS 19.
- SMEs would use a single method of recognising actuarial gains and losses for post-employment benefits other than pensions.
The extraction omitted a number of black letter principles that are in IAS 19, including:
- Principles relating to multiemployer plans.
- Principles relating to state plans.
- Principles relating to insured plans.
- The asset ceiling test.
- Regularity of actuarial valuation.
- Detailed guidance on actuarial assumptions.
- Principles relating to reimbursement rights.
- Standards on curtailments and settlements.
For these matters, the SME standard would require a fall-back to the full IAS 19.
Board members commented on the draft extraction, but no Board decisions were made. Among the comments:
- The IAS 19 principles relating to multiemployer plans, state plans, and insured plans should not be omitted because these kinds of plans are commonly used by SMEs.
- Consider whether all or most of the material on defined benefit plans should be removed from the extraction, with reference back to the full IAS 19, because SMEs tend not to have defined benefit plans.
- The SME version of IAS 19 is "far more readable" than the full IAS 19. The document may have an educational use in relation to IAS 19.
- Add a statement of objective and an executive summary at the beginning.
- Explicitly mention the fall-back to the full IFRS in each SME standard.
- Some Board members found the measurement simplifications appropriate, while others favoured reverting to the full text of IAS 19.
- Requiring discounting for all employee benefits payable beyond one year from the balance sheet date complicates, rather than simplifies IAS 19 for SMEs.
- Abolishing the full corridor approach of IAS 19 is not simplification.
- Staff should indicate its proposed justification for each proposed recognition and measurement change or disclosure omission or simplification.
- The Board should agree on the types of entities for which it believes its SME standards appropriate (who is the target company), but should not adopt quantified size criteria.
- Present the proposed SME standards to the Board in a 'marked draft' reflecting all changes to the principles in the related IFRS.
IFRIC Update
The Board noted a summary of the recent decisions and activities of IFRIC. The IFRIC Chairman noted that he had recently attended a European forum where the sentiment was that individual countries (or groups of countries) and bodies or associations within countries should not interpret IFRS but that these countries or entities should be providing guidance on applying IFRS.
This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.
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