Monday 24 April 2006 (afternoon only)

• Consolidations, including special purpose entities: Education session on FASB FIN46R

Tuesday 25 April 2006 (afternoon only)

• Liabilities and Equity: Education Session on the FASB's current approach to accounting for instruments with characteristics of liabilities and equity – the ownership-settlement approach
• Financial Instruments
• Revenue Recognition

Wednesday 26 April 2006

• Financial Instruments Puttable at Fair Value
• Conceptual Framework: Reporting Entity: Meaning of control of another entity, including whether it should be defined at the concepts level
• Insurance Contracts
  • Universal life contracts
  • Unit-linked and index-linked payments
  • Profit margins
  • Credit characteristics of insurance liabilities
  • Unit of account
  • Unbundling
  • Measurement attribute
• Conceptual Framework: Elements: Education Session on issues relating to the definitions of elements of financial statements, focusing on the definitions of assets and liabilities
• Conceptual Framework: Elements: Initial discussion of distinctions between liabilities and equity and between classes of equity

Agenda of the Joint IASB-FASB Meeting

Thursday 27 April 2006 (from 11:15am)

• Financial Instruments – hedge accounting
• Business Combinations II – three issues:
  • Fair value
  • Accounting for acquisition related costs
  • Disclosures for non-controlling interests associated with business combinations
• Revenue Recognition

Friday 28 April 2006 (morning only)

• Leasing – agenda proposal for a joint leasing project
• Conceptual Framework – definitions of assets and liabilities

Monday 24 April 2006 (afternoon only)

Consolidations, including special purpose entities: Education session on Consolidation of Variable Interest Entities – an introduction to FASB FIN 46(R)

Ed Trott, A Member of the US Financial Accounting Standards Board, led the IASB in a discussion of FASB Interpretation FIN 46(R) Consolidation of Variable Interest Entities. He explained what the FASB aimed to achieve through the Interpretation and shared some of the experience that the FASB has gained. The session concentrated on general principles and on six examples of applying those principles to a variety of common situations.

The session highlighted that within both the FASB and IASB standards there is a tension between the various aspects of the boards' definitions of control. For example, some standards focus on the 'power' aspect of control while others focus on the 'so as to benefit' criterion, often with contradictory results.

The session also noted that in FIN 46(R), the FASB used the word 'expected' in the way the term in used in FASB Concepts Statement 7, meaning a 'probability-weighted outcome', rather than the commonly-used meaning of 'most likely.' The examples used during the session demonstrated that the probability-weighted outcome was critical in assessing which entity had a majority of the variable interests in many situations.

No decisions were made.

Tuesday 25 April 2006 (afternoon only)

Liabilities and Equity: The Ownership-Settlement Approach and Upcoming Steps [Education Session]

FASB staff conducted an educational session to update the IASB on status of the FASB's liabilities and equity project. The objective of the project is to establish a framework for classifying and measuring instruments with characteristics of equity and liabilities under US GAAP.

Staff noted that the approach being presented today encompasses not only the single-component financial instruments, which the Board discussed at its March 2005 meeting, but also multiple-component financial instruments.

Staff presented an accounting approach called the Ownership-Settlement Approach. The approach is based on 13 principles that deal with classification, initial measurement, subsequent measurement, separate reporting within equity, and extinguishment accounting. The presentation included a comparison of the approach to current IFRS literature.

In addition to this approach, the FASB will further develop two alternative approaches:

• The Dilution Approach. A narrower view of equity that bases its classification scheme on whether an instrument will or might dilute net assets belonging to existing shareholders.
• Reassessed Expected Outcomes (REO) Approach. This approach was presented to the IASB at its June 2004 meeting. REO is a probabilistic-based approach that applies contingent claims modelling techniques to determine classification based on the current economic conditions.

After choosing one approach, the FASB to publish a Preliminary Views document in the second quarter of 2007.

No decisions were made during this session.

Financial Instruments

The staff presented a paper dealing with long-term objectives on how to simplify and improve financial reporting for financial instruments. The same paper will be discussed at the upcoming joint IASB/FASB Meeting 27 April 2006.

The paper addresses ways to simplify or eliminate the need for special hedge accounting. Both fair value hedging and cash flow hedging were addressed.

Several Board members commented favourably on the paper and suggested that the staff should explore the issues raised in the paper more extensively. One FASB member who was attending the meeting said that the paper was a good preliminary proposal but suggested that further consideration of the issues should await completion of the Fair Value Measurement project.

Board members expressed some general comments but no decisions were made.

Revenue Recognition

Staff presented a paper dealing with alternative methods for recognising revenue. The paper represented a continuation of the discussion at the Board's March 2006 meeting. The two main methods examined were the Extinguishment-Based Method (EBM) and the Performance-Based Method (PBM). Several hybrid methods were presented, making a total of five methods:

• 1. EBM
• 2. EBM with an exception for long-term contracts
• 3. Customer Benefit Method
• 4. PBM
• 5. PBM with Application Accommodations (PBM-AA)

Board deliberations focussed on methods three and five. To illustrate the difference between the two methods, the Board discussed a performance obligation. The Customer Benefit Method is founded on a customer perspective, with revenue recognition based on whether the customer has accepted performance to date. The PBM with Application Accommodations takes an entity perspective, with revenue recognition based on the progress that the entity has made in fulfilling its performance obligations; it and uses customer validation merely as a means to determine performance progress.

The Board noted that customer acceptance would be important for revenue recognition if it is a contractual condition. However, customer acceptance would not necessarily create an unconditional asset for the seller.

As Board members seemed to think that view five was more in line with existing standards and with the direction that the IASB has taken in other standards, they voted 10/4 for the staff to develop this view further.

This paper will be discussed further at the joint IASB/FASB Meeting on 27 April 2006.

Wednesday 26 April 2006

Financial Instruments Puttable at Fair Value

This was a continuation of the discussion the Board had in its March meeting on proposed amendments to IAS 32, whereby financial instruments puttable at fair value and certain obligations arising on liquidation would be classified as equity, provided certain conditions are met. This discussion focussed on a staff analysis of the costs and benefits of the proposed amendments.

The staff analysis was that the main costs associated with the proposed amendments include:

• requiring a new analysis of various financial instruments;
• an increase in the complexity of IAS 32;
• an increase in financial structuring opportunities; and
• the costs of complying with the equity classification.

The staff analysis was that the main benefits associated with the proposed amendments include;

• it addresses constituents' concerns about the classification of certain financial instruments;
• it increases comparability between entities (for example between entities with financial instruments puttable at fair value that meet the requirements for equity classification and entities with ordinary shares); and
• the classification is more relevant and more understandable.

The Board noted that whilst they liked the proposed accounting for financial instruments puttable at fair value, they did not believe that the proposed amendments were principle-based, and that the main benefit was that the classification was more relevant and understandable to users. They further noted that care would be needed in describing comparability as a benefit, as financial instruments puttable at fair value are different from ordinary equity shares in that they allow the holder to require redemption for a cash amount. Furthermore, the equity classification is only available to the most subordinated class of instrument. As such, very similar instruments may get a different classification where one is the most subordinated class of instrument and the other is not.

The Board then discussed the proposed amendments to IAS 1. These changes require three new disclosures, as follows:

• 1. disclose information about the reclassification of instruments between equity and financial liabilities of the instruments affected by the amendments;
• 2. disclose fair values of financial instruments puttable at fair value classified as equity; and
• 3. disclose information about length of the life of a limited life entity.

As no new issues were raised, this should be the final discussion by the Board on this matter prior to issuance of an exposure draft.

Conceptual Framework: Reporting Entity

This discussion focussed on the meaning of control of another entity, including whether it should be defined at a standard or concepts level. Staff proposed that control be defined as follows:

Control of an entity is the ability to direct the strategic financial and operating policies of an entity so as to access benefits flowing from the entity and increase, maintain or protect the amount of those benefits.

The Board agreed with the staff proposals that:

• control, in the context of control of another entity, should be defined at the concepts level;
• the definition of control should contain both a power element and a benefits element, together with a link between the two, along the lines set out in the working definition (given above); and
• the conceptual framework should explain that determining whether one entity has control over another entity involves an assessment of all the facts and circumstances.

There was a general discussion about common control transactions and entities. Staff clarified that this would be discussed at a later stage. The purpose of this discussion was to consider the very simplified question of whether entity A controls entity B.

With regard to power element of control, staff asked the Board whether:

• power relates to the entity's financing and operating policies;
• power is non-shared;
• the ability to direct the financing and operating policies of the other entity is sufficient; hence, in concept, control is broader than legal control, in particular, it includes de facto or effective control; and
• one entity has control over another should be based upon an assessment of the present facts and circumstances, and therefore the control concept should not exclude situations in which control might be temporary.

There was general agreement by the Board with the above, with certain caveats. In particular, the Board were concerned with how latent control fits into this model.

There was general agreement by the Board that with regard to the benefits element of control:

• the control definition should refer broadly to benefits or economic benefits, rather than specific types of benefits; and
• leaving aside the issue of SPEs, the control definition should not specify a minimum level of benefits.

Insurance Contracts

Interest and discount rates

Staff first asked the Board whether they agreed with the recommendation in agenda paper 7G, paragraph 5 that the Board should not develop guidance in this project on the following topics:

• how to determine a discount rate for maturities beyond the term of instruments traded in observable markets; and
• how to develop interest rates for currencies in which there is little or no market in risk-free instruments.

The Board agreed with the staff recommendation.

Measurement attributes

The Board then discussed what measurement attribute should be used for insurance liabilities. Staff proposed that:

• a. The measurement attribute for insurance liabilities should be current exit value. Current exit value should be defined as the amount that the insurer would expect to have to pay today to another entity if it transferred all its remaining contractual rights and obligations immediately to that entity (and excluding any payment receivable or payable for other rights and obligations).
• b. An insurer should not be prohibited from recognising a net gain (net after acquisition costs) or net loss at the inception of an insurance contract. However, if an insurer identifies an apparently significant gain or loss at inception, it would need to check carefully for errors or omissions.
• c. The Board might conclude in the fair value measurement project that current exit value is synonymous with fair value. However, it would be premature to reach a conclusion on that point now in the project on insurance contracts, because the project on fair value measurement is still at an early stage. The staff recommends that the Board should, for the time being, define the measurement attribute for insurance contracts as current exit value. As work proceeds on the fair value measurement project, the staff will assess periodically whether it is appropriate to recommend merging the two concepts for the project on insurance contracts.

The Board were asked to vote on the above recommendation. 7 Board members voted in favour of the recommendation, 6 voted against, and 1 abstained. Generally, the Board members who did not vote in favour of the recommendations were concerned about the following issues:

• They preferred the alternative current value approach set out in the paper, whereby the margin is calibrated at inception to the actual premium charged. Under this approach, the margin reflects changes over time in the insurer's estimate of the amount of risk, but freezes the per-unit price of risk at inception. Further more, this approach would prohibit the recognition of any net gain at inception. Several Boar members were amenable to considering variations on this approach (for example where the per-unit price of risk is not frozen at inception).
• There were concerned about recognising a net gain at inception.
• There were concerns about how this approach tied into the revenue recognition project, and whether it was consistent with the proposals in that project.
• There was concern over how practical the approach recommended by staff was. It was possibly too idealistic, with too much emphasis on obtaining market prices where none exist.

Units of account

The Board discussed the level of aggregation of insurance contracts for measurement purposes. The Board generally agreed with the staff proposals on the level of aggregation – that a portfolio of contracts should contain contracts with similar risk characteristics. However there was some discussion over how much diversity can exist with a portfolio of similar contracts.

Unbundling

The Board was asked to consider whether a measurement model should unbundled the individual elements of an insurance contract and measure them individually. Staff proposed that unbundling deposit and service components for the purpose of recognition and measurement is likely to require arbitrary allocation and complex systems, and is unlikely to result in more representationally faithful financial statements. Unbundling should not be required.

There was some agreement with the staff proposal, but several Board members were concerned that the proposal meant entities had a free choice over whether to unbundled or not. There was also concern with how this tied into revenue recognition in other types of contract, where unbundling would be required in certain circumstances. Staff will consider whether there are circumstances in which unbundling should be prohibited.

Separate accounts

Staff asked the Board to consider the issue of separate accounts. Certain contracts link the benefit amount to the fair value of a designated pool of assets operated in a way similar to a mutual fund. That is, the contract holder bears the risks and rewards of the account's investment performance and the issuer derives only fee income as an asset manager. Some life insurers sell contracts that combine such elements with other elements, such as life insurance cover or guarantees of minimum investment performance. Staff proposed that an insurer should recognise separate account assets, and the related obligation to pay policyholder benefits, unless the insurer has a contractual obligation to pay all cash flows from the separate account assets to the separate account policyholders. that is, unless:

• a. The insurer has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the separate account assets. This condition is not breached if the insurer provides such benefits as guarantees of investment performance or guaranteed minimum death benefits, but the insurer would need to recognise its stand-ready obligation to provide those benefits, and measure that obligation at current exit value (if the guarantee meets the definition of an insurance contract) or fair value (if the guarantee is a financial instrument).
• b. Contract, law, or regulation prohibit the entity from selling, pledging, or lending the separate account assets except for the benefit of the separate account policyholders.
• c. The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the entity is not entitled to reinvest such cash flows outside the separate account, except for investments in cash or cash equivalents during the short settlement period from the collection date to the date of required remittance to the separate account, and interest earned on such investments is passed to the separate account.
• d. The insurer has substantially none of the risks and rewards of ownership of the separate account assets (other than the right to collect fees for providing investment management services).

It was noted that these are broadly the 'pass-through' criteria in IAS 39, but are being used as recognition, rather than derecognition, criteria. There was some concern about whether this was in conflict with the general recognition criteria in the Framework. Also, there was some inconsistency between criteria 'a' and 'd'. Possible solutions to this inconsistency included deleting 'd' or being consistent in the two paragraphs in the treatment of guarantees. This issue will be revisited by staff.

Customer relationships

In its February meeting, the Board decided that when an insurer recognises rights and obligations arising under an insurance contract, it should also recognise the portion of the customer relationship that relates to future payments that the policyholder must make to retain a right to guaranteed insurability. Staff propose that the (recognised portion of) the customer relationship should be presented as part of the liability. The Board agreed with the staff proposal, with several Board members commenting that the two should not be presented separately as they are inextricably linked.

Staff will investigate how best to provide useful disclosure about the extent to which the overall liability 'package' incorporates cash flows that are enforceable.

Profit margins

The Board has previously concluded that the measurement of insurance liabilities should incorporate a margin. The Board's previous discussions have focused on margins designed to convey decision-useful information to users about the uncertainty associated with future cash flows (risk margins).

At this meeting, the Board concluded that the measurement attribute for insurance liabilities should be current exit value and that the measurement of insurance liabilities should, in addition to a risk margin, also incorporate a margin that represents an unbiased estimate of the compensation that market participants would demand for providing services (a profit margin), other than the service of bearing risk (the risk margin covers the service of bearing risk). The Board also noted that in practice, it will be difficult to separate these components.

Unit-linked and index-linked payments

The Board started a discussion about the measurement of policyholder payments that are denominated in terms of an internal or external investment fund or an index. However, due to time constraints, it was agreed to continue this discussion at the next Board meeting.

Conceptual Framework: Elements

The Board held a preliminary discussion related to the definitions of elements of financial statements. The Board will continue these discussions at the joint meeting of the IASB and FASB. No decisions were made during this discussion.

The Board also began discussions of the conceptual distinction between liabilities and equity and perhaps between classes of equity. Although no decisions were made during this session, a significant number of Board members were of the view that obligations to sacrifice economic resources or conveyance of returns and risks differing from ownership both matter in the determining the existence of a liability. This is viewed as consistent with some recent standards decisions made by both the IASB and the FASB.

Business Combinations Phase II – Oral Update

The staff provided the Board with an overview of how the staff intends to approach the joint meeting with the FASB. In addition, the staff informed the Board that the more difficult topics arising from the Business Combinations project will be brought back to the Board's for consideration as soon as the staff have completed the comment letter analysis as well as working through all those comments – a process that is time consuming as it does not constitute mere re-affirmation of the principles exposed.

The Board agreed with the staff's proposals and expressed support for the excellent work the staff has been doing on this project. The Board also noted that constituents who do not understand the IASB's due process should refer to the Due Process Handbook which sets out the process that the IASB must follow in finalising a Standard.

On whether re-exposure was likely for the Business Combinations exposure draft, the staff indicated that it was not yet clear whether this would be necessary.

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

Thursday 27 April 2006

Financial Instruments – Long-term Objectives

The Boards discussed their long-term objective to eliminate or simplify hedge accounting in the broader context of the FASB/IASB Memorandum of Understanding's agreed objective to issue one or more due process documents relating to accounting for financial instruments by 1 January 2008. The Boards did not discuss the paper issued to Observers as Agenda Paper 1 for the joint meeting.

A FASB Member observed that the long-term objective of the Boards was the elimination of the current mixed attribute model for financial instruments. Therefore, the due process document should address why one basis is better than mixed attributes and why, in the Boards' view, fair value for financial instruments was the better answer for users, preparers and auditors. Members from both Boards commented that the due process document should address the measurement attribute rather than simply the calculation that is the result of that determination; that the document must articulate clearly what a financial instrument is and to which portions of a financial instrument (if any) a particular calculation might be applied. Board members stressed that this document would not seek to advocate (or otherwise) the extension of fair value measurement to assets and liabilities that are not 'financial instruments' as defined. In addition, the due process document would need to address both decision usefulness (relevance, reliability, and neutrality) and complexity issues.

The Boards discussed the shape and content of the due process document. The character of that document (that is, whether a Staff Paper or a Preliminary Views Document) could not be determined until the staff had prepared a outline and an estimate of the amount of Board involvement required. The amount of Board time necessary would also be a product of the amount of 'new thinking' vs synthesis of existing work in the document. Board members, especially IASB Members, stressed that a Preliminary Views Document would receive more and better attention from constituents and thus a higher-quality response.

The IASB and the FASB agreed to commit their staff to the next stage of 'the effort' (this was not an Agenda Decision). One FASB Member did not support this because the staff proposal was not sufficiently focused to enable him to make a properly considered decision.

The next stage is that the IASB and FASB staff will develop an outline of the due process document together with their assessment of Board time and involvement necessary if the document were to be released by 1 January 2008.

Business Combinations Phase II

Costs incurred in connection with a business combination

The Boards discussed the appropriate accounting for costs incurred in connection with a business combination in the context of the general recognition and measurement principles agreed by each Board in March 2006. Those principles are:

• In a business combination, the acquirer recognises all of the assets acquired and all of the liabilities assumed.
• In a business combination, the acquirer measures each recognised asset acquired and each liability assumed at its acquisition-date fair value.

The staff noted that application of those principles means that acquisition-related costs associated with a business combination would not be accounted for as part of the business combination accounting (and, generally, would be expensed in the period they are incurred). In the staff's view, acquisition-related costs do not meet the recognition criteria of an asset acquired in a business combination and are not part of the fair value measurement of recognised assets acquired and liabilities assumed in a business combination.

The staff summarised the comments received from constituents, many of which criticised the ED either because the constituents favoured asset treatment for such expenditures or because they perceived an inconsistency between business combination accounting and single asset purchases. (See Observer Note [IASB] 2B/[FASB] 15.)

Most of those who spoke during the debate supported the staff view. It was noted that the 'assets' acquired by the acquirer from service providers (lawyers, accountants, investment bankers, etc) were consumed during the transaction and had no future benefit. However, the ED's Basis for Conclusions had not refuted the arguments for recognition of such costs as an asset (essentially a component subsumed in goodwill). In addition, there was a perceived inconsistency between the treatment of such costs for asset purchases and for share issue costs. Again, the Basis for Conclusions needed to address these areas better than it had done at the ED stage.

The Boards affirmed that the acquirer shall not include acquisition-related costs in the measure of the fair value of the acquiree or the assets acquired or liabilities assumed as part of the business combination. Instead, the acquirer accounts for acquisition-related costs separate from the business combination in accordance with other IFRSs or US GAAP. (FASB: none opposed; IASB: 11 in favour; 2 opposed; 1 abstained, pending review of the Basis.)

Presentation and disclosure of non-controlling interests

The Boards were encouraged to achieve convergence of their positions on several issues related to the presentation and disclosure of non-controlling interests.

Disclosing a reconciliation of the controlling and non-controlling interest

The issue was that the IASB would require a reconciliation of movements in the carrying amount of equity attributable to equity holders of the parent entity and non-controlling interest, while the FASB's current position is that the reconciliation would be required for non-controlling interests only.

After a short discussion, the FASB did not object to adopting the IASB position.

Disclosure of changes in controlling ownership interests

The IASB agreed that entities should be required to disclose the effects of any transactions with the non-controlling interest on the equity attributable to the controlling interest in a separate schedule in the notes to the financial statements.

Several IASB members welcomed this more prominent display, but stressed that this disclosure would be either within the statement of changes in shareholders' equity or the notes to that statement (i.e., not as items of profit or loss).

Disclosure in the event of a loss of control of a subsidiary

In March 2006, the Boards affirmed that if a parent loses control of a subsidiary but retains a non-controlling equity investment in the former subsidiary, the retained non-controlling equity investment should be remeasured to fair value and any gain or loss on such remeasurement should be recognised in net income/profit or loss. At that time, the FASB also affirmed that the amount of any remeasurement gain or loss and the line item in the income statement where the gain or loss is recognised should be disclosed.

The IASB agreed that the amount of any remeasurement gain or loss and the line item in the statement of profit or loss where the gain or loss is recognised should be disclosed. Board members observed that such gains and losses would not be operating items.

Disclosing amounts attributable to the controlling interest

The Boards affirmed that only the amounts attributable to the controlling interest should be required to be disclosed either on the face of the consolidated financial statements or in the notes. There was some controversy and confusion during this discussion-one IASB member in particular was concerned that useful information would be lost through high levels of aggregation. Although a reconciliation of components would be required, the member was not convinced that users would be able to identify all critical information easily and accurately. The IASB member agreed to work with the staff out of session to articulate his concern.

Consideration transferred and fair value in a business combination

The Boards explored whether the revised definition of fair value and the recent FASB redeliberations in their Fair Value Measurements project affect the presumption in the Business Combinations Exposure Draft that the consideration transferred in an arm's-length exchange for an acquired interest (the transaction price) is the best evidence of fair value of that interest.

The staff explained that the definition of fair value used in the ED had evolved as a result of the FASB's redeliberation of their Fair Value Measurement draft Statement:

The staff suggested that, consistent with the Fair Value Measurements project, in many cases:

• (a) In an 100 percent acquisition, the consideration transferred is presumptively the acquisition-date fair value of the acquiree, as a whole.
• (b) In a less than 100 percent acquisition, the consideration transferred is presumptively the acquisition-date fair value of the interest acquired and that the fair value of the interest acquired likely will be used as one piece of information in measuring the fair value of the acquiree as a whole.

However, the FASB's Fair Value Measurements Statement will include four examples in which the entry price might differ from the exit price. The staff suggested that a business combination might occur under any one of those examples. For example:

• (a) The market in which a business combination occurs might be different from the market in which the acquirer would sell or otherwise dispose of the aggregate acquired interest.
• (b) The unit of account represented by the consideration transferred might be different from the unit of account of the acquired interest in the aggregate.
• (c) A business combination might occur under duress or a seller might be forced to accept a price because of urgency.
• (d) A business combination might occur between related parties.

During the discussion that followed, a FASB member attempted to simplify this analysis by suggesting (as a practical expediency) that presumptively the transaction price would represent fair value except in the case of a related party transaction or a combination under duress. In those situations it would be necessary to gather more information about the transaction before concluding that the transaction price did or did not represent fair value. Another FASB member noted that what the Boards were trying to distinguish were transactions in which the transaction price was pre-determined from those that were subject to true negotiation.

No decisions were made. The staff will use the discussion to help them as they continue to re-examine the fair value measurement requirement and any possible exceptions to that principle.

Revenue Recognition (see also our notes of the IASB's discussion on 26 April 2006)

Possible alternative revenue recognition methods

The staff noted that during their discussions earlier in the week, the IASB had modified a condition present in two alternative revenue recognition methods, the 'Customer Benefit Method' (CBM) and the 'Performance-based Method with Application Accommodations' (PBM-AA). The IASB had suggested deleting the 'customer acceptance of performance to date (unless acceptance is perfunctory)' condition from the revenue recognition criterion in each method.

The debate quickly gravitated to a discussion of the CBM and PBM-AA methods, which are much the same. There seemed to be general agreement about the fundamental principles, but less agreement about how those principles were described (the 'labels' being used). FASB members noted that to accept the PBM-AA method might run the risk of contradicting guidance from the US Securities and Exchange Commission on 'bill and hold' sales.

Ultimately, the following decisions were made:

• The FASB did not object to the IASB's modification of the revenue recognition criteria in the CBM and PBM-AA.
• The FASB did not object to using the notion of a customer's obligation as the 'back-stop' trigger for revenue recognition.

The FASB was asked for an indication of which model it preferred:

• Three members favoured the CBM.
• Four members favoured the PBM-AA.

The due process document would discuss these alternatives.

Friday 28 April 2006

Leases

The staff presented the Boards with a paper that provided a summary of the discussions previously held by the two Boards and presented three possible approaches for a potential leasing project to be carried forward. The intention of this session was thus for the Boards to decide which of the three following approaches the Boards would support for taking the project forward:

• Option 1 - Add a joint project to the agenda with the first phase primarily involving the staff working with a working group of leasing experts and a group of users of financial statements with the intent to bring a complete package for Board consideration in the first half of 2007 (this was the staff's preferred approach).
• Option 2 - Add a modified joint project to the agenda with the IASB taking the lead.
• Option 3 - Defer an agenda decision on lease accounting until some of the projects on the Boards' agendas have been completed or substantially completed with a view to making the project a joint project at that time.

FASB members were reluctant toward option 2 as they were concerned about capacity problems. Furthermore they knew that there would be opposition in the US with moving forward this project letting IASB take the lead, as the intention is to progress this as a joint project.

Option 1 would not be a project not requiring significant Board resources in the first phase. It would however involve the staff spending time researching the project and developing ideas. This research phase might include:

• Discussing lease accounting issues with a working group of leasing experts and a group of users of financial statements.
• Identifying and analysing the conceptual and practical issues involved in further developing the ideas in the G4+1 Special Report.
• Developing a lease accounting model that is consistent with the current frameworks and developing standards.
• Holding voluntary education sessions for Board members.

The output of this would be a staff research paper.

Based on the discussion, the Boards voted for Option 1, with IASB members agreeing unanimously and FASB member disagreeing. The IASB expects to make a formal agenda decision in June 2006, which would allow time for consideration also by the SAC and the IASCF Trustees.

The staff was asked to come back with a proposed timetable for the project.

Conceptual Framework

During the discussion on the conceptual framework project, the Boards deliberated on the following:

• The elements phase of the working definitions of an asset and a liability
• The proposed plan for the measurement portion of the conceptual framework project

Asset Definition and Liabilities Definition

The purpose of this session was for the staff to present the working definitions of an asset and of a liability together with amplifying text, and ask the Boards whether these provide a sufficient basis for further work on the project.

The staff recommendation for the asset and the liability definition is as follows:

• Asset definition. An asset is a present economic resource of an entity.
• Liability definition. A liability is a present economic obligation of an entity.

At the meeting the staff handed out an addendum to the agenda paper reflecting some last minutes refining of the essential characteristics of the asset and liability definitions. This addendum explained that an asset has three essential characteristics (which were proposed as amplifying text):

• a) There is an underlying economic resource.
• b) The entity has rights or other privileged access to the economic resource.
• c) The economic resource and the rights or other privileged access both exist at the financial statement date.

Likewise a liability has three essential characteristics:

• a) The obligation is economic - it requires the entity to provide or stand read to provide its economic resources to others, or forgo economic resources that it might otherwise be able to obtain.
• b) The entity is obligated to others to act or perform in a certain way (or refrain from acting or performing).
• a) The economic obligation and the legal enforceability (or its equivalent) both exists at the financial statement date.

The Boards started the session by discussing the asset definition and the amplifying text proposed. Board members challenged the wording set out in c), as the text implied that both an economic resource and a right have to exist for an asset to be recognised. There seemed to be general agreement amongst Board members that this sentence was not clear and should be revised.

Other Board members commented on the term 'economic resource' as they found it to be a very wide and general expression with no specific meaning. A proposal was put forward to change this to 'potential cash flows'.

Furthermore, the debate also seemed to indicate that Board members had difficulty distinguishing between the term 'economic resource' and the term 'economic benefit'.

The Boards then concentrated the debate on the definition of a liability around stand ready obligations and obligations arising from foregoing economic resources that otherwise could be obtained, and whether these should be recognised as liabilities. Specifically they discussed a situation in which an entity is paid not to engage in certain business activities that could generate future economic benefits. The entity has an obligation that requires it to forego a possible future economic cash flow. The entity would be required to make repayment if it breached the contract, and therefore it has a liability until the contract expires.

Board members differed in their view whether this should result in recognition of a liability.

The Boards decided not to take any decisions during this session. They instructed staff to redraft the amplifying text of assets and liabilities based on the debate as well as comments made by Board members.

Measurement: Planning

The staff presented the Board with the progress plan for the Measurement phase of the Conceptual Framework project. (The progress plan timetable was not handed out to observers).

As the staff considered the current milestones under the measurement phase to lack organisational rationale for addressing fundamental and difficult measurement issues, they presented the Boards a new measurement phase based on three milestones:

• a. Milestone I: Defining and describing the properties of measurement bases
• b. Milestone II: Evaluating measurement bases using the qualitative characteristics
• c. Milestone III: Conceptual conclusions and practical applications

Some Board members expressed their concern that characteristics for considering a measurement basis was not indented to be a part of Milestone I of the measurement phase while other Board members had a perception that this was unnecessary at the first stage.

The Boards agreed to the staff's proposal for a single measurement phase and agreed the proposed restatement of measurement milestones and issues.

The Boards were asked whether they would agree to the proposal regarding public consultations for each milestone in the measurement phase.

Many Board members were supportive to the proposal, and commented that this would give the opportunity to have a two way communication with constituents. It was also noted that this could result in more constituents getting involved, considering the alternative, which is asking for comments in the form of letters.

The Boards supported the proposal. Staff added that they were aiming to do some consultations before the year end.

Eventually it was decided that the Boards would issue a Staff Paper at the end of the first milestone, a Preliminary Views document after reaching decisions in the second milestone, and an exposure draft after making decisions in the third milestone.

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