NOTES FROM THE JOINT IASB-FASB MEETING
27-28 April 2006, London
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:
| As used in the ED | Current revised definition |
|---|
| Fair value is the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, unrelated willing parties | Fair value is the price that would be received for an asset or paid to transfer a liability in a transaction between market participants at the measurement date. |
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.
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