16-17 November 2004, London

Tuesday 16 November 2004

Convergence – Post-employment Benefits

A pre-ballot draft of amendments to IAS 19 Employee Benefits had been circulated, and the Board discussed some of the issues raised in respect of that draft. It was also noted that IFRIC members had been asked to conduct a fatal flaw review of the proposed amendments to IAS 19.

Disclosure of Cumulative Actuarial Gains and Losses Not Recognised in Profit or Loss

The pre-ballot draft required the disclosure of the cumulative amounts of actuarial gains and losses not recognised in profit or loss. A Board member had raised the point that this disclosure would incorporate amounts recognised directly in retained profits on transition to IAS 19. The Board agreed that this would reduce comparability of the disclosure, and therefore the requirement should be amended to mandate disclosure of the cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expense.

Group Plans and Multi-Employer Plans

The Board discussed the inconsistencies in treatment of group plans and multi-employer plans under the revised draft. The Board agreed that in concept, information may not be available to a participant in a multi-employer plan, but a participant in a group plan should be able to obtain information on a consolidated basis that will fulfil the disclosure requirements proposed in the pre-ballot draft. It was noted that where one small subsidiary in a group is required by the jurisdiction in which it operates to prepare accounts under IFRS, this group may struggle to get IAS 19 information for the plan as a whole. In this instance an inability to obtain the information would necessarily result in a non-compliance with IFRS and therefore a likelihood of a qualified audit report. The Board acknowledged this but did not see it as a persuasive reason to relax the disclosure requirements.

Accordingly, for a group plan, where IAS 19 information is prepared at a consolidated level, a subsidiary should recognise its share of the net defined benefit cost for the plan as a whole in accordance with the contractual agreement or stated policy for charging the defined benefit cost if there is such an agreement or policy. Where no such agreement or policy is in place, the individual group entity that legally sponsors the plan shall recognise the net defined benefit cost and other entities within the group shall recognise a defined benefit cost equal to their contribution for the period. Some Board members expressed very strong views that this accounting allows entities preparing separate financial statements to manipulate their results, whilst others viewed this as no different from any other related party transaction (such as rent free premises for which rent income and expense is recognised by neither party to the transaction.

In either of these cases, the disclosure requirements of IAS 24 Related Party Disclosures apply. Furthermore, where the subsidiary recognises a defined benefit cost equal to their contribution for the period, additional disclosure requirements are triggered requiring certain information to be disclosed based on IAS 19 calculations for the plan as a whole.

Expected Rate of Return on Plan Assets

At its October 2004 meeting the Board agreed to remove a requirement to disclose the expected rate of return on plan assets by class of asset. Following on from feedback received, particularly from analysts, subsequent to that meeting, the Board agreed to reverse that decision and reinstate the disclosure requirement.

Timing

The Board should receive a ballot draft to vote on within the next week. Electronic publication of the amendments to IAS 19 is currently expected on 10 December 2004. Two Board members indicated that they would dissent from the making of the standard, and a third indicated that they had not yet decided but might dissent.

Convergence – Proposed Amendments to IAS 37

At its September meeting the Board considered a pre-ballot draft of an Exposure Draft proposing amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Exposure Draft had been developed with two objectives – the first converging with the requirements of FAS 146 Accounting for Costs Associated with Exit or Disposal Activities and the second to redefine contingent liabilities for the purposes of co-ordination with the Business Combinations Phase II project.

At the September meeting the Board discussed briefly whether this document should be issued as a proposed revision to IAS 37 or as a proposed new IFRS. The Board asked the staff to consider this issue, and also determine what other aspects of IAS 37 would need to be revisited in a bigger project. The staff presented a paper providing a comprehensive outline of items that would need to be revisited if IAS 37 were going to be revised in its entirety (rather than just by reference to two specific objectives). The Board agreed that endeavouring to address these issues at this time would result in delaying the progress of convergence with US GAAP and the Business Combinations II project. Accordingly it was decided that the Board would expose changes related to these objectives, together with incidental changes, rather than a proposal for a comprehensive overhaul of accounting for provisions and contingencies.

The Board considered whether it would be more appropriate to issue this document as a proposed revision to IAS 37 or a proposed IFRS. This matter, and the respective merits of IAS and IFRS, was debated at length. The Board noted from staff that even re-drafting the standard as an IFRS rather than an IAS would result in a significant extension of the time required to complete the project, and accordingly is not appropriate at this time. The Board noted that such an exercise would necessarily require the Board to revisit the measurement objective which is not consistently described throughout the standard.

Leases

The chairman of the UK's ASB, Ian Mackintosh, accompanied by ASB staff members Andrew Lennard and Hans Nailor presented a paper to the Board examining issues relating to possible methods of accounting for leases within the constraints of existing IFRS.

The Board considered whether assets that represent lessee's contractual rights to use property, plant and equipment should be treated as tangible assets or intangible assets. They agreed that this is a matter which needs to be further explored, and given the constraints (particularly in relation to revaluation) of existing GAAP, it would be better to consider this without regard to the subsequent accounting treatment to come to the 'ideal' answer.

The Board considered whether assets that represent renewal or purchase options should be measured at a revalued amount. One Board member noted that in any event, the fair value of the option must be recognised at the date of exercise for incorporation into the cost of the asset. A number of Board members expressed concern that common practice is to recognise the cost of the renewal at the option premium plus the strike price, when in fact it should be recognised at the fair value of the option at the date of exercise plus the strike price.

Board members agreed that they would be troubled by a model which permitted an option to be revalued where the underlying asset could not.

The Board considered whether liabilities that represent lessee's obligations to make lease payments that are variable or contingent during the lease should be accounted for in accordance with IAS 37 or IAS 39. The Board also considered whether in the lessor's books these should be considered as a financial asset, an intangible asset or part of an asset that could be represented as an interest in property. The Board noted a difference between its own view and that of the ASB as to the timing of recognition of such contingencies – that is the ASB would only recognise amounts contingent on lessee turnover when the lessee makes the sale, while the IASB would incorporate a measure of this asset/liability at an earlier point.

The Board noted a need for exploration of a treatment proposed by some such that leases are treated as a net investment. The Board indicated that this should be explored only sufficiently to explain why the Board had decided it was an inappropriate methodology.

The Board requested the ASB staff to develop a paper on accounting for leases without being constrained by the requirements of existing GAAP as the analysis considered at the meeting showed that existing GAAP was of marginal use in developing an appropriate comprehensive lease accounting regime.

Wednesday 17 November 2004

Consolidations

The Board agreed to proceed with the preparation of an exposure draft that would result in the inclusion of guidance developed regarding the 'control' notion in IAS 27. This ED would exclude guidance on SPEs as the Board has not fully deliberated this issue. The exposure draft is likely to be issued in mid-2005. The Board however agreed to test that guidance against certain SPE scenarios at the next couple of meetings in order to ensure that the guidance would be unlikely to change.

Fund Managers with Dual Roles

At the June 2004 meeting the Board considered how the control definition might be applied if a fiduciary such as a fund manager has power over another entity (the investee) by virtue of a dual role in relation to that investee; that is:

• as a fund manager acting in a fiduciary capacity with power over a fund that has a holding in the investee, but which holding on its own does not give the fund manager power over the investee; and
• as a direct investor (principal) in the investee, but which holding on its own does not give the fund manager power over the investee.

The Board tentatively concluded that there should be a rebuttable presumption that control is assessed in such circumstances by considering the fund manager's two positions collectively. The Board asked the staff to develop possible criteria for when the presumption would be rebutted.

Staff indicated that they had found it difficult to establish criteria for rebutting the presumption. After some discussion, the Board decided not to proceed with the presumption as it is not operable. The Board requested that constituents be asked to comment specifically on this issue in order to establish whether such circumstances exist.

Options over an asset versus options over an entity

The Board had tentatively concluded that an investor's unexercised but presently exercisable holdings of options or convertible securities that give the holder the right to obtain other instruments that enable them to direct the investee's strategic financing and operating policies (potential voting rights) are relevant in assessing whether the investor controls the investee.

For example, if Entity A has a 100% ownership interest in Entity B, but Entity C holds currently exercisable options over all of the equity instruments in B, then C rather than A would, in the absence of other factors, control B.

A consequence of this tentative decision is what some might characterise as an anomaly in the timing of recognition of assets when options are held over an asset compared with when options are held over an entity that holds an asset.

The issue is most clearly illustrated by considering the following extreme scenarios:

• Scenario 1: Entity B's only asset is a parcel of land. Entity A holds a currently exercisable call option over that parcel of land.
• Scenario 2: Entity B's only asset is a parcel of land. Entity A holds a currently exercisable call option over 100 per cent of the shares in Entity B.

In other words, if potential voting rights are considered in assessing control, the resulting asset recognition criteria might be inconsistent with the recognition of holdings of similar rights directly over assets. The Board asked the staff to consider this apparent inconsistency further.

After some discussion, the Board requested the Staff to develop examples for consideration by in the future, setting out the debit and credit entries taking into account Business Combinations Phase II decisions taken already. The Staff will consider FASB examples developed on this issue as well as explore whether consolidation of the entity should be undertaken on the assumption that the options are exercised or not.

IFRIC Update

The IFRIC Chairman gave an over view of IFRIC member appointments and other movements as well as an update on IFRIC activities.

IAS 1 Requirements for Classification of Expenses by Nature or Function

At its October 2004 meeting, the IFRIC discussed a potential agenda topic of whether to tighten the requirements in paragraph 88 of IAS 1 Presentation of Financial Statements for the presentation of an analysis of expenses by nature or function. The purpose of that tightening would be to prevent opportunistic mixing of functional and natural classifications of expenses in the analysis, and thus enhance the comparability of such analyses.

Some Board members noted that this issue stems from the fact that 'operating profit' is not defined.

The staff's recommendation in this regard was to develop the following additional guidance (or similar) for inclusion after IAS 1.88:

In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, expenses are classified in such a manner that each class of expenses represents what it purports to represent and are classified consistently from period to period. For example, under a functional classification:

• inventory write-downs are included in cost of sales;
• termination benefits are included in the same class as other employee benefits; and
• impairment losses on assets are included in the same class as depreciation or amortisation in respect of the same assets.

The Board disagreed with this proposal because it is too simplistic and goes beyond the content of BC13 of IAS 1 (e.g. inventory write-downs are not necessarily part of cost of sales because they may relate to inventory still on hand).

The Board suggested that IFRIC should develop an Interpretation on this issue to highlight better, the content of BC13 of IAS 1 or a minimalist basis.

Other IFRIC matters

The Board considered and approved the following draft Interpretations for issue, subject to editorial changes discussed:

• D8 Members' Shares in Co-operative Entities and Similar Instruments
• D4 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

The Board suggested that the amendment to IAS 39 proposed in this draft Interpretation should be made effective for periods beginning on or after 1 January 2006 (different from the rest of the draft) due to 'stable platform' concerns. The staff would seek concurrence from IFRIC members on this issue and then proceed with issuance of the document.

Business Combinations II

The FASB staff joined the IASB for this session. The IASB was asked to consider and indicate their preferences on certain issues that had been discussed by the FASB, regarding the on-going drafting of the phase II exposure draft. The IASB was not asked to make decisions.

The IFRS 3 definition of a 'business combination' currently differs from the FASB equivalent. After some discussion, the Board agreed that both definitions required improvement and this should be taken into account in determining a common definition for this project. As an alternative, the IASB indicated that it would be prepared to go forward with the FASB definition.

The issue of different drafting around the same principles was discussed (i.e. to use FASB language and IASB language - presumably in different documents - but to mean the same thing). The FASB had indicated that they would be willing to proceed on that basis. The IASB raised concerns as the intention of this project was to issue a single document.

Joint Ventures – Progressing a Short-term Project

At its July 2004 meeting the Board considered a paper in which the staff recommended that:

• any short-term convergence project on joint ventures should be conducted by the Short-term Convergence project team.
• the longer-term and more fundamental review of joint venture arrangements should continue to be conducted as a research project by the Joint Ventures research team.

The Board considered the merits of a short-term project intended to eliminate the option in IAS 31 with certain Board members expressing support for the removal of proportionate consolidation as it is not supportable under the Conceptual Framework.

The Board agreed to proceed with this project, which would consider elimination of the option.

The other issues related to the joint venture project would be dealt with in the long-term project.

Transition and Initial Recognition of Financial Assets and Financial Liabilities

In July 2004, the IASB published an Exposure Draft of Proposed Amendments to IAS 39 Financial Instruments: Recognition and Measurement – 'Transition and Initial Recognition of Financial Assets and Financial Liabilities'. The ED proposed permitting prospective application of the 'day 1' gain or loss recognition requirements in paragraph AG761 for transactions entered into after 25 October 2002. The comment period closed on 8 October and 35 comment letters were received.

In considering the comments received, the Board underscored its intentions when developing this ED, which was the elimination of the reconciling item between IFRS and US GAAP. After discussing the requests for relief in applying this guidance, the Board agreed to make the effective date 1 January 2004 with an option to select 25 October 2002 for those preparers that wanted to align with US GAAP as well as a further option to retrospectively apply the requirements of 'day 1' profit recognition.

The Board agreed that re-exposure of this decision was not necessary and there was no indication by members to dissent on the issuance of the pronouncement.

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