15-18 November 2005, London

Tuesday, 15 November 2005

Fair Value Measurements [Education session]

The staff conducted an education session on the FASB's working draft of a final Statement on Fair Value Measurements. In addition, the staff reviewed the scope of FASB's Fair Value Measurements project as it relates to IFRSs and the issues and questions to be addressed in preparing an IASB Exposure Draft and related Invitation to Comment.

No decisions were made.

At the September 2005 meeting, the IASB added the Fair Value Measurements topic to its agenda. The aim of the project is to provide guidance to entities on how they should measure the fair value of assets and liabilities when required by other Standards. This project will not change when fair value measurement is required by IFRSs.

At a previous meeting, the Board decided to issue the FASB's final Statement on Fair Value Measurements as an IASB Exposure Draft with an Invitation to Comment. The appendices in the FASB document dealing with consequential amendments and references to US GAAP pronouncements will be replaced with proposed consequential amendments and references to IFRSs. The Board further decided that there should be limited changes to the FASB's document. Instead, the Invitation to Comment should discuss any areas where the Board disagrees with the FASB's conclusions along with the basis for the disagreement. The staff expects these areas to be identified during Board deliberations during the December 2005 and January 2006 meetings whilst aiming toward issuance of the IASB Exposure Draft by April 2006.

Wednesday, 16 November 2005

Control (Consolidation)

The Board discussed a proposed staff approach to developing disclosure principles with regard to the judgement exercised in determining whether one entity controls another entity. Two principles were proposed:

• The first is disclosure of information that would help an investor assess the appropriateness of the decision. The type of information this involves might include the important facts and circumstances relevant to the decision and the assessments and judgements that the entity made in reaching its decision.

  Under this approach, some of the deliberation processes themselves are explained in the financial statements, and not just the results of those deliberations, as is generally the case under the current IAS 27 model.

• The second type of disclosure is information that would help an investor assess the impact of that decision. The type of information this involves might include summary information about the resources and activities of the investee such as assets, liabilities, revenue and expenses. The staff noted that disclosures that allow users to assess the impact of the control decision might need to be extensive (and for each material subsidiary). The current disclosures for associates (total assets and total liabilities, for example) are unlikely to be sufficient.

  Symmetry in the disclosure requirements about the control decision is important. That is to say, if the decision requires the exercise of judgement then users may need information to assess the impact of that decision whether the investee is consolidated or not.

Board members expressed broad support for the proposed staff approach, but had concerns about symmetry of disclosure: that is, the idea that disclosure of why consolidation is appropriate when the entity holds less than 50 per cent of the voting shares is as important as disclosure of why consolidation is not appropriate when an entity holds more than 50 per cent of the shares in another entity. One Board member expressed disbelief that management would not know whether they controlled another entity, and would not be sympathetic to an argument that it was not possible to determine whether control existed. Board members were also concerned that any disclosures in the financial statements should not be predicated on providing sufficient information for users to 'audit' management decisions.

A Board member noted that the critical issue was not management's assessment of the power criterion in the developing control model, but the benefit criterion. This issue was acute in a range of special purpose entities that run on 'autopilot' (that is, the power criterion is non-operative) but which expose the sponsor to risks and benefits. These were the situations that should be of concern.

Technical Corrections

Technical Correction Policy

The Board agreed not to pursue its proposed technical correction policy. It concluded that the experience of Proposed Technical Correction 1 had demonstrated that it was not a good way to amend an existing Standard. The Board had an Exposure Draft policy in place and was able to issue proposals for comment for a period of not less than 30 days in limited circumstances. This policy had been used in the past and is addressed in the forthcoming IASB Due Process Handbook.

Technical Correction 1 - Amendment to IAS 21

The staff introduced the results of exposure of Proposed Technical Correction 1 and its proposed changes to the text as a result of that exposure.

The Board agreed to amend IAS 21, paragraph 15 as follows:

An entity or any of its subsidiaries may have a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity's net investment in that foreign operation and is accounted for in accordance with paragraphs 32 and 33. Such monetary items may include long-term receivables or loans. They do not include trade receivables or trade payables.

This amendment was limited to situations in which control exists. The Board considered a proposal to extend paragraph 15 to associates and joint ventures, but confirmed its original intention that the situation addressed in TC 1 was limited to control situations. That is, an entity cannot control the reversal of a component of a net investment in an associate or joint venture.

Other decisions:

• The Board agreed to make IAS 21 paragraph 15A more explicitly an example of the application of the principle in paragraph 15.
• The Board agreed to delete proposed paragraph 15B and the related paragraph BC 7.
• The Board confirmed the proposed change to IAS 21 paragraph 33.
• The Board deleted the proposed change to IAS 28 paragraph 29.
• The Board confirmed the proposed effective date of 1 January 2006, early adoption permitted.

The staff raised an issue related to IFRS 1 First-time Adoption of IFRS that had been identified earlier that day. Initial reactions were that a first-time adopter adopting the Amendment would not have a problem on transition. EU endorsement and other considerations might create problems, but the staff was not yet in a position to offer advice.

Accounting Standards for Small and Medium-sized Entities (SMEs)

The staff summarised recent events, including IASB roadshows, the public roundtable on SMEs, and staff presentations in various countries, for the Board. Staff noted:

• Wide support for global SME standards issued by IASB.
• Wide support for simplifications apart from recognition and measurement (things like eliminating difficult options, scope exceptions that require calculations or complex judgements, and eliminating guidance not relevant to SMEs).
• Wide support for Recognition and Measurement simplifications. However:
  • Different constituents support different recognition and measurement simplifications.
  • And for different reasons.

The Board discussed whether it should defer consideration of recognition and measurement simplifications pending completion of a draft exposure draft that reflects simplifications other than recognition and measurement. Some Board members expressed concern that constituents might perceive that the Board is 'going to stop the project' and/or that it is 'not serious' about producing meaningful SME standards. Others objected to that characterisation, saying that they were serious, but they wanted to approach the problems in a disciplined way.

Staff proposed to review all IFRSs with a view toward eliminating the complex options, scope exceptions, and implementation guidance not generally relevant to SMEs. The resulting principles would be reorganised topically. Based on this approach, staff will prepare a rough draft of a major section of an exposure draft, for consideration by the Board in January 2006. Staff also proposed that further exploration of specific recognition and measurement simplifications should continue while the other aspects of the exposure draft are being developed.

The Board agreed with this approach.

The Board moved on to discuss the staff recommendations. These focused on possible recognition and measurement simplifications that were addressed in a large number of Questionnaire responses and included a staff recommendation and request for Board decision.

IAS 2 Inventories

The Board agreed that no simplification of the major principles in IAS 2 was needed for SMEs.

Use of the percentage of completion method for contracts under IAS 11 and for service revenue under IAS 18

The Board agreed, in principle, that no simplification of the major principles relating to construction contracts and service revenue in IAS 11 and IAS 18 was needed for SMEs. However, several Board members were concerned about the tax consequences of such transactions, bearing in mind the staff proposals with regard for IAS 12.

IAS 12 Income Taxes

The Board agreed that the staff should explore further, with preparers and users of SME financial statements, the issue of recognition of deferred income taxes by SMEs and bring a recommendation to the Board at a future meeting. One Board member stated that, given the concerns over front-loading percentage of completion revenue noted above, they would require full tax allocation accounting.

IAS 17 Leases

The Board expressed a preference to allow staff to explore further with both preparers and users of SME financial statements the following possibilities:

• All leases as finance leases with measurement simplifications.
• Retaining the operating and finance lease split but with measurement simplifications.

A Board member cautioned the Board that they needed to be very careful when considering simplifications in IAS 17 that they not trap SMEs into bad decisions because the management of such entities do not understand the economics (that is, accounting for leases should not drive the financing decision).

IAS 19 Employee Benefits

Board members expressed concern that the Board should not be seen to aid any attempt to obfuscate the true cost of obligations created by defined benefit plans established by the entity or imposed by government (such as gratuity or long-service plans). All employee benefit obligations should be accounted for using the IAS 19 principles.

The Board agreed that the staff should explore further an approach that would simplify the defined benefit measurement (for example by allowing triennial actuarial valuations in the absence of any triggers that would call into question the actuarial assumptions used in the last actuarial valuation; requiring all actuarial gains and losses to be recognised immediately in profit or loss, thus removing a significant record-keeping burden).

IAS 27 Consolidated Financial Statements

The Board agreed to require consolidated financial statements when one SME controls another entity.

The equity method of accounting under IAS 28 Investments in Associates and under IAS 31 Interests in Joint Ventures

The Board agreed that SMEs should measure investments in associates using either the equity method or as investments at fair value with gains and losses recognised in profit or loss.

The Board agreed that SMEs should measure interests in joint ventures using either method permitted in IAS 31 (equity method or proportionate consolidation).

IAS 36 impairment of goodwill and intangible assets

The Board agreed with the tenor of the staff recommendation that an indicator approach (but not an amortisation approach) should be explored for recognising impairment of goodwill and other indefinite-lived intangibles.

IAS 36 other impairment issues

The Board agreed that the staff should explore the following approach to impairment for all items other than goodwill and indefinite-life intangible assets:

• Retain the key principle that assets should not be carried at more than recoverable amount.
• Simplify recognition by requiring impairment only when clear under-usage, damage, or intent to sell. However, the impairment indicators should be based on those in IAS 36 paragraph 12.
• Simplify calculations – fair value rather than a value-in-use calculation.

The agenda paper included staff recommendations on other matters for which time did not permit discussion, plus a list of additional simplifications that the staff is studying. Staff plans to bring all of these to the Board in December.

Performance Reporting - Segment A

The Board was asked whether the forthcoming exposure draft on Phase A of the reporting financial performance project should require all non-owner changes in equity to be included in the financial statements but allow preparers the choice of one statement (a statement of recognised income and expenses) or two statements (an income statement and a statement of total recognised gains and losses – or similarly labelled statements).

A majority of Board members stated a preference for one statement, but said that, as political compromise, they were prepared to accept a two-statement approach as an interim step. The staff was asked to explain this in as candid a manner as possible in the exposure draft.

The Board agreed to issue the exposure draft permitting the alternative of presenting two statements.

Mr Cope and Mr Garnett signalled their intention to dissent from the ED, for the reason that they wish to require a single statement now. Mr Leisenring may dissent on the same basis, but he wants to see the proposed Basis for Conclusions first. Mr Engstrom might dissent if the Basis for Conclusions appears to prejudge the issue of moving to one statement in the near term.

Short-term Convergence: Segment Reporting

The Board discussed an issue that arose during the preparation of the ballot draft of an exposure draft on amendments to IAS 14 Segment Reporting. The issue was the consistency of terminology in the ED.

The Board agreed that the ED should use the term 'operating segment' throughout and that the ED should be titled Operating Segments.

Short-term Convergence: Borrowing Costs

The Board agreed with a staff proposal that the amendment to IAS 23 Borrowing Costs should eliminate the immediate expense alternative in the current standard but should not propose to use the capitalisation method in the US standard. The reason for this is that the method in US GAAP is not seen as 'a higher quality solution' than the current capitalisation method in IAS 23.

Short-term Convergence: Earnings per Share - Treasury stock method

The Board agreed a staff recommendation that, assuming that the change to the treasury stock method is finalised in a FASB Statement:

• A similar proposed amendment is made in IAS 33 to the treasury stock method that is applied to the inclusion of options, warrants and their equivalents in the calculation of diluted EPS.
• The if converted method is eliminated and that the amended treasury stock method is applied to the inclusion of convertible instruments in the calculation of diluted EPS, that is, the amended treasury stock method is also applied to the inclusion of convertible instrument in the calculation of EPS.

A Board member raised a concern that the treasury stock method does not work if the affected shares are held in a partly-owned subsidiary and suggested that a modest change to IAS 33 paragraphs 19 and 20 could be made to address this issue. Other Board members agreed that there was no reason not to address this. FASB staff present by video link suggested that, if the IASB were to propose such a change in its ED, the FASB might consider it in their redeliberations.

The FASB staff queried whether the elimination of the 'if converted' method is appropriate for convertible equity instruments. Board members saw no conceptual difference, for this purpose, between debt and senior equity securities: both have a prior claim on the residual net assets of the entity. The standard would be cleaner if the 'if converted' method was eliminated for all convertible instruments.

The Board agreed that the proposals would be issued for a 90-day comment period.

Thursday, 17 November 2005

Business Combinations Phase 2 – Roundtables debriefing

Whilst the Board was provided with a paper giving a preliminary summary of both the IASB and FASB roundtable discussions, this paper was not made available to observers. Further, the Board was not asked to make any decisions.

The first part of the session was dedicated to administrative details. This was primarily on comparing the two roundtable sessions and seeing which one worked best and why.

The remainder of the session was spent reviewing what was said at both the Norwalk and London roundtable meetings. Generally, there was a lack of support for many of the proposals. The main exception to this was financial analysts who, for example, agreed with expensing transaction costs.

It was also noted that it was unlikely that the Board could issue standards before 2007, and therefore that the earliest application date was likely to be in 2008.

IFRIC update

The Board received an IFRIC update. Notes from IFRIC Meetings are available on IASPlus.

In this session, the Board were presented with a proposed amendment to paragraph 3 of the proposed interpretation on Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies. This amendment clarifies that non-monetary items that have been revalued need only be remeasured from the date of revaluation. The Board voted on and agreed with this amendment.

Friday, 18 November 2005

Insurance Contracts [Educational Session]

This was an educational session and no decisions were made.

Representatives from the insurance and reinsurance business held an educational session on reinsurance and insurance linked securities. This is the second of three educational sessions on insurance in conjunction with the development of the phase II project on insurance contracts.

Presenters gave an introduction on the aspects and nature of reinsurance. The session also covered the different types of reinsurance and the risk models reinsurance companies' use when assessing risks and premiums from insurers. The Board considered different accounting issues in conjunction with these types of contracts and specifically considered guidance on risk transfer to be one of the key issues.

At the end of this session Board members considered the accounting implications of the increasing market for insurance-linked securities (catastrophe bonds) used by insurance companies to deal with peak risks due to severe catastrophes.

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