Amendments to IAS 37

Redeliberation of the proposal to eliminate the term 'contingent liability

The Board considered a staff analysis of comments on the proposal to eliminate the term 'contingent liability' from IAS 37. The staff noted that several concerns expressed about the proposal to eliminate the term 'contingent liability' related to other proposals included in the ED. Those concerns included omitting the probability recognition criterion, determining when a liability exists, the potential scope of stand-ready obligation,s and the new analysis of liabilities into conditional and unconditional obligations. Those topics either had been, or would be, addressed separately during the Board's redeliberations.

The Board was asked to address two matters specifically:

• Whether to eliminate the term 'contingent liability'; and
• Disclosure about potentially significant risks.

There was little discussion of whether to eliminate the term 'contingent liability'. Board members noted that many of the comment letters stated that the term was 'well understood', but often one respondent's understanding was different from another's. The Board thought that, given the other amendments being made to their proposals as a result of the exposure process, the term was unnecessary and unhelpful. The Board agreed to eliminate the term.

The staff had identified a potential gap in the disclosure requirements proposed in the ED with respect to disclosure about situations when the existence of a liability is uncertain and, therefore, no liability is recognised under the criteria adopted by the Board, as contrasted with disclosure of all potentially significant risks that the entity faces at the balance sheet date.

Board members acknowledged the problem, especially with respect to litigation. They agreed that to require preparers to estimate the amount of something that did not meet the definition of a liability did not make sense. The problem was how to craft a robust definition of the kinds of uncertainties for which disclosure should be required so as to avoid boilerplate disclosure about business risks in general. While litigation was an obvious example of the kinds of 'potentially significant risks' for which disclosure was sought, there were other examples, including illegal acts, environmental laws, and copyright.

The Board did not reach decisions on this topic. They asked the staff to return with a more developed proposal.

Can recognition of a liability influence the outcome of legal proceedings?

The ED proposed that if a range of possible outcomes with respect to a liability exist, the entity would disclose information indicating the uncertainties associated with the future cash outflows that would be required to settle or transfer the liability. The Board considered concerns raised by constituents that applying those principles to a liability, when the facts and circumstances associated with the liability are the subject of a lawsuit, might adversely influence the outcome of legal proceedings.

Constituents' concerns focussed on the legal notion of 'discovery' and that the entity's analyses supporting the disclosure might be subject to discovery, potentially prejudicing their defence. Board members, especially those with corporate backgrounds, were of the opinion that internal documentation and analyses of legal claims and similar uncertain liabilities would exist. The degree to which those analyses would be subject to legal discovery would vary among legal jurisdictions. It would be impossible for the Board to write a Standard to accommodate all legal systems. If an entity was particularly concerned, they should take the necessary steps to have any assessment made the subject of attorney-client privilege.

The Board agreed not to provide any exemption from recognition of a liability on the grounds that it would prejudice the entity. In addition, the Board agreed not to provide an exemption from the disclosures proposed in paragraph 67 of the ED on the grounds of prejudice to the entity. (Paragraph 67 proposes disclosure of the amount and description of each class of recognised non-financial liability.)

Project plan

The Board discussed the public roundtables to be held in Connecticut USA (30 November 2006), London (8 December 2006) and Melbourne, Australia 20 December 2006). The roundtables would discuss the results of the Board's redeliberations, not the original proposals in the ED. In addition, although invitations to participate in the roundtables had been sent to all those who had responded to the IASB ED and the FASB's Invitation to Comment, late applications would be accommodated, subject to space.

IFRIC Update

The staff briefed the Board on the results of the IFRIC meeting held earlier in July (see our IASPlus Report: IFRIC Update for this meeting is still in production). In particular, the Board will receive two Draft Interpretations for approval in the near future: one on customer loyalty programmes; and another on the interaction of a minimum finding requirement and the asset ceiling in IAS 19 Employee Benefits. A Board member noted that the conclusions reached with respect to customer loyalty programmes go beyond current US GAAP in this area and would be problematic for the operators of certain schemes, particularly airlines.

The IFRIC was close to concluding its redeliberations on customer loyalty programmes and it was hoped that the Board would be asked to approve the Interpretation in October 2006. In addition, an Interpretation based on D17 IFRS 2 Group and Treasury Share Transactions was nearing completion. A Board member expressed concerns about the tentative conclusion with respect to this topic.

IFRS 2 – Vesting Conditions and Cancellations

Vesting conditions

The Board agreed that vesting conditions include performance conditions and service conditions only. As to whether a definition of vesting condition (and, by extension, 'performance condition' and 'service condition') was required, different opinions were expressed.

The Board agreed to develop further guidance, to be incorporated as an addition to the Implementation Guidance for IFRS 2, on the various conditions that may determine whether a counterparty obtains the equity instruments granted. This might take the form of a simple organisation chart or table.

Cancellations

More time was spent discussing the topic of cancellations and whether it should make a difference whether the cancellation comes about through the actions of the counterparty or the entity.

The Board agreed that cancellations are cancellations, which ever party brings them about and that no amendment to IFRS 2 should be made with respect to this principle.

However, the Board agreed to investigate further whether some of the schemes that were seen as causing the problem, such as Save As You Earn (SAYE) schemes, were truly share-based payment schemes. Board members noted that such schemes often required contributions and/or salary deductions from plan participants; these contributions were held in a segregated account by the plan sponsor until such time as the depositor purchased the shares using the amounts in the SAYE account. As such, the arrangement operates in a manner similar to a savings account with interest. It was not entirely obvious that there was a share-based element. The staff will investigate this further and revert to the Board.

Post-employment Benefits, including Pensions – Agenda decision

The Board considered a formal proposal to add two projects to the Board's technical agenda. The staff noted that the proposal had already been discussed with the SAC and the Trustees, as required by the Board's Due Process Handbook. The two projects would represent:

• (a) a targeted series of improvements to IAS 19, to be completed within a four-year period; and
• (b) a comprehensive review and revision of the existing pension accounting model, to e undertaken in conjunction with the FASB.

The Four-year Project

The basic pension accounting model would remain unchanged.

The Board would focus on removing the 'add-ons' to the basic model, in particular the smoothing and deferral mechanisms, such as the corridor, the assumed rate of return on plan assets, and the recognition of gains and losses. The Board would reconsider the definitions of defined benefit and defined contribution plans, with special attention being given to cash-balance plans. In addition, the Board would consider providing additional guidance on settlements and curtailments and consider presentation of amounts related to post-employment benefits in the financial statements. The staff expressed reservations as to whether the Board could reasonably address settlements and curtailments in the time allotted and noted that this would be the first candidate for removal if the project timetable came under strain.

Comprehensive project

The comprehensive project was already underway at the FASB. The project plan would ensure that the IASB was (during the four-year project) kept up-to-date with developments, such that any differences of opinion could be identified quickly. The Board agreed unanimously to add the post-employment benefits project to its technical agenda. They also agreed with the approach, although it was evident that several Board members were sanguine about the four-year plan.

Working group

The Board agreed that it would be advisable to appoint a working group to assist it with the four-year project. Presentation matters would be referred to the existing Financial Statement Presentation Working Group. Thus, the new working group would need pension experts, actuaries, etc.

Process for Non-urgent, Minor Amendments to Standards

The Board considered a proposal from the staff for a process for dealing with non-urgent, minor amendments, operating within the boundaries of the IASB's Due Process Handbook. Following the proposal, the IASB would establish an orderly process for making small changes to standards that are worthwhile improvements but not urgent.

Some Board members spoke in favour of the policy, noting that the SAC [and Trustees] would not need to be consulted on individual 'projects' but should be kept informed of them.

Other Board members expressed concern with the approach: especially about defining what constituted a 'minor' or 'non-urgent' matter. In addition, it would be very difficult to differentiate consistently 'drafting errors' from a change in the Board's preference. It was also noted that the timing of the process could result in a standard being in Limbo for two years-something that was not in the IASB's or constituents' best interests.

Before implementing the process, the staff were asked to discuss it with IOSCO. The process raised several difficult enforcement issues that might need resolution.

All that said; the Board approved the proposed process unanimously.

Conceptual Framework – Phase B: Definitions of assets and liabilities

The Board discussed the following proposed definition and essential characteristics of an asset:

• An asset is a present economic resource to which an entity has a present right or other privileged access.
• An asset of an entity has three essential characteristics:
  • a. There is an 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.

All three characteristics must be met for an item to meet the definition of an asset. That is, each characteristic is a necessary condition and, collectively, they constitute a sufficient condition for an item to be an asset.

The Board discussed this definition and the related elaboration of the 'essential characteristics' in depth. Many of the concerns raised by Board members retraced underlying concerns about what an asset represented (the resource; the right to the resource; or the right to the right) and whether a promise to provide a resource (e.g. an option) would meet the definition of an asset.

Board members requested the staff to reinstitute prior wording in the elaboration of 'economic resource' such that it was clear that, at the balance sheet date, there is the non-zero likelihood of generating inbound cash flows or reducing outbound cash flows.

It was suggested that the definition of an asset might be reworded as follows:

• An asset is an entity's present right or privileged access to an economic resource.

This proposal was supported by some Board members, however other Board members wanted more emphasis given to benefits.

Board members then tested various items that might represent an asset against the proposed definition. These discussions demonstrated that there are still problems in the way the general principle is articulated that the staff must resolve before the Board is satisfied with the definition. However, a majority of the Board agreed to proceed on the basis of the definition outlined by the staff (with amendments).

Amendments to IAS 24 Related Party Disclosures – Agenda Decision

The Board considered a formal proposal to add a project to the Board's technical agenda to amend IAS 24 with respect to certain transactions between state-controlled entities and among entities when one entity is a subsidiary and the other is an associate of the same parent/ investor. The staff noted that the proposal had already been discussed with the SAC and the Trustees, as required by the Board's Due Process Handbook.

Transactions between state-controlled entities

Board members asked for clarification of the scope of the possible amendments. It was noted that there was no proposal to limit or exempt disclosures of transactions between the State and any State-owned business entities (that is, parent-subsidiary or investor-investee transactions). The project would explore whether and to what extent disclosure accommodations could be made with respect to transactions among entities which are owned by the State, or in which the State has significant influence.

The Board agreed to add this aspect of the project to its technical agenda. It was noted that a blanket exemption was unlikely to command the support of the Board, but that restricting disclosure to 'off-market' transactions might be a possibility. However, it was too early to conclude how the Board might approach the issue.

Transactions between two related parties of an entity

This issue relates to what the requirements of IAS 24 are when:

• (a) an entity has both subsidiaries and associates that transact with each other; and
• (b) the associate is the reporting entity.

Board members expressed various views about this issue. One noted that transactions between the subsidiary and the associate should be within the scope of IAS 24, but saw difficulty with enforcing this. Other Board members disagreed, noting that if the associate's procedures for identifying related parties were adequate, the associate should be able to identify the parent's subsidiaries. At the margins, there will be situations in which the associate would not know it is transacting with a related party, but it must still make its best efforts to identify them.

It was suggested that, as part of the plan for addressing this part of the project, the staff should contact those SAC members that are professional users of financial statements and who had expressed concerns about the current definition of related parties.

The Board agreed to add this aspect of the project to its technical agenda.

Insurance Contracts - Phase 2:

The IASB continued its discussion of various aspects of accounting for insurance contracts, the output of which will be a Preliminary Views Discussion Paper.

Timetable for Discussion Paper

The staff presented the latest project timetable and expected contents of the Discussion Paper. The staff expects that a Discussion Paper will be published in December 2006.

Board members expressed concerns about scheduling meetings with industry representatives during the same meeting week that the Board was scheduled to discuss many of the issues those constituents are likely to discuss with the Board. The staff agreed to consider how this schedule might be changed.

Board members expressed concern with including 'a summary of proposals by some insurance trade associations' as an appendix to the Discussion Paper. The staff clarified that the appendix would list where the proposals could be found (for instance, the URL for each proposal) rather than attempt to provide an overview or digest of those proposals.

It was noted that disclosure would not be addressed, as the staff think it premature to do so at this stage of the project. However, the staff noted that there was no intention to alter fundamentally the disclosure principles in IFRS 4.

It was also noted that the FASB would do something with the Discussion Paper, but at the moment what that would be is uncertain. Insurance is not on the FASB technical agenda yet, so it is likely that the Discussion Paper will form part of the FASB agenda proposal.

Changes in the insurance liability

The staff noted that the working approach in the Discussion Paper has been to treat the premium received on short-dated insurance contracts as revenue, but to unbundle the revenue received on long-dated contracts and recognise the deposit element separately.

Board members noted that the treatment of short-dated contracts was troublesome given the direction of the revenue recognition discussions; some stating that they were not prepared to include a preliminary view that was contrary to the direction of the revenue recognition project. Those Board members were of the opinion that unbundling provides better information. What was more important was a thorough discussion of the issue.

The Board accepted a staff suggestion that the Discussion Paper should not come to a preliminary view on unbundling short-duration contracts but should explain what unbundling meant in this context and what the implications of such a treatment would be.

The Board discussed an example that addressed revenue and acquisition costs. The Board agreed that the excess of the initial premium received over the initial measurement of the liability should not be netted against the acquisition costs incurred. Netting would be inconsistent with normal offsetting restrictions in IFRSs and would obscure input information about the level of acquisition costs.

Unit-linked and index-linked payments

Presentation of separate account assets and separate account liabilities

The Board agreed 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 (a 'pass-through' obligation). The Board appeared to accept that this presentation could be a 'single line' presentation (a single line for unit/index-linked assets and a single line for the policyholder benefits liability).

Measurement of separate account assets

The staff explained that in most countries, insurers measure assets in unit-linked funds at fair value and measure the unit-linked benefits on a similar basis: if the obligation is to pay benefits equal to 100 units, the benefit is measured at 100 times the current unit price.

In May, the Board noted that accounting mismatches can arise if some or all of the unit-linked assets:

• (a) cannot be recognised (for example, if the unit-linked assets include shares or financial liabilities of the issuer itself (treasury shares) or goodwill in subsidiaries);
• (b) are recognised, but cannot be measured at fair value (for example, because an applicable standard requires another measure); or
• (c) are measured at fair value, but changes in their fair value must be recognised outside profit or loss.

The Board redebated this issue at some length in an attempt to develop an approach that would avoid these mismatches, but without success. The Board agreed that the Discussion Paper should include a full discussion of this issue, the conflicts that exist within IFRSs, and the challenges that the Board faces because of the mixed attribute model within which it is working. However, no preliminary view would be expressed.

Wednesday 19 July 2006

Leases

Under the IASB-FASB Memorandum of Understanding, the two Boards have agreed to consider and decide on the scope and timing of a potential leasing project. Staff had two questions for the Board. The first was whether the Board agreed with staff's proposal to add a leasing project to the Board's agenda. The Board agreed with this proposal.

The second question was whether the Board had any comments on the project plan and timetable. Staff proposed to work towards issuing a discussion paper jointly with the FASB in the third quarter of 2008. The Board recognised that this was a fairly ambitious timetable, but did agree to it.

There was general agreement that the project should address the accounting by both lessor and lessee. At a later stage, it may be possible or necessary to split the project into two parts: one dealing with lessor accounting, and one dealing with lessee accounting. For example, it may be that more work needs to be done on lessor accounting, but that a discussion paper on lessee accounting can be issued more quickly.

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

Project status

The session primarily focussed on section 12 Financial Assets and Financial Liabilities of a draft Exposure Draft of an IFRS for SMEs. However, before that, staff presented a brief summary of the project's progress. Most of the 40 sections of the draft IFRS for SMEs have been tentatively approved. The main outstanding sections to be drafted are those on income taxes and employee benefits. In addition, the basis for conclusions and invitation to comment also need to be drafted.

Income taxes

Before looking at the financial instruments section, the Board briefly considered the approach being taken to accounting for income taxes. Staff proposed using a timing difference approach. There was support for this, although some Board members were concerned that certain assets and liabilities that should be recorded would be missed.

Financial instruments

The remainder of the time was spent considering section 12 of the draft SME IFRS> Section 12 contains substantial re-drafts based on decisions taken at the June Board meeting. However, the full text of section 12 was not made available to observers.

At the June meeting, the Board tentatively agreed that an SME should not have the option to use IAS 39 instead of section 12. However, whilst section 12 adopts a simpler way of accounting for financial instruments than IAS 39, the simplifications mean that many of the options available in IAS 39 would not be available to SMEs (for example, the available-for-sale and held-to-maturity classifications for financial assets). Furthermore, certain assets that could be carried at amortised cost under IAS 39 would have to be carried at fair value through profit and loss under section 12, and the derecognition provisions of section 12 are simpler but stricter than those in IAS 39. As a result, staff asked the Board to reconsider its June decision. The Board agreed that SMEs should have the choice to adopt IAS 39 in full instead of using section 12.

As part of simplifying the requirements on accounting for financial instruments, the reference to categories of financial assets and liabilities has been removed. Instead, staff proposed that the default is for all instruments to be carried at fair value, with changes in fair value recognised in profit or loss. There are three exceptions to this, two of which are optional, and one of which is mandatory:

• 1. 'plain vanilla' receivables, such as trade receivables, payables, and similar instruments (elective);
• 2. commitments to make or receive loans that cannot be net settled and will result in a financial instrument that qualifies for recognition at amortised cost (elective); and
• 3. equity instrument that are not publicly traded and whose fair value cannot be measured reliably, and options on such instruments (mandatory).

Part of the reason for doing this was to eliminate the need to refer to derivatives or embedded derivatives. Some Board members felt it would be better to reverse these paragraphs so that the standard first stated which items could be carried at cost (or amortised cost) and then stated that all other items had to be carried at fair value through profit and loss.

At the June meeting, the Board asked that the guidance in IAS 39 on determining fair values to be included in the draft IFRS for SMEs. The Board also asked that the guidance on impairment be re-written. These changes were processed by the staff and approved by the Board.

The Board was again asked to approve the guidance on derecognition. Broadly, an entity would derecognise an asset when:

• the contractual rights to the cash flows expire; or
• the entity transfers all the significant risks and rewards relating to the asset; or
• the entity transfers physical control of the asset and the transferee can sell the asset to an unrelated third party without restriction.

Whilst the wording had not changed significantly, staff highlighted that the simplified derecognition provisions result in a very high hurdle for derecognition. It is therefore possible that certain securitisations and debt factoring that would qualify for derecognition under IAS 39 would not be derecognised under the IFRS for SMEs. The Board agreed with the derecognition provisions. They pointed out that few SMEs enter into securitisation transactions, and the option to adopt IAS 39 is available to those that do and wish to derecognise.

The proposals for hedge accounting were debated at length. Some members believed that the easiest way of simplifying the hedging rules was to only allow hedge accounting in four identified circumstances and to not account for any ineffectiveness that may arise. The logic is that hedging is limited to circumstances where there is unlikely to be much ineffectiveness. Some call this the 'shortcut method'. Under this proposal, an entity could hedge the following:

• interest rate risk of a debt instrument measured at amortised cost;
• foreign currency exposure in a commitment or highly probably forecast transaction;
• commodity price risk exposure in a commitment or highly probably forecast transaction; and
• foreign exchange risk exposure in a net investment in a foreign operation.

Some Board members proposed an alternative under which effectiveness would have to be measured at each reporting date and any ineffectiveness would be reported immediately in profit or loss – similar to IAS 39 but with simplified calculations.

The Board asked the staff to develop both a shortcut approach and an effectiveness testing approach, and also to consider whether the IFRS for SMEs should permit both of those approaches.

Thursday 20 July 2006

Short term Convergence: Interests in Joint Ventures

In December 2005, the Board decided to remove the option in IAS 31 Interests in Joint Ventures that allowed interests in jointly controlled entities to be proportionately consolidated. By removing this option, an investment in a joint venture 'entity' would need to be accounted for using the equity method. However, to implement that decision, the Board requested that the staff should clarify the definition of a joint venture and the difference between an interest in a joint venture entity and a direct interest in assets or liabilities of a joint arrangement.

The Board agreed, at a conceptual level (subject to exploring the practical application), that participants interests in a joint arrangement be classified as either direct interests or indirect interests in the underlying assets and liabilities. Some Board members believe this is a positive move towards a principle based classification instead of the current requirement in IAS 31 which are in effect a free choice between three alternatives.

The Board agreed that in certain circumstances where participants have indirect interests in a mere contractual arrangement (that is, not an incorporated entity or partnership), such interests should be accounted for by the equity method.

The Board agreed not to impose additional disclosure requirements on joint venturers without first undertaking a more comprehensive analysis of user needs. Such an analysis would be better undertaken as part of the longer term project.

At the March meeting there was some discussion about the impact of whether the outcome of the arrangement's operation is distributed in kind and the product is a commodity traded on an active market. The Board agreed that whether or not the output is traded on an active market is not relevant for the nature of the participant's interests in the arrangement. If the elements defining an indirect interest are met it does not matter whether the output is tradeable or not on an active market. The Board noted however that where entitlement is to physical quantity, this may be an area where the legal form of the arrangement is closely aligned with the substance.

In concluding this discussion, some Board members noted that the proposals made are an improvement to IAS 31 and it is up to the FASB to move towards the new guidance being developed in the interests of convergence.

Consolidations (including SPEs)

The Board discussed the basic framework the staff is developing for a proposed revised consolidation standard. A paper dealing specifically with SPE issues will be discussed at the September meeting.

The Board discussed the following informal objective:

...the entity reporting [is] to present information about the assets and liabilities, and the activities related to dealing with those assets and liabilities, for which it holds sufficient rights to be able to utilise or deal with as if they were its own.

Some Board members expressed concern about this statement due to the protective rights afforded minority shareholders in many jurisdictions. Others believed the focus should be on the objective of providing information that allows users to estimate the nature and timing of cash flows.

The Board disagreed with the staff proposal to consider the requirements for the presentation of separate financial statements on the basis that this was a significant area that would delay the overall consolidations project. Consequently, the Board agreed to consider presentation of separate financial statements as a separate project.

The Board discussed the tentative definition of 'control' (see below) as agreed by the Board previously together with staff recommendations related thereto. This discussion included various scenarios depicting de facto and latent control issues but did not make decisions. Some Board members indicated that there may be instances where the benefits arising from an entity should be assessed ahead of the power criterion, particularly as the control question relates to SPEs.

Definition of control (as tentatively agreed by the Board):

Control is the ability to direct the strategic financing 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.

Although the staff believe that the basic thinking behind this definition is sound, the staff wish to amend it to focus on the assets and liabilities of the entity rather than the entity per se. The type of wording the staff is considering is as follows:

An entity has a controlling interest in another entity when it has exclusive rights over that entity's assets and liabilities which give it access to the benefits of those assets and liabilities and the ability to increase, maintain or protect the amount of those benefits.

There was general support from the Board of the staff's articulation of the control concept and the emphasis on the underlying assets and liabilities, not the entity.

The Board voted on whether the control question should be assessed on the basis of present interest; that is, not taking into account instruments / arrangements that may allow the investor to acquire an additional interest in the future (excluding the effect of options which are still being explored). The Board was unanimous, in favour of the present interest approach.

The board indicated general support for the direction taken by the staff on the issue of options over an entity. Specifically, some Board members commented that they believe this work looks promising. However, no decisions were made.

Business Combinations Phase II

Identifying the components of a business combination (BC)

A business combination might be comprised of several substantively separate, but related, transactions and events. It is important to identify each of the components of a business combination so that each component is accounted for in accordance with its economic substance. The component of the business combination that involves acquiring the assets and assuming the liabilities that comprise the acquiree should be accounted for as an acquisition (i.e. using the acquisition method).

Consequently, the Board agreed to include the following principle in the final BC standard:

The acquirer shall assess whether a business combination includes any transactions that are substantively separate from the acquisition of assets and assumption of liabilities that comprise the acquiree. Only the consideration transferred and the assets acquired or liabilities assumed that comprise the acquiree shall be accounted for using the acquisition method. Other transactions should be accounted for separately based on their economic substance in accordance with other IFRSs.

A transaction or event arranged by or on behalf of the acquirer and/or initiated primarily for the economic benefit of the acquirer or the combined entity (rather than for the benefit of the acquiree or its former owners prior to the business combination) is a substantively separate transaction.

A brief discussion ensued regarding proposed guidance fro pre-existing relationships, arrangements to pay for employee services and exchanges of share-based payment awards. In particular, the Board discussed the proposed guidance of reacquired rights which some Board members believe do not meet the definition of an asset and should therefore be expensed (the other alternative being to leave them subsumed in goodwill). However, this issue will be explored by the Staff and discussed by the Board in September.

Accounting for restructuring costs in a business combination

The Board affirmed its previous decision that an acquirer should recognise restructuring or exit costs as liabilities assumed in a business combination only if those costs meet the recognition criteria in IAS 37 as of the acquisition date. Those liabilities would be measured at fair value on the acquisition date. Therefore, restructuring or exit costs that do not meet the recognition criteria should be recognised when they occur as a substantively separate transaction from the business combination.

Measurement date for equity instruments issued as consideration

The BC exposure draft requires that consideration transferred in a business combination be measured at its fair value on the date control is achieved (the acquisition date). A consequence is that the fair value of any equity securities issued as consideration in a business combination is measured at the acquisition date-not at the agreement or closing date. This is a matter on which the current requirements under IFRSs differ from those under US GAAP and therefore an area where the Boards are seeking a converged solution.

The IASB reaffirmed its previous decision that equity instruments issued as consideration in a business combination should be measured at the acquisition date fair value. This decision would maintain consistency of measurement between the consideration paid and assets and liabilities acquired and assumed respectively. In addition, the Board considered that on its consolidations project, if it concluded that control was achieved through an agreement on a particular date, measurement of any consideration and the assets acquired and liabilities assumed to be measured on the acquisition date.

ED 8 Segment Reporting

The IASB issued its Exposure Draft ED 8 Operating Segments for public comments on 19 January 2006. The comment period ended on 19 May 2006 and the IASB received 182 comment letters.

Management approach

Some commentators did not support the management approach (18%) proposed by the Board, instead preferring the IAS 14 approach as the more superior guidance (compared to SFAS 131). Others agreed with the management approach for the identification of segments but not for measurement of the various segment disclosures (19%). Some respondents agreed with the Boards exposure draft (51%). 12% did not comment on this issue. After some discussion, the Board agreed to proceed with the management approach adopted in SFAS 131 for both the identification and measurement of segments.

Scope of the standard - entities that hold assets in a fiduciary capacity for a broad group of outsiders

IAS 14 currently applies only to entities whose equity or debt securities are publicly traded and entities that are in the process of issuing equity or debt in public securities markets. The ED proposed extending the scope to cover also entities that hold assets in a fiduciary capacity for a broad group of outsiders.

Some Board members expressed concern that if the IAS 14 scope is used for the new Standard, entities that are not publicly listed will have competitive advantage over those that are listed as they will not have to provide segment information. Consequently, those Board members preferred to include a 'scope in' covering fiduciary capacity. Others noted that the issue was wider as it affected manufacturing entities as well, not just insurers, c-operatives and similar entities (generally those subject to prudential supervision).

The Board agreed that as a principle, all entities claiming compliance with IFRS should comply with all individual IFRSs, therefore there should be no scope exemption in the Segment Reporting standard. To achieve this, the Board decided to prepare a separate exposure draft to be released at the same time as the exposure draft of the SME standard which will consist of a definition of publicly accountable entities. That separate exposure draft will set out the consequential amendments to the scope of the Segment Reporting standard. Once finalised, all IFRS preparers that are not publicly accountable will be subject to the SME standard (unless they chose to apply full IFRSs) which it is believed, will not require Segment Reporting. By default, all other entities claiming compliance with IFRS will be required to provide segment information.

Scope of the standard - Exemption for separate financial statements

Legal entities within a consolidated group are often set up to comply with particular legal or regulatory requirements, yet the business can often be run on a cross-border/cross-entity basis. As a result, business performance is often not considered at a legal entity level, since it is a largely artificial distinction. Collecting segmental information for such entities, where it will typically not be readily available, is likely to be costly and of little benefit to users and because the information provided would not reflect how the business is run i.e. it is not conducted within the context of that single entity.

After considering the above arguments, the Board agreed to include in the final standard a scope exemption for separate financial statements similar to paragraph 6 of IAS 14.

Competitive harm

Some respondents were opposed to a standard that, in their view, would potentially destroy shareholder value in some instances. They recommended that entities should be exempt from aspects of the standard if disclosure could cause competitive damage. With this approach, they suggested that an entity would be required to explain the reasons on a 'comply or explain' basis.

The Board rejected these arguments and voted unanimously to proceed without a competitive harm exception.

Revenue Recognition

The Board discussed further its previous decision at a joint meeting in April with the FASB, that revenue should be recognised when the reporting entity obtains an unconditional right to at least some consideration. Various examples were discussed related to the following:

• Agenda Paper 14B explores how revenue would be recognised if, in the event of breach, a contract requires a legal remedy of specific performance.
• Agenda Paper 14C explores how revenue would be recognized if, in the event of customer breach, a contract requires a legal remedy of monetary damages and those damages would require the customer to pay an amount that reimburses the reporting entity for its costs incurred to date plus a profit margin. In return, the customer would obtain the work in process and title to it. In other words, the contract requires a legal remedy of 'partial physical settlement.'
• Agenda Paper 14D began to consider how revenue would be recognized if, in the event of customer breach, a contract requires a legal remedy of monetary damages and those damages would require the customer to pay a net cash settlement amount to the seller.
• Agenda Paper 14E began to consider how revenue would be recognized if a contract has contractually stated customer acceptance provisions that unconditionally obligate the customer to compensate the reporting entity for performance to date.

The Board did not make specific decisions related to the above examples but indicated its support and general agreement with the direction taken by the Staff.

Friday 21 July 2006

Financial Statement Presentation

The purpose of the July meeting on financial statement presentation was to discuss application of some, but not all, of the project's working principles. The goal was for the Board to reach agreement on the basic format for the financial statements (the sections and categories for each financial statement) that will be included in the initial discussion document. Issues regarding notation / labelling and recycling will be discussed at the September meeting.

The Board agreed in principle that there should be a distinction between business and financing. The Board is yet to discuss and finalise the exact terminology. The Board agreed with the following staff recommendations although some individual Board members expressed concerns about specific issues which the staff will work to resolve:

Summary of staff recommendations for how items would be presented in the financial statements

Following the table are defined terms and related application and implementation guidance.

Some Board members were concerned that the proposals appeared to provide preparers with a free choice of where in the financial statements certain items would be presented. Those members want minimum requirements to be introduced that will standardise presentation to a greater extent across preparers.

Other Board members indicated that they would like to see how derivatives are to be dealt with before subscribing to this approach.

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