Financial Instruments Puttable at Fair Value

Scope of the project

At its March 2005 meeting, the Board agreed to give further consideration to accounting for 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'). As IAS 32 currently stands, these instruments are classified as financial liabilities. The Board noted that the application of IAS 32 and IAS 39 to financial instruments puttable at fair value, when those shares are the common shares of the entity, gives rise to anomalous accounting.

As a result of the Board's decisions in March 2005, the staff recommended two categories of amendments to IAS 32:

• 1. The first category encompasses the definition and classification of a 'financial instrument puttable at fair value' and is aimed at shares, partnership interests, and minority interest puttable at fair value. Those classes of instruments have similar features, giving the holder the right to put the instrument back to the entity in exchange for its fair value, which is the instrument's pro rata share of the fair value of the issuer.
• 2. The second category addresses instruments that have an obligation arising on liquidation. Instruments in limited life entities do not normally contain the right to put the instrument back to the issuer during the life of the entity. Instead, such instruments confer the right to receive cash or other assets on liquidation of the entity, with liquidation being a certain event. Put another way, shares in limited life entities establish an obligation that arises on liquidation, and liquidation will occur at a known date.

The amendments would result in all of the following being classified and presented as equity: shares, partnership interests, and minority interests puttable at fair value, and shares in limited life entities.

For discussion purposes, the issues were analysed as follows:

• 1. Instruments puttable at fair value.
• 2. Instruments with obligations arising on liquidation, and liquidation is certain (affects limited life entities).
• 3. Instruments with obligations arising on liquidation, and liquidation is at the option of the holder (affects partnership interests).
• 4. Classification of minority interests in consolidated financial statements, when minority interests are puttable at fair value or an obligation arises on liquidation (and liquidation is certain or at the option of the holder).

The Board decided to tackle issue 1 first, to set the guidelines from which the more complex issues down the list could be addressed. The Board discussed the staff's proposals at length, noting that whether the put option is a separate instrument from the shares should not result in different accounting. If this is not achieved, the result would be the creation of structuring opportunities.

The Board agreed that the only short-term solution to this issue would be to create exceptions until the long-term project dealing with equity and liabilities has been completed. This exception would specify that it would only be available for all of the equity that is the subject of the put option (that is, there would be no opportunity for other types of contracts to be written over similar equity instruments). In addition, that class of equity must be the 'absolute residual' – the 'most subordinated' class of equity. Additional work would be performed to adequately ring-fence these exceptions.

The Board discussed what would constitute different classes of equity (for example, where different voting or participation rights attach to the same category of shares) but did not make decisions on this issue. The Board seemed to agree that in the consolidated financial statements, a non-controlling interest (minority interest) would be considered to be the same class of equity to that of the parent entity (that is, the existence of a non-controlling interest would not disqualify an entity from applying the exception).

Items 2 through 4 above were not addressed as distinct issues but were referred to at various points throughout the Board's discussions.

The Board noted the reservations of some members about the additional complexity that would be introduced into the accounting for financial instruments if these proposals are adopted. The Board agreed to proceed with this project, as it has already been taken onto the agenda and because the issue is significant.

Determining whether a share puttable at the fair value of the residual interest in the entity should be split into an ordinary share and a put option with approximately zero value

On this issue, the staff recommended the following:

A compound financial instrument should be split into components when it is clear that the components exist, that the components can be separated and when separating the components results in faithful representation of the financial position of the entity. In the case of the put option in a puttable share, the staff found that it was not possible to separate a component as it was not possible to economically identify those situations in which the put option would be exercised. In addition the put option component is not identifiable based on separate cash flows.

The staff also found that shares puttable at a fixed strike price are economically similar to convertible debt. Consequently the staff believes that classifying a puttable share as equity while classifying convertible debt principally as liability does not result in the faithful representation of what are economically similar obligations. In other words, the put option changes the nature but not necessarily the value of the obligation to shareholders.

Consequently, the staff did not recommend that a puttable share be split into an ordinary share and put option with a floating strike price.

Some Board members indicated support for the staff recommendation and others for an alternative approach that acknowledges that IAS 32's classification scheme is 'fundamentally flawed'. Supporters of the alternatives conclude that the composite instrument described as a puttable share does not satisfy the definition of a liability, and presenting it as a liability does not enhance the relevance of the financial statements. Proponents of this view acknowledge that there is a liability component of the instrument, but measuring that liability based on redemption amount described in IAS 32 is not the fair value of that component on initial recognition. Such measurement is inconsistent with how virtually all other financial instruments and mostg non-financial liabilities are measured (excepting, perhaps, employee benefit obligations).

The Board was asked to vote on whether (a) to continue a separate project on financial instruments puttable at fair value or (b) to address the issue in the broader and longer-term liabilities and equity project. The Board agreed to add this issue to the broader liabilities and equity project whilst continuing with the separate project on financial instruments puttable at fair value.

  Revenue Recognition

The Board tentatively decided in June 2005 to explore a revenue recognition approach that measures performance obligations using an allocation of the customer consideration amount ('customer-based value') rather than fair value. At this meeting, the Board considered some of the issues relating to the identification and measurement of performance obligations using a customer-based value (CBV). Specifically, the Board was asked to consider a series of questions related to the staff's recommendations. These are set out below together with the Board's decisions:

1. Deliverables

The Board has previously tentatively decided that revenue should be defined in terms of changes in assets and liabilities. It has also tentatively decided that those assets and liabilities usually arise from legally enforceable rights and obligations that are conveyed in contracts with customers. Thus, a seller is providing a set of legally enforceable rights and incurring a set of obligations for which it expects to be fully compensated. Revenue should arise when each deliverable (or performance obligation) is delivered (or extinguished).

Board members were asked whether they agree, as a general concept, that revenues should arise when each contract deliverable (or performance obligation) is delivered (or extinguished).

The Board agreed.

2. Disaggregating the components of a revenue contract

Determining how to disaggregate a revenue contract (that is, identifying the separate units of account for the performance obligations) is an issue that is fundamental to revenue recognition and to the Board's proposed assets and liabilities approach. That issue deals with identifying the obligations that should be accounted for as recognised liabilities (separate units of account). Because revenue results from changes in assets and liabilities, it is critical that those changes be identified so that the timing and amount of revenue is faithfully represented. Contracts must be disaggregated so that a reporting entity is able to evaluate when those changes occur.

The CBV measurement attribute appears consistent with the customer's perspective of the arrangement. That is because the performance obligation is measured based on the price that the customer can or would pay for the good or service. Because the CBV measurement attribute is based on the customer's perspective, it is logical to also disaggregate revenue contracts and identify the separate units of account based on that perspective.

Board members were asked whether they agree that performance obligations in revenue contracts should be disaggregated from the customer's perspective.

The Board agreed.

3. Utility to the customer

In order to disaggregate the revenue contract using the customer's perspective, a reporting entity must analyze what the customer perceives it is receiving (buying) in the arrangement. That is, the customer's perspective should evaluate which components of a contract have value to an average customer (that is, a marketplace participant). In other words, the reporting entity must determine which components have utility to a customer. Utility to a customer means that a marketplace participant perceives that the product (that is, the good, service, or right to use) underlying the performance obligation is, in and of itself, fit for some purpose or is serviceable for some end.

Board members were asked whether they think that the notion of utility to a customer is useful for determining whether a component should be considered a separate unit of account.

The Board agreed having considered an alternative characterised as 'perceived delivery'. This alternative was suggested as some Board members believe that the concept of 'utility to the customer' may require onerous assessments by the reporting entity of the customer's decisions.

4. Guidance on componentising revenue

The staff provided three alternatives as to how the guidance for determining whether a component has utility to a customer would be structured and incorporated into the Standard.

The Board agreed with the following as a working principle (highlighting that the criteria is not exhaustive):

The standards-level guidance would explain that revenue contracts should be disaggregated (that is, separate units of account should be identified) from the customer's perspective and that guidance would describe the notion of utility to a customer. The Board would also provide broader criteria than for determining whether a component has utility to a customer and, therefore, should be treated as a separate unit of account. The following criteria would indicate that a component has utility to a customer:

• a. The component is sold separately by any vendor (or as an optional extra) or it could be resold separately by the customer in the customer's reference market.
• b. The component obligates the reporting entity to stand ready to perform over a specified term (that has been termed an unconditional stand-ready obligation in the Revenue Recognition project). The reporting entity may have the obligation to stand ready to provide goods, services, or other consideration in the event that specified events occur.

5. Defining 'customer based value' (CBV)

Earlier this year, the Board agreed to consider an approach to revenue recognition that would measure performance obligations based on customer based value (CBV).

CBV can be defined as the amount at which a product having utility to a customer is sold (or could be reasonably sold) on a standalone basis.

Board members were asked whether they agree with the definition of CBV.

While generally agreeing collectively, the following points were made by Board members:

• The phrase in parenthesis should be deleted.
• The definition should include the fact that utility to the customer should be assessed on the basis of 'rational economic behaviour' (or similar concept).
• The guidance should clarify that CBV is akin to fair value observable in a business to customer market (that is, the customer's reference market, not that of the reporting entity).

6. CBV reliability hierarchy

The staff developed the following hierarchy of relative reliability to be used in determining CBV:

• a. Level 1: CBV shall be estimated using an entity's sales information, specifically, current sales prices based on current sales transactions in an active market. An active market is one in which prices are readily available (transactions occur with sufficient frequency to provide pricing information on an ongoing basis) and representative of CBV (a customer would currently transact at those prices).
• b. Level 2: If Level 1 information is not available, CBV shall be estimated using other entities' (that is, competitors') sales information, specifically, current sales prices based on current sales transactions in an active market.
• c. Level 3: If Levels 1 and 2 information is not available, CBV shall be estimated using an entity's sales information, specifically, current sales prices based on current sales transactions in an inactive market.
• d. Level 4: If Levels 1, 2, and 3 information is not available, CBV shall be estimated using entity inputs that reflect an entity's own internal assumptions and data as a practical expedient. Such inputs include extrapolated or interpolated inputs that cannot be corroborated with observable market data. Said differently, Level 4 estimates represent an estimate of an entity's costs and a normal profit margin.

Board members were asked whether they agree with the notion that a relative reliability hierarchy is applicable to CBV measures.

The Board agreed with the staff proposal as a broad concept.

7. Measurement

One of the perceived strengths of CBV is that information necessary to estimate it should be readily available. However, such information would be lacking for many unconditional stand-ready obligations. An unconditional stand-ready obligation requires the reporting entity to stand ready to perform over a specified term. The reporting entity may have the unconditional obligation to stand ready to provide goods, services, or other consideration if specified events occur. Moreover, the primary characteristic of stand-ready obligations is that the timing and amount of economic benefits required to settle them is uncertain. Fair value provides a comprehensive mechanism for dealing with that type of uncertainty.

Board members were asked whether they think that unconditional stand-ready obligations should be measured at fair value.

The Board agreed on the basis that this would be consistent with its proposals in the amendments to IAS 37 Non-financial Liabilities.

8. Allocation

The Board considered briefly, the allocation of the customer consideration amount and the measurement issue pertaining to performance obligations at fair value if an active market exits. The Board did not conclude on these issues and requested that they be brought back to a subsequent meeting.

  Classification of Instruments Denominated in a Foreign Currency

At its April 2005 meeting, the IFRIC addressed the issue of the classification of the conversion option in a convertible bond that is denominated in a foreign currency (ta currency other than the functional currency of the entity issuing the bond).

The IFRIC concluded that although this matter is not addressed directly in IAS 32, it is clear that when the question is considered in conjunction with guidance in other Standards, particularly IAS 39, any obligation denominated in a foreign currency represents a variable amount of cash. Consequently, the IFRIC decided that contracts (including the conversion option in a convertible bond) that will be settled by an entity delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency should be classified as a liability.

The Board discussed whether a short-term solution to this issue is the best way to proceed. The Board voted (12/2) not to proceed with this project.

The Chairman indicated that there would be no further short-term fixes to IAS 32 or IAS 39. Instead the Board would focus on the long-term project to address the flaws currently present in those standards by considering the broader issues of financial instruments accounting. The only short-term project items to be considered any further are those that are already on the agenda of the Board or IFRIC, or those that may arise and present 'fatal-flaw' type issues widely affecting the entities applying IFRS.

  Consolidations including SPEs

The Board discussed two issues that involved the detailed consideration of examples prepared by staff:

Options over assets versus options over equity instruments

This discussion centred on considering whether there is any 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 the assets.

Board members noted that the 'control' notion is different when applied to a subsidiary and parent relationship compared to other types of assets in general. A concern was expressed that the potential voting rights introduced by options over equity interests should not be the determinant of whether control exists where that option has not yet been exercised. Instead, other rights attaching to that option (such as the ability to appoint Directors to the Board of a company) would be the determinants of whether control exists.

Some Board members were asked to work with the staff in exploring further the differences inherent in the definition of control.

The issue of references within specific standards to 'separate' and 'individual' entity financial statements was raised as part of this discussion. The staff were asked to explore this issue and ensure that the wording across all the standards is made consistent.

Attribution of profits or losses in the context of potential voting rights

The Board had a detailed discussion of the examples prepared by the staff. The Board agreed that the staff should continue developing examples to highlight issues and that those examples should include SPEs.

The Board discussed an outline of the plan to develop standards. It was noted that this is not yet a convergence project with the FASB although an assessment would be made in the future whether the FASB would also work on this project.

The Board decided not to expose for comments, at this time, amendments to IAS 27 arising from decisions already made regarding control (a 'clean up project' for IAS 27). Instead, the Board will pursue a single project that will also include the issues that are currently under discussion. At subsequent meetings, the Board will also consider examples related to variable interest entities.

Wednesday, 21 September 2005

Education Session: Introduction to International Valuation Standards – Presentation by IVSC representatives

This was an educational session, and no decisions were made.

Representatives of the International Valuation Standards Committee (IVSC) provided some background information about the organisation and then highlighted the following key issues:

• IVSC standards are intended to apply internationally. To date, members of the IVSC have operated under the members' code which requires compliance with these standards except where local legislation may require something different. In those cases, members would take into account the local requirements but ensuring that they comply with the overall principles of the IVSC standards. The IVSC does not have the authority or ability to enforce its standards but does not permit members to claim compliance with IVSC standards where they have not complied with all of them.
• The point was made about the growing influence of the IVSC's standards which initially dealt with property, plant, and equipment and had now expanded to other types of assets including intangibles.
• The IVSC made the point to the IASB, of the importance of establishing a clear and unambiguous concept of fair value as it applies to all types of assets (and businesses) from which valuation experts can work. To date, the inconsistent guidance within specific IFRS standards had resulted in confusion amongst preparers and users. Some of the inconsistencies have resulted from not knowing whether to apply the going concern assumption, or not, and whether fair value is based on the 'highest and best use' concept which takes into account alternative uses of the same asset.

The IASB indicated that the intention of fair value is to base that measurement on highest and best use taking into account all alternative uses, but acknowledged that IFRSs are not always clear in this regard. In addition, the IASB indicated that fair value should always reflect market assumptions.

The Board discussed the IVSC's overall views on the FASB Fair Value Measurement proposals (the IVSC made it clear that they had not yet had the opportunity to study the FASB's latest position following the redeliberations phase). IVSC indicated its broad support for the FASB's conclusions and pointed out the differences with the current IFRS literature that would remain if the IASB did not take on a similar project.

The IVSC pointed out that, from experience, users of IFRS literature did not believe that the IAS 39 fair value guidance was applicable to other areas. The IASB noted that the IAS 39 fair value guidance was its latest position on fair value measurement and should ideally be applicable to all fair value measurements, highlighting the need to expedite its fair value measurement project that would apply to all fair value measurements.

The Board asked the IVSC to input as soon as possible its views on the latest FASB positions in order for them to be considered in finalising the FASB document. This would allow the IASB to work from a base that is as comprehensive as possible. In addition, the IASB asked to IVSC to consider and inform the IASB of any inconsistencies within IFRS that could be corrected via the IASB's technical corrections policy particularly where the IFRS did not state the IASB's intentions with respect to fair values.

The IASB raised the issue of emerging economies where fair value measurement is considered problematic. The IVSC representatives indicated to the IASB the existence of a white paper included as part of its published standards dealing with emerging economies and setting out best practices.

In concluding, the IASB noted the appreciation expressed by the FASB for the IVSC's involvement in their fair value project. Both the IVSC and the IASB expressed their wish to work closely in the future in developing both the IVSC's standards and IFRS as global standards.

  Emission Rights: Agenda Proposal

The purpose of this agenda item was for the Board to consider whether to add a project to its technical agenda to provide guidance on how to account for emission trading schemes as, in the staff's view, divergence is likely to result. Based on the IFRIC's work and the Board's discussions to date, the staff suggested that there are four fundamental issues to be addressed:

• 1. Are allowances/credits assets? If so:
• 2. What is the corresponding entry for an entity that receives allowances from government free of charge?
• 3. How should allowances/credits be accounted for?
  These three issues then raise a fourth issue:
  
• 4. How should the effects of changes in the assets and liabilities arising from an emission trading scheme be reported in profit or loss?

The Board agreed that the emission rights issue has to be resolved and discussed the alternative ways to address this issue. It was noted that IAS 20 is already on the IASB agenda but had not been progressing fast enough due to staff resource constraints. Based on current information, it was indicated that resources may become available in January 2006 to work on the IAS 20 project.

The Board reasoned that, as emission rights are a form of government grants, it would be logical to address the broader IAS 20 project and in so doing, address the emission rights issues. The Board was concerned by current perceptions that it would address the emission rights issues first, and in so doing address the IAS 20 project, whereas the Board intends to approach this from the opposite end.

  Income Taxes: Short-term Convergence

The Board discussed aspects of the income taxes project related to uncertain tax positions and special deductions.

The staff recommended that any uncertainty over filed tax positions be regarded as giving rise to a stand-ready liability to pay additional tax.

The Board agreed with this recommendation. It was viewed as consistent with the principle in IAS 37 that the uncertainty surrounding the potential for the tax authorities to reject the filing of an aggressive tax return should be regarded as a stand-ready obligation. However, the measurement of that liability would be based on expected value in accordance with IAS 12 methodology that does not require risk adjustment. In terms of IAS 12, measurement will be determined by tax rates that are substantively enacted at the balance sheet date. The Board noted that it has not yet discussed the effect of possible deductions (for instance, small company deductions) in as far as they affect deferred taxation.

The Board agreed with the staff's proposals to retain the disclosures over uncertainties surrounding the tax balances proposed in the amendments to IAS 37.

The Board also agreed that IAS 12 should be amended to adopt the SFAS 109 impairment approach to the recognition of deferred tax assets.

  Segment Reporting: Short-term Convergence

The IASB staff initiated this session by indicating that they would like the Board to vote on seven main issues raised by the Board members on the first pre-ballot draft of a segment reporting exposure draft. The votes were based on the following recommendations arising from the pre-ballot reviews:

• 1. The title of the proposed IFRS should be changed from 'Segments' to 'Operating Segments'.

  The Board disagreed with the staff on the basis that the term 'operating' is not defined in IAS 1 as well as for anti avoidance reasons.

• 2. The style of the objective paragraph should be made consistent with the approach taken in IFRS 7.

  The Board deferred this issue to the 'plain English' sub-group for consideration and resolution.

• 3. The proposed IFRS should define the term 'public accountability' and extend the scope to include all entities that have public accountability.

  The Board noted that the notion of a 'publicly accountable' entity is still evolving as part of the SME project. Consequently, the Board decided to scope in publicly listed entities as well as unlisted entities that receive funds in a fiduciary capacity, such as banks, insurance companies, brokerages, and mutual funds.

• 4. The requirement to disclose impairments by segment should be deleted.

  The Board agreed on the basis that a difference with US GAAP should not be created.

• 5. A disclosure requirement for 'material items of income and expense' in accordance with paragraph 86 of IAS 1 should be added.

  The Board concluded that a disclosure item should be added.

• 6. Need for a separate appendix for defined terms.

  The Board concluded that this is not necessary.

• 7. The basis for conclusions of SFAS 131 should be included as an appendix to the basis for conclusions of the proposed IFRS.

  The Board agreed.

In addition to the above issues, the Board discussed comments received from the Accounting Standards Board of Japan (ASBJ). The underlying concern raised by the ASBJ was characterised as stemming from the ASBJ's disagreement with the focus on management systems driving the disclosures in the segments standard. It was concluded that the issues raised by the ASBJ should be taken to a meeting between the ASBJ and the IASB on 23 September, although the IASB had not been convinced that its positions so far in this project required revisiting.

The Board clarified that segment information will be required in interim reporting via a consequential amendment to IAS 34.

  Earnings Per Share: Short-term Convergence

The Financial Accounting Standards Board (FASB) plans to publish a revised exposure draft in September 2005 that would amend FASB Statement No. 128 Earnings per Share. The exposure draft is a revision of FASB's December 2003 exposure draft, which was published as part of its short-term convergence project. The revised exposure draft clarifies the guidance on mandatorily convertible instruments, the treasury stock method, contracts that can be settled in cash or shares, and contingently issuable shares.

The FASB's proposals would create requirements that diverge from those in IAS 33 Earnings per Share. The Board was asked to consider the proposals and establish whether a similar project should be undertaken. The IASB discussed two alternatives:

• 1. Proceed with the FASB to address these issues. However, divergence would persist principally due to the different accounting for convertible debt, something that could only be resolved through the 'debt/equity' project.

• 2. Do nothing at this time. The IASB reasoned that the SEC was unlikely to be concerned by the difference that would arise in this area as it is not a significant issue.

FASB staff (via video link) indicated that it was the FASB's intention to address earnings per share more comprehensively as part of the 'debt/equity' project.

The IASB decided not to do anything at this time but monitor the FASB project through to its conclusion.

Thursday, 22 September 2005

  Agenda Proposal: Fair Value Guidance

The Board discussed a project proposal to provide guidance on how entities should measure fair value of assets and liabilities when an IFRS requires such measurement. The staff reiterated the project would not affect when fair value should be used, only provide guidance on how to measure fair value when it was required. In particular, the Board discussed whether:

• The IASB issue the FASB's statement (final standard) as an IASB Exposure Draft, or do the Board want to debate individual issues in the document?
• An IFRS that provides fair value guidance would result in consequential amendments. To what dept should the Board make consequential amendments?

The Board discussed whether the proposed approach violated their due process. Some Board Members supported the approach, noting that it was important that the IASB developed guidance that converged on a high-quality solution. If the IASB debate individual issues in the forthcoming FASB standard before issuing its own exposure draft, the project would be delayed by up to twelve months and could lead to divergence rather than convergence. Other Board members expressed their concern about how constituents would react to the approach. Other Board members thought that the IASB should accept the FASB standards as the basis for its ED; however, it was possible that the application guidance provided by the IASB could be different from FASB's.

The Board agreed that the Invitation to Comment should be a wrap-around of the final standard as issued by the FASB. The IASB and FASB staffs were preparing a series of educational and technical sessions to familiarise the Board with the new FASB Standard. These sessions would begin in November or December 2005. Areas in which the Board had concerns with a decision of the FASB would be raised in the Invitation to Comment. In addition, the IASB would ask what additional application guidance should be provided.

In a formal vote, the Board agreed to issue an ED based on the forthcoming FASB standard (2 Board members were opposed). In addition, the scope of the ED would be restricted to those standards that explicitly mention fair value (1 abstention). The Board discussed how they should approach differences in opinion between the FASB standard and the IASB ED. It was agreed that it was premature to decide on how they should deal with this.

  Disaggregation of Changes in Fair Value of Financial Instruments: Project Proposal

The Board discussed a project proposal about providing disaggregation of changes in fair value of financial instruments. The staff noted that many financial instruments are already reported at fair value and there are specific requirements for reporting changes in those fair values in income, other comprehensive income, or equity. However, there are few requirements or guidelines for reporting disaggregated information about changes in fair value.

There was general agreement that users of financial statements have a vital need to understand the components of changes in fair value – that is, distinguishing changes related to cash flows (due to realisation, acquisitions, etc.) vs changes related to the instrument, issuer, and markets in general (credit risk, market risk, etc.) vs changes in the measurement model. The level of disaggregation need not be the same in all instances. For example, the effect of movements in credit risk would be more relevant in the case of a financial institution than for a manufacturer.

Several Board members were concerned about the dividing line between financial instruments issues and those related to the Board's project on reporting financial performance. They asked the staff to be sensitive to this border.

After a rather unstructured discussion, the Board agreed that the staff would return in October with a modified project proposal for a narrowly-focused project on disaggregating information on the changes in fair value of financial instruments.

It was also agreed that the IASB and FASB should have a strategic discussion about how to move forward on fair value for financial instruments. This would be added to the topics for the October joint FASB-IASB meeting.

  Conceptual Framework

The discussion was led jointly by staff from the Accounting Standards Board of Canada, the Institute of Chartered Accountants of New Zealand, and the US Financial Accounting Standards Board.

Process for assessing qualitative characteristics

The Board discussed a revised approach to assessing the qualitative characteristics in the IASB Framework. Much of the discussion was based on a flowchart demonstrating the sequence in which individual qualitative characteristics would be assessed. This 'process' would replace the present hierarchy in the Framework.

The discussion concentrated on the effect of assessing representational faithfulness, particularly in situations in which the related attributes of neutrality and verifiability were not met. There was a sense of unease that an element might not be recognised in the financial statements simply because the high hurdle of (for example) neutrality could not be met. Many Board members were uncomfortable with this apparent conclusion, stating that they would rather have an element included, but measured at an amount that, while verifiable, might not be neutral rather than not having it included in the financial statements at all.

It was noted that the process flowchart, as it was presented in the agenda paper, was appropriate for use by standard-setters only and was inappropriate for preparers. This demonstrated an unresolved issue: the relative status of the conceptual frameworks in the GAAP hierarchies of various standard-setters.

The timeliness of financial information was also addressed. The relevance of timely information depends on what decisions are being made. Consistency and comparability were also addressed, and the staff agreed to be more disciplined about how the concepts should be articulated, in particular that consistency should be both 'over time' and 'across transactions within an entity;' while comparability applied separately but equally 'between entities' and 'across transactions within an entity.'

The Board agreed that the staff should continue the project on the basis of the approach outlined in the process.

The reporting entity

The Board agreed that reporting entity issues should not delay the publication of a discussion document on the Objectives and Qualitative Characteristics sections of the conceptual framework.

A Board member noted that the parent entity vs group is a significant issue for some constituents, especially the CFA Institute (users). This matter is also of concern in the European Union and other areas in which entity-only financial reports are common. Other Board members noted that there is a concern over the border between conceptual issues about the reporting entity and standard-setting activities.

Staff agreed to forward the Australian conceptual framework discussion of reporting entity to all Board members. Otherwise, the approach to this phase of the conceptual framework project was agreed as outlined in the Observer Notes available on the IASB Website.

Prospective information

The Board agreed that any work on prospective information should wait until the conceptual framework project is completed. The staff informed the Board subsequently that that opinion was also that of the FASB.

  Technical Plan

The Board discussed the public IASB project timetable and a long-term management plan and how the Board should communicate their project timetable to constituents. This discussion was the first of what will become a quarterly review of the Board's project timetable.

Board members noted that because of constraints on staff, the IASB had often used IFRIC dedicated staff to provide support for IASB projects. Some Board members thought this inappropriate. The IFRIC should have dedicated resources, free from Board 'poachers.'

The Board agreed that the project plan for items on the joint FASB-IASB agenda should be consistent between the FASB and the IASB. In addition, at each quarterly review, the project staff would provide a copy of a revised project summary that would include project milestones (when due process documents are expected). The project timetable and individual project summaries would be available on the IASB website. There should be a better explanation of the research agenda.

The Board agreed to experiment with an approach that would provide more detail of due process documents for immediate periods and less for periods further out. Thus, there would be a detailed quarterly plan for the current year; a half-year split for the next year and a 'whole year' indication for the subsequent year. This plan would be subject to Board member review and approval (out of session).

A Board member wanted the project plan to be an assessment tool, although this was not generally supported.

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