The Chairman noted that from the September meeting the Board will experiment with a new meeting format. The meetings will run from Tuesday morning until noon on Friday and will have larger breaks between sessions than currently occurs. He requested observers to monitor the IASB website for further details.

Exploration for and Evaluation of Mineral Resources – Continued redeliberation of ED 6

Impairment and cash-generating units

In June 2004, the Board confirmed its intention that an entity recognising an exploration and evaluation asset should be required to assess that asset for impairment and that IAS 36 should be used to measure, present, and disclose that impairment in the financial statements. However, it was persuaded by comments received from constituents that requiring IAS 36 recognition to be applied to assets for which there was insufficient data to make a proper, informed assessment of recoverable amount could lead to inappropriate impairment losses being recognised and would defeat the purpose of permitting entities to recognise exploration assets in the first place. Therefore, the Board agreed that the approach to recognition should be changed such that the assessment of impairment would be triggered by changes in facts and circumstances. This would allow entities to continue using their current practices.

The staff proposed that paragraphs 12 to 18 be replaced by wording similar to the following:

Recognition and measurement

12. Exploration and evaluation assets shall be assessed for impairment when and only when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying amount of an exploration and evaluation asset exceeds its recoverable amount, an entity shall measure, present and disclose any resulting impairment loss in accordance with IAS 36.

13. This IFRS requires an entity recognising an exploration and evaluation asset to assess that asset for impairment. However, sometimes exploration and evaluation assets do not generate cash flows and there is insufficient information about a specific area's mineral resources for an entity to make reasonable estimates of an exploration and evaluation asset's recoverable amount. This is because the exploration for and evaluation of the mineral resources has not reached a stage at which sufficient information is available. Therefore, this IFRS requires an entity to assess an exploration and evaluation asset for impairment only when facts and circumstances suggest that the carrying amount of such an asset exceeds its recoverable amount. Once facts and circumstances indicate that an exploration and evaluation asset may be impaired, IAS 36 shall be applied with respect to measurement, presentation and disclosure.

14. One or more of the following facts and circumstances would suggest that an entity should test an exploration and evaluation asset for impairment:

a. the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed

b. further exploration for and evaluation of mineral resources in the specific area are neither budgeted nor planned for in the near future

c. exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities mineral resources and the entity has decided to discontinue such activities in the specific area

d. sufficient data exists to indicate that, while a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from a successful development or by sale

In such cases, the entity performs an impairment test in accordance with IAS 36 Impairment of Assets. Any impairment loss is recognised as an expense in accordance IAS 36.

15. The list in paragraph 14 is not exhaustive. An entity may identify other indications that an exploration and evaluation asset may be impaired and these would also require the entity to determine the asset's recoverable amount.

16. Unless it is part of a cost centre under full cost accounting, when a specific area is surrendered, abandoned or otherwise deemed worthless, any exploration and evaluation asset related thereto shall be impaired and recognised as an expense in accordance with IAS 36.

17. When an entity has discovered commercially viable quantities of mineral reserves but is delaying a decision to develop the resource because the specific area requires major capital expenditure before production can begin, it shall assess the carrying amount of the related exploration and evaluation asset.

Reclassification of exploration and evaluation assets

18. An exploration and evaluation asset shall be reclassified as a development asset when the decision to develop the mineral resource is taken. Exploration and evaluation assets shall be assessed for impairment, and any impairment loss recognised, prior to reclassification.

The Board agreed with the above in principle but asked the staff to reword the paragraphs including removing paragraph 16 above.

Level at which impairment is tested

The Board proposed in ED 6 that entities should be able to test impairment at the level of the cost centre for extractive activities. The staff noted that many respondents disagreed with the proposal. A number of them stated they would prefer to apply the 'cash generating unit' (CGU) definition in IAS 36.

The Board noted that they believed applying the IAS 36 CGU definition would result in impairment being applied at a lower level (such as well by well in an oil field) and that commentators had misinterpreted the proposals in ED 6.

The Board agreed that they did not intend to push impairment in these circumstances down to a well-by-well or similar level but were concerned about the comments received. They requested the staff to discuss the issue with a number of the commentators particularly those using the full cost method.

Effective Date and transition

The staff recommended that the proposed standard be effective for 1 January 2006 and that early adoption be allowed. Staff said this proposal was in response to comments about the 'stable platform' despite the standard being necessary for those jurisdictions applying IFRS for the first time in 2005. The Board agreed.

Transition would follow the normal retrospective approach under IAS 8 except if information is not available, in which case this would need to be disclosed. This could apply, for example, for impairment tests required at 1 January 2004.

The Board agreed that, subject to the above items requiring further investigation, it intends to finalise the standard at the September meeting.

Short-term Convergence: IAS 20 Government Grants and Disclosure of Government Assistance

The previous decisions to replace the provisions of IAS 20 with a standard based on guidance for recognising grants in IAS 41 were noted.

The staff noted that there was a potential inconsistency between the government grant liability measurement and revenue recognition requirements of IAS 41 and the proposed changes to IAS 37 and the Revenue Recognition project. The inconsistency relates to the delay in revenue recognition under IAS 41 requirements until a specified condition is satisfied at which time the full grant is recognised in revenue.

The staff noted that IAS 41 refers to conditional and unconditional grants but does not provide sufficient guidance on what is meant by conditional in this context. The staff recommended that a definition of 'condition' be added as follows:

A condition is a stipulation that entitles government to the return of the granted resources if a specified future event that is not presently regarded as remote either occurs or does not occur.

The Board agreed that a definition should be added but that it should refer to it having commercial substance (i.e. in order to exclude routine / normal trading transactions).

Recognition of government grant as an asset or reduction of liability

The staff recommended that an entity should recognise a government grant as an asset at the earlier of the entity:

• having an unconditional right to receive the government grant without conditions attached to its retention; and
• receiving the government grant.

A number of Board members noted that this was not their preferred solution but agreed that further development is outside the scope of the short-term convergence project. After discussion the Board agreed not to provide guidance on whether an asset and liability would be recognised when a repayment clause is attached to a condition or whether no asset should be recognised at all until the grant is fully non-repayable.

Testing an asset for impairment

The staff recommended that an asset acquired in connection with a government grant should be tested for impairment on initial recognition. The Board agreed subject to adding clarification that any liability recognised in relation to the grant be considered as part of the cash generating unit.

Loans at nil or low interest rates

The staff recommended removing the reference to these loans from the proposed government grants standard so that they would be accounted for under IAS 39. The Board agreed.

The Board agreed to require retrospective application except for the impracticability exemption and to request commentators to provide details of circumstances where this would not be possible.

Joint Ventures

This discussion was brought forward from Wednesday and observer notes were not provided at the time of the meeting.

The staff recommended that:

a. the short-term project on joint ventures, whose objective is to achieve convergence in the accounting for interests in jointly controlled entities, be conducted by the IASB's and FASB's joint Convergence project team.

b. the longer-term and more fundamental review of joint venture arrangements be conducted as a research project by the Joint Ventures research team lead by the Australian Accounting Standards Board (AASB) with help from the standard-setters in China/Hong Kong, Malaysia, and New Zealand.

The Board tentatively agreed to remove the short-term convergence project and ask the AASB to accelerate the research project. The staff were requested to discuss this with the AASB, to obtain a revised timetable so that more Board meeting time could be made available for the project, and to consider the issue at the first available meeting, possibly November. In addition the staff should consider what amendments could be made particularly in the area of disclosures.

Short-term Convergence: Classification of liabilities as current or non-current

FASB has been considering the changes made to IAS 1 Presentation of Financial Statements in the Improvements Project relating to classifying a liability as current or non-current when it has been refinanced after the balance sheet date or a waiver of a breach of covenant has been agreed after the balance sheet date.

The FASB continues to support the IAS 1 answer (the liability is classified as current) conceptually but feels unable to move forward due to opposition from constituents who believe they would only become aware of the problem after balance sheet date, when the financial statements are prepared, when it is too late to correct the problem and obtain a non-current classification. The FASB will readdress the issue in its project on financial performance.

The Board agreed not to amend IAS 1.

Revenue Recognition

At recent Board meetings, several Board members expressed the view that a reporting entity's performance obligations to its customers should be initially measured based on the amount that the customer paid or agreed to pay to the reporting entity (the 'customer consideration amount') rather than the amount that the reporting entity would have to pay to legally lay off its obligation to its customers (the 'legal layoff amount'). Some of those Board members also expressed the view that measurement of those obligations should be based on the perspective of the customer rather than that of the reporting entity.

A customer perspective focuses on the fact that the customer and the reporting entity are counterparties to the same contract. Under this view, the reporting entity's obligations to its customer are thought to correspond precisely to the customer's rights (and vice versa). Accordingly, the reporting entity's accounting for its rights and obligations should mirror the customer's accounting for its rights and obligations under the contract (assuming that the customer prepares financial statements).

Under a reporting entity perspective, the reporting entity's accounting for its rights and obligations is not based on how the customer accounts for its rights and obligations under the contract. Instead, the reporting entity's accounting is based on the reporting entity view of its rights and obligations, which does not necessarily mirror the customer's view of those rights and obligations.

The Board agreed with the reporting entity perspective. Some Board members continued to express concern that revenue would be recognised despite an obligation to refund in the case of non-performance.

The Board discussed a case study covering a long term contract illustrating the application of the proposed conceptual model for accounting for contractual rights and obligations.

In this example a number of Board members agreed that allocating revenue to contract origination, assuming its fair value can be determined, would be better than current percentage-of-completion accounting. Other Board members expressed concern either because they disagreed with the model or because they were concerned as to its application due to the assumptions being unrealistic.

Tatsumi Yamada conveyed a message from the Accounting Standards Board of Japan (ASBJ). The ASBJ expressed concern as to the direction of the project and requested that it be stopped. The message was noted.

Business Combinations Phase II

The Board discussed issues where the IASB and FASB have reached different conclusions.

The first is the treatment of an excess of the consideration paid over the fair value of the acquirer's interest in the business acquired (the overpayment). The IASB requires this to be taken to profit or loss and the FASB requires it to be subsumed within goodwill. The Board continued to believe they have the better principle and would prefer to expose on this basis and ask a specific question as to reliability of measurement and other problems. If FASB did not agree to this the IASB will expose the FASB requirement.

The second relates to the IASB conclusion that there is a rebuttable presumption that the consideration paid provides the best evidence of the fair value of the business acquired. The FASB believes that this would normally be the case and should be used when 100% of a subsidiary is acquired but should not be a rebuttable presumption when a partial interest is acquired. The IASB agreed to move to the FASB requirement.

The third relates to differences in the IASB's and FASB's application guidance on the definition of a business. The IASB agreed to move to the FASB guidance together with an explanation in the Basis for Conclusions on the implication of the differences.

The Board noted various inherited differences, some of which will be dealt with in the short-term convergence project and some of which will need to be dealt with in later projects.

The Board noted a summary of decisions taken to date.

In response to a query regarding field testing of the full goodwill method, the staff noted they would be observing the FASB's field visits with preparers. The FASB staff noted that their user consultative group were in favour of the full goodwill method as they believed it provided more useful information.

Wednesday 21 July 2004

Amendment to IAS 32: Classification of financial instruments puttable at fair value

At its June meeting, the Board had a preliminary discussion on the classification as liabilities or equity of financial instruments puttable at a pro rata share of the fair value of the residual interest in the issuer ('financial instruments puttable at fair value'). The Board noted that the application of IAS 32 to financial instruments puttable at fair value gives rise to anomalous accounting because, assuming that the fair value of the entity is higher than the entity's net asset value, the balance sheet will always show net liabilities, and those net liabilities will increase the better the entity performs.

The Board agreed to explore whether it should propose an amendment to IAS 32 in the short term through one of the following possible approaches:

(a) An exception so that instruments puttable at fair value are classified as equity;

(b) Continuing to classify such instruments as liabilities but amending their measurement so that changes in their fair value would not be recognised;

(c) Considering whether all puttable instruments (and not only those puttable at fair value) should be separated into a put option and a host instrument.

(d) Do nothing (staff recommendation).

Concerns were raised regarding amendments to IAS 32 at this stage, but if an amendment were to be made, the Board leaned toward approach (a).

Approach (a)

If the Board decides to use approach (a), the staff proposed the following drafting:

A financial instrument that will or may require the entity to redeem it and that otherwise evidences a residual interest in the assets of an entity after deducting all of its liabilities shall be classified as a liability unless all of the following criteria are met:

• there is no other instrument classified as equity.
• the instrument is the most subordinated class of all instruments issued by the issuer and has no preferential rights relative to other instruments of the issuer.
• the redemption price is a pro-rata share of the fair value (or, in the absence of an otherwise determinable fair value, a formula that all the shareholders agree represents a reasonably close approximation of fair value) of the residual interest in the assets of the issuer at the redemption date.
• the redemption event is the same for all of the instruments.
• holders of the instrument participate in the issuer's net assets and distributions of profit on a prorate basis."

More detailed guidance would be provided in the Application Guidance. It was also suggested that an additional restriction be added making it clear that this exception would only be available to non-public entities.

Approach (b)

If the Board decides to use approach (b), the staff recommends that the Board:

• introduce a fifth category of financial instruments in the definitions (eg 'financial liabilities that evidence a residual interest in the entity'. Such a category would be defined along the lines of the exception proposed in approach (a);
• amend paragraph 47 of IAS 39 to specify that financial liabilities in this fifth category are measured at the amount initially recognised and not re-measured, as follows:

  "After initial recognition, an entity shall measure all financial liabilities at amortised cost using the effective interest method, except for: …

  (c) financial liabilities that evidence a residual interest in the entity, which shall be not be re-measured subsequent to initial recognition."

Staff were asked to continue work on approach (a) by considering as many examples as possible that would then be discussed at the September meeting, so the Board can aqssess the extent of the impact of such an amendment.

Insurance Contracts Phase II

The Board discussed general education material on the nature of insurance contracts and current accounting models for insurance contracts. In essence, this meeting was the kick-off of the Phase II project starting with a clean slate. No decisions were made as this session was meant to be a 'refresher' for the Board.

The Board discussed general issues around which model(s) should be used for different types of insurance contracts--focussing on the 'asset/liability model' and the 'deferral and matching model'. The Board also discussed general issues on whether the model should:

• be constructed in a manner that prohibits or limits the recognition of net profit or loss on initial recognition,
• incorporate expectations about cash inflows and outflows that are a consequence of policyholder renewals or cancellations, and
• should require costs incurred to acquire new insurance contracts to be capitalised as assets and amortised.

In September, the Board will discuss issues related to measurement, such as discounting, asset/liability interaction, risk/service adjustments, unbundling, participating contracts, and credit standing. This discussion is also expected to be educational, and no decisions are expected.

Business Combinations Phase II

The Board continued the Phase II discussion on Business Combinations by going through the principal decisions made to date and clarifying the wording in the summary document presented by the staff.

The staff tentatively indicated that a draft exposure draft could only be expected at the end of the fourth quarter. This was tentative, as staff were still to meet with the FASB staff to set out the work plan.

An indication was requested of Board members intending to dissent on the exposure draft. Five Board members indicated that they would dissent, principally for the following reasons:

• The full goodwill approach taken by the Board contradicts the Framework as that portion attributable to the minority interest does not meet the definition of an asset. In addition, the recognition criteria for an asset require the measurability of an asset to be reliable. The dissenting Board members indicated that this was not the case for goodwill, which is in principle a residual amount. Furthermore, any impairment write offs of such goodwill would be taken through the income statement of the entity and thereby affecting the minority's interest in the results of the entity. Cost/benefit concerns of the full goodwill approach were also raised.
• The accounting for transactions with minority interests has not been fully explored, and the disclosure requirements in this area are insufficient.
• The step acquisition provisions agreed to by the Board.

Thursday 22 July 2004

Accounting Standards for Small and Medium-sized Entities

The Board discussed draft SME versions of the IASB Framework for the Preparation and Presentation of Financial Statements and of three standards:

• IAS 16 Property, Plant and Equipment
• IAS 18 Revenue
• IAS 23 Borrowing Costs

As was the case with the discussion at previous meetings of a number of other draft SME versions of IFRSs, the Board's discussion was preliminary, and no decisions were made. Decisions on the content of IASB Standards for SMEs will be made only after the Board has considered the responses to the Discussion Paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities.

Draft SME version of the Framework. Staff presented to the Board an extraction of the principles from the Framework in the form of an IASB Framework for SMEs. Board Members expressed some concern that the extraction might be regarded as creating a different Framework for SMEs than the one looked to by entities following IFRSs. The Board concluded to wait to review the responses to the Discussion Paper before providing guidance to the staff on whether a special version of the Framework is appropriate for SMEs. Draft SME version of IAS 16. The SME version of IAS 16 includes no discussion of the revaluation model but has a reference back to IAS 16 if an SME wants to adopt the revaluation model rather than the historical cost-depreciation model. The Board did not disagree with this approach.

Board members generally felt that some of the grey-letter guidance in IAS 16 that was omitted in the draft SME version of that standard would be particularly useful to an SME. Examples include the initial costs to be included as part of the cost of an item of property, plant and equipment; accounting for costs subsequent to initial acquisition; inspection and overhaul cost; costs of self-constructed assets; component depreciation; and when depreciation should begin and should cease. Staff agreed to review the deleted guidance and, at a future meeting, present to the Board a revised standard with certain guidance reinstated, perhaps as an appendix of application guidance rather than in the body of the SME standard. The Board also suggested that the staff consider a similar approach (application guidance and examples in an appendix) for other SME standards.

Draft SME version of IAS 18. All of the principles in IAS 18 are included in the draft SME version of that standard except that the detailed guidance on exchanges of goods and services in paragraph 12 of IAS 18 is replaced with a reference back to IAS 18. Also, several disclosures are not included. Board members generally felt that revenue recognition is a pervasive issue for all SMEs, and most of the guidance in IAS 18 should be retained in the SME version of that standard.

Draft SME version of IAS 23. IAS 23 was not revised in the recent Improvements Project. It presents the two accounting policy choices (expensing and capitalisation) as the 'benchmark' and 'allowed alternative' respectively. The SME version of IAS 23 retains the two choices but does not include any discussion of the capitalisation model. Instead, there is a reference back to IAS 23 if an SME wishes to choose capitalisation. However, the SME version of IAS 23 does not describe the choices as 'benchmark' and 'allowed alternative'. Instead, it describes them as the 'expense model' and the 'capitalisation model'. The Board did not disagree with this approach.

Project Plan. The Board also discussed a project plan proposed by the staff and made some modifications to it. Under the plan tentatively agreed to by the Board:

• The Board will have reviewed the SME version of all IASs and IFRSs and the Framework by December 2004, in most cases at more than one Board meeting. However, the views expressed in the letters of comment on the Board's Discussion Paper may result in a change to this timetable.
• An SME version of IAS 26 Accounting and Reporting by Retirement Benefit Plans is not needed because such plans have a fiduciary responsibility to their participants and, therefore, have public accountability. They must use IFRSs, not SME standards.
• The Board will begin its consideration of the comments received on the Discussion Paper at the October 2004 meeting. Consideration would continue in November and December 2004.
• Assuming that the responses to the Discussion Paper do not result in major alterations to the Board's approach to the project, in January 2005 the staff will bring to the Board an initial combined document reflecting a proposed exposure draft of IASB Standards for SMEs. Deliberation of that document would continue during the first half of 2005, with a goal of approval of an exposure draft by 30 June 2005.
• The Board suggested that the staff organise one or more roundtable meetings with preparers, auditors, and users of SME financial statements to discuss their views about the IASB's exposure draft of IASB Standards for SMEs after it is published.

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