Post-employment Benefits – Intermediate risk plans [Education session with actuarial representatives]

No decisions were taken during this session.

Among the key issues that the Board will address in its project on employee benefits are:

• accounting for 'intermediate risk plans' (an 'intermediary risk plan' is a pension plan where the risks are shared between the employer and the employee); and
• the definition of defined contribution and defined benefit plans.

At the October meeting the Board held an educational session that covered how different pension schemes attribute risk between the employer and employee, and the measurement issues that are created. The session was split in two parts. Tim Reay from Hewitt (UK) briefed the Board on types of risks in intermediate plans and also presented findings from a research study on intermediate plans. Geert De Ridder from Deloitte (Belgium) held the second session, which focused on measurement problems in accounting for defined benefit plans when the risks are shared as in intermediary risk plans.

The Board debated the discontinuity in measurement that may arise between 'pure' defined contribution plans and defined contribution plans with a minimum guarantee. (Belgian law requires defined contribution plans to have minimum guaranteed rates of return). This plan would be classified as a defined benefit plan under IAS 19, which would create measurement differences if service costs deviate from contributions during the plan.

  Extractive Activities Research Project [Education session]

The Board held an education session on their extractive activities research project. Representatives from the research team presented the outcomes of the research on whether fair value is a suitable measurement and/or disclosure objective for extractive activities.

The representatives focused on agenda paper 4D (available from the IASB Website). The paper considered whether fair value as either the measurement or the disclosure objective for extractive activities would satisfy the qualitative characteristics to provide useful financial information. The research team reported that users had indicated more support for disclosure of inputs necessary for them to prepare their own valuations rather than the reporting of fair values. Based on a lack of support from users for fair value as the measurement objective, combined with difficulties in obtaining verifiable estimates of fair value and significant compliance costs incurred to estimate this value, the research team expressed concern with requiring fair value as a measurement objective.

The Board debated which difficulties the extractive industries may incur when measuring fair values of mineral reserves and resources, and how this would be different from other industries. The alternative to fair value would be to continue to measure mineral reserves and resources at historical cost. Board members generally said that they did not like the alternative, and they seemed confused about why users would be more interested in knowing how much is paid for a resource or reserve compared to what it is worth. The Board noted that it did not see the benefit of going forward with this project if it were to be based on historical cost as a measurement objective.

The Board asked the research team to go back and further explore which difficulties arise on fair value measurement of resources and reserves and bring this back in the future.

  Insurance contracts

At its September 2006 meeting, the Board received a briefing from insurance trade associations on their recommendations on a series of principles used when accounting for insurance contracts. At the October meeting the Board reviewed its tentative decisions in the light of the proposals from these organisations.

Below we have highlighted the proposals that were reviewed by the Board. For a more comprehensive list of the background we refer to the observer notes available from the IASB Website.

Non-life insurance claims liabilities

One of the insurance trade associations present at the September meeting stated that it believes that life and non-life insurance contracts have significant differences that should be reflected in measurement. It also stated that applying discounting to non-life contracts in many cases would add an element of uncertainty to the liability component that would produce incomparable and generally less useful results.

The Board reconfirmed their disagreement with this view and concluded, in line with their previous tentative decisions, that these liabilities should be measured on a discounted basis, including an explicit risk margin.

Non-life insurance pre-claims liabilities

The Board reconfirmed that it prefers a single measurement contract and also that these contracts should be measured at current exit value.

Initial measurement - gains at inception

The insurance industry is proposing that no gains or losses should arise on initial recognition. The Board was split. It decided that the discussion paper should address and explain the rationale for both the position where gains at inception could arise and the position where the margin that may arise would be adjusted to the observed price, with the consequence that a gain would not be recognised.

Risk Margin

The Board reconfirmed that the measurement of an insurance liability should include a risk margin (based on an explicit and unbiased estimate) that the participant would take for bearing risk in a contract.

Service Margin

The Board reconfirmed that an insurance liability may have, in addition to the risk margin, a service margin that the participant would require to render services. The Board expressed that it would not require bifurcation between the risk margin and service margin in all cases.

Discount rate

The Board discussed and confirmed their tentative decision that discount rates should be consistent with observable market prices for cash flows with characteristics that match the insurance liability in terms of timing, currency and liquidity.

Measurement attribute

The Board reconfirmed that the discussion paper should use 'current exit value' as the measurement attribute.

Basis for estimates

The Board confirmed their previous conclusion that cash flows not related to the liability itself should be excluded from the measurement.

Review of assumptions

The Board concluded that all changes in estimates of both financial and non-financial variables should be recognised.

Unbundling

The Board had a longer discussion regarding unbundling. Some Board members thought that the wording set out in the agenda paper was inconsistent. The staff noted the comments from the Board and the Board confirmed their previous conclusion that an insurer should not unbundle if the components are so interdependent that measurement of isolated components would be arbitrary. It was also confirmed that the discussion paper should include examples.

Credit characteristics of insurance liabilities

The Board reconfirmed their previous conclusion that the current exit value of a liability reflects its credit characteristics.

Separate customer intangible asset as part of the initial investment made to acquire a customer relationship

The Board debated whether an intangible asset should be recognised to reflect the initial investment the insurer has done for acquiring a customer (and thereby recognise a separate asset on the balance sheet).

After a debate the Board concluded, in line with their previous decision, that acquisition costs should normally be recognised as an expense when it is related to cash flows already received or through future cash flows incorporated in the measurement of the liability.

The Board also discussed whether an asset should be presented separately from its insurance liability, if the liability includes cash flows related to a customer relationship. The Board was split, and it was decided that the discussion paper should be presented with arguments for both splitting the asset from the liability and for presenting the liability net.

Tuesday 17 October 2006

  Meeting between Representatives from the IASB and EFRAG (morning)

A group of IASB Board members met with representatives of the European Financial Reporting Advisory Group (EFRAG) in an open session to discuss aspects of the FASB-IASB convergence activities.

PAAinE

The EFRAG representatives explained that they have established 'Proactive Accounting Activities in Europe' (PAAinE) as a partnership between EFRAG and the European national accounting standard setters to encourage early debate within Europe and to develop European views on accounting issues.

Equity-Liability Distinction

EFRAG's view is that the existing equity-liability classification requirements in IAS 32 Financial Instruments: Presentation are not satisfactory. "Those requirements are proving a barrier to the wider adoption of IFRSs in certain European countries and are damaging the credibility of IFRSs generally".

However, EFRAG does not support the IASB's ED on Puttable Instruments and Obligations Arising on Liquidation "because the amendment is so narrow and rules-based". The EFRAG representatives reported that there is a PAAinE project addressing possible long-term solutions to Europe's problem with IAS 32. EFRAG also noted that the issue is being addressed in the IASB's Framework project and also by the FASB in its liabilities and equity project. EFRAG representatives urged the IASB to speed up its work in this area, possibly by using the PAAinE project results. Representatives of both EFRAG and the IASB noted the importance of resolving this issue on the basis of a clear principle rather than ad hoc rules.

Financial Statement Presentation

The EFRAG representatives indicated that they are not persuaded of the need for fundamental change in this area. EFRAG noted that the IASB has developed a set of 'working principles' on financial statement presentation but has not invited comment on them. EFRAG believes that the IASB should invite comment. Issues of concern to EFRAG include:

• 'Cohesiveness' of the financial statements as a working principle does not relate to the qualitative characteristics
• Insufficient emphasis on inter-entity comparability
• Insufficient emphasis on relevance
• Presentation of 'strategic value' should be as important as liquidity
• Define objectives of individual financial statements

Representatives of the IASB explained that cohesiveness refers to common classifications of items across financial statements. In response to questions, representatives of EFRAG explained that 'strategic value' means information about utility, not just liquidity.

Business Combinations Phase II

EFRAG does not believe it is appropriate to either propose or implement any major changes to the existing measurement model in IFRS 3 before the debate on measurement has been concluded. EFRAG does not see how the proposed Amendments to IFRS 3 Business Combinations will achieve more useful information such as through increased comparability or transparency.

EFRAG does not support the proposed requirement for the acquirer to measure the fair value of the acquiree as a whole at the date of acquisition, because the fair value of the consideration paid is affected by the merger announcement. In response, representatives of the IASB said the IASB is studying whether the measurement can be made immediately before the announcement.

EFRAG does not support the 'full goodwill method' and does not see the benefits of this method especially in situations when the acquirer obtains less than 100% of the equity interests of another entity.

Conceptual Framework

EFRAG noted that a PAAinE project is under way and the project's first paper will be issued in the next few weeks. The paper discusses 'a number of fundamental underlying issues relating to the Framework that need to be resolved before work on a Framework (or revising the Framework) can begin. Those issues include:

• What is the purpose of the Framework? Who are its primary users – standard-setters or preparers?
• Who are the users of financial reporting and what are their information needs?
• To which entities should the Framework apply?
• To which types of financial reporting should the Framework apply?
• What is the authority of the Framework – EFRAG believes it should be mandatory.
• Where in the hierarchy of IFRSs does the Framework fit?

Representatives of EFRAG expressed concern about the proposals in the IASB's Discussion Paper on the Objectives and Qualitative Characteristics. Concerns relate, among other things, to:

• insufficient emphasis on stewardship, accountability, and prudence as objectives;
• representational faithfulness and verifiability do not adequately replace reliability as a qualitative characteristic; and
• a need to support the assertion that the ability of an entity to generate net cash inflows is the primary focus of financial reporting.

Revenue Recognition

The PAAinE group is developing a paper on Revenue Recognition, which will be published by December 2006.

Borrowing Costs

EFRAG has decided not to support the proposals in the IASB's ED on Borrowing Costs. Among other reasons, EFRAG is concerned that because the IASB ED will not be fully converged with FASB Statement 34, borrowing costs will continue to be a reconciling item for IFRS preparers registered with the US Securities and Exchange Commission. IASB representatives indicated their understanding that the SEC staff believes the IASB ED and SFAS 34 are sufficiently converged not to regard the differences as requiring reconciliation. IASB agreed to follow up with the SEC.

  Financial Statement Presentation

The Board continued its discussions on the financial statement presentation project. The purpose of the October discussion was to get tentative views from the Board on three issues to be discussed at the joint meeting with the FASB next week:

• The financing section and investing category
• Presenting information about the short- and long-term nature of assets and liabilities
• Measurement, other comprehensive income (OCI) and recycling, and statement of comprehensive income

Financing section and investing category

Issue 1: Defining the financing section

The Board had previously agreed that the financing section in the statement of financial position should comprise equity, treasury assets, and financing liabilities.

The first issue the Board discussed was whether non-financial items should be excluded from the financing section of the financial statement. To increase consistency, all non-financial assets could be excluded from the financing section. This would still not prevent financial items from being excluded when they are not a part of financing activities. Board members noted some concerns but tentatively agreed with the proposal.

The second part of this issue was related to a proposed definition of the financing section and proposed application guidance to be included in the Standard. The Board seemed to agree with the proposed definition, under which the financing section should include only financial items that management views as part of the financing of the entities business activities. However, the Board stated concern about the list of proposed items to be excluded and included, and noted that it could not issue such a list with out a thorough discussion of the items included.

Issue 2: Defining the investing category in the business section

The Board discussed the following proposed definition of the investing category of the statement of financial position which was based on the Board's request from the September meeting.

"The investing category should include only financial assets and liabilities (as defined in the literature) not classified in the financing section that management views as incidental to the entity's main business activities (referred to as investing assets and liabilities). Items typically included in the investing category are

• a. Available-for-sale financial instruments
• b. Equity method investments
• c. Financial instruments held to hedge (a) or (b) above."

As for the financing category, an entity would be required to explain any items listed in the definition above that is not included in the investing category.

Board members asked for clarification as to why certain items like investment property would be excluded from the investing category. No decisions were made to this section.

Issue 3: Presentation of pension assets and liabilities

At the staff's request, the Board did not discuss this issue.

Presenting information about the short- and long-term nature of assets and liabilities

Issue 1: Short-term classification for assets and liabilities

The Board discussed whether assets and liabilities should be classified as short-term based on the operating cycle of the business or based on when the expected realization or settlement of the asset is within one year. It then discussed whether an entity should be required to present operating assets and liabilities in short- and long-term categories on the face of the income statement.

Board members were divided on whether classification of short-term assets and liabilities should depend on the operating cycle or a one year settlement/realisation criterion. They expressed agreement to splitting short- and long-term items on the face of the income statement if it provides useful information.

Issue 2: Information about liquidity

The Board had previously decided that information about the liquidity of an entity's assets and liabilities should be presented in the notes to the financial statement to help users assess the liquidity of an entity. At the October meeting the Board discussed the following three alternatives:

• a. Information about short and long-term assets and liabilities would be presented by line item in order of liquidity. (for example, short-term assets as inventory presented separately).
• b. Information about short- and long-term asset and liabilities would be presented by category. (for example, short-term assets as financing assets presented separately).
• c. Information about short- and long-term asset and liabilities would be presented by line item for all but the operating category (similar to the requirement in alternative 'a' except for operating assets and liabilities, which are disclosed in the aggregate).

The Board did not choose one of these alternatives. However, it concluded that the most important issue is to understand how much information is needed rather than to focus on whether this information is stated on the face of the income statement or disclosed in the notes.

The Board did not discuss the third issue in the paper regarding deferred taxes.

Measurement, OCI and recycling, the statement of comprehensive income

Issue 1: Information regarding measurement of assets and liabilities

The Board discussed and indicated agreement that the financial statement presentation standard should include the general guidance in IAS 1 that requires disclosure of measurement basis used in preparing the financial statements in the summary of significant accounting policies. It also agreed that, if items included within a certain line item in the statement of financial position are measured on more than one measurement basis, an entity should be required to disclose the measurement bases used and the amount included in that line item based on each measurement basis.

The Board then expressed agreement that disclosure of information about the significant uncertainty in the current measure of assets and liabilities and how the measured amount was selected, within the context of the particular measurement attribute used should be prescribed in individual standards when the Board deems it appropriate.

The Board also discussed whether the financial statements should provide information that would allow a user to distinguish between changes in assets and liabilities that are due to remeasurements and changes that are not. It also discussed how remeasurements should be defined. No indications were made on this issue but the Board asked the staff to explore this further.

Issue 2: OCI and the mechanism of recycling

The Board discussed whether other comprehensive income (OCI) should be a separate section in each of the financial statements or whether OCI items should be classified in the appropriate categories that are based on functional activities of an entity (that is not to add the OCI section to the working format). The Board members expressed split views on how to move forward on this.

  Business Combinations Phase II – Redeliberations of proposed revisions to IFRS 3

The Board continued its discussions on the proposed revision of IFRS 3 Business Combinations. At the October meeting the Board was presented five agenda papers, of which the first three papers were subject to deliberations while the last two papers were presented for educational purposes. Those Papers will also be discussed at the joint meeting with the FASB on 23-24 October 2006.

Assembled Workforce

The Business Combinations Exposure Draft (ED) proposed that an assembled workforce should not be recognised as an intangible asset separately from goodwill.

Respondents to the ED expressed mixed views on whether an assembled workforce should be recognised as an intangible. The Board discussed whether an assembled workforce represents:

• 1. intellectual capital of the employees of the entity, or
• 2. the fact that the acquired entity has a collection of employees in place in order to operate the business on day one

The Board did not tend to support the second view as it would be similar to the logic in that an existing customer relationship would meet the criteria for being recognised as an intangible asset separately from goodwill.

The Board then briefly discussed whether there are other intangible assets that need to be clarified, and decided no.

The Board also discussed whether an assembled workforce should be recognised as an intangible asset separately from goodwill. Board members' views were mixed – some members believed that it would meet the definition of an asset and others not.

In-process Research and Development

The Board briefly discussed and agreed that R&D assets acquired in a business combination should be capitalised at the acquisition date and measured using the current exchange value.

Pre-existing Relationships and Reacquired Rights

The Board discussed whether it should retain the guidance in the Business Combinations ED that would require that the effective settlement of a pre-existing relationship be accounted for separately from the business combination. The Board agreed to retain the guidance.

The Board then discussed the issue of whether reacquired rights in a business combination should be accounted for separately as an intangible asset. Board members were divided 8 to 5 in favour of recognising. The majority viewed this to be equal with acquiring any other asset that would meet the recognition criteria as an intangible asset, while the minority viewed this as allowing internally generated assets to be recognised.

As a result, the Board indicated that the final Standard should have guidance that limits the useful life of a reacquired right to the remaining contractual life of the contract between the parties.

Measurement Adjustments

The Business Combinations ED proposed that an acquirer should retrospectively recognise measurement adjustments if the acquirer at the date of acquisition did not have the necessary information to complete the initial accounting before its financial statements are issued.

Based on comments from constituents, the Board redeliberated whether it should allow prospective adjustments. After a short discussion the Board reaffirmed that the overall benefit of improved comparative information would outweigh the potential costs of retrospective application and that measurement adjustments should be made retrospectively.

Measurement Attribute

The Board held an education session on the impact on recent developments on the Boards (both the FASB and the IASB) fair value measurement projects on the business combinations project. The Boards will discuss this issue during their joint meeting next week. The education session introduced three alternative measurement attributes available for assets and liabilities assumed in a business combination.

• Each Board uses its existing definition of fair value
• Both Boards uses an entry price measurement attribute
• Both Boards uses an exit price measurement attribute

Non-controlling interests and goodwill

The Board held an education session where a new approach to measuring non-controlling interests (NCI) was introduced. The intention is to come to a joint solution between the FASB and the IASB for measuring NCI and goodwill in a business combination.

Under the 'full goodwill method' proposed in the Exposure Draft, the acquirer would recognise all of the goodwill from a business combination and as a result a portion of the goodwill would be allocated to NCI. The main concern from constituents was that this would result in a meaningless measurement of NCI.

The new approach introduced would measure NCI directly at fair value. Goodwill would then be the difference between the fair value of the consideration transferred plus the fair value of the NCI and the fair value of the net assets.

The IASB indicated agreement with the proposal, but no decisions were taken as this will be discussed at next week's joint meeting with FASB.

Annual improvements to IFRSs

The Board discussed two annual improvements projects.

Investment property under construction

The Board discussed the issue of whether investment property under construction should be within the scope of IAS 40 Investment Property instead of IAS 16 Property, Plant and Equipment.

The Board agreed that investment property should be within the scope of IAS 40 and that IAS 40 and IAS 16 should be amended to reflect this.

Contingent rents

The second issue was a recommendation from the IFRIC that the issue of whether contingent rents relating to operating leases should be recognised as incurred or amortised on a straight line basis would be most appropriately solved via the annual improvements project.

The Board discussed and agreed that contingent rents should be recognised as incurred or earned rather than on a straight line basis. IAS 17 Leases will be amended to reflect this.

Wednesday 18 October 2006

  Amendments to IAS 37 Non-financial Liabilities

Does the proposed measurement principle permit a choice?

The staff reminded the meeting that the measurement principle proposed in the IAS 37 ED was that 'An entity shall measure a liability at the amount that it would rationally pay to settle the present obligation or transfer it to a third party on the balance sheet date'. This principle was derived from the current explanation of 'best estimate' in IAS 37 paragraph 37. The staff proposed removing the notion of 'amount to transfer' from the measurement principle in any final standard. Board members noted that 'settlement' was a broader notion than transfer and opened the door to ambiguity-something acknowledged by the authors of IAS 37 and its UK equivalent. Others expressed concern that 'settle' was being used to imply 'extinguishment' or legal defeasance (that is, the derecognition notion in IAS 39); this was not the measurement objective of IAS 37 as exposed.

Still other Board members noted that in languages other than English, 'settlement' subsumed 'transfer' but 'transfer' excluded 'settlement'.

It was evident that the Board was split on the staff proposal, and for very significant reasons. To use 'transfer' would suggest that the measurement attribute was 'exit fair value'. Senior staff warned the Board that to use terms and notions from FAS 157 Fair Value Measurements was completely inappropriate: that document had not been through the IASB's due process and should not be assumed to be part of the IASB's canon of guidance.

Board members suggested that the Board should clarify what the measurement objective in IAS 37 was and what the components of that measure should be. Other Board members saw this as an inappropriate extension of the scope of the project. These Board members noted that constituents (and Board members) could identify two or three possible measures in IAS 37:

• The amount that the entity could rationally agree [settle] with a third party to assume the obligation (the entity retains the credit risk);
• The amount that the counter-party will accept from the entity to settle [extinguish] the obligation;
• The sum of the cash payments that the entity expects to make to settle [extinguish] the obligation, discounted to the balance sheet date.

Board members discussed these notions for a while. It was noted that, given the limited scope of the project, the Board might have to accept that there were different approaches to measurement in IAS 37 and that the IASB should not pre-judge its fair value measurement project. Consequently, the IASB should explain that 'settlement' can occur either with the counter-party or with a third party. It was also noted that the discount rate used must include a risk premium appropriate to the obligation. As IAS 37 measures liabilities, the risk premium reduces the discount rate and increases the liability on the balance sheet. (A Board member noted that as a result of the implementation of IFRIC 1, it became apparent that preparers had been using the wrong discount rate – somewhere between the risk-free rate and the entity's investment hurdle rate.)

The Board also noted that 'rationally' was not a synonym for 'economically rational' – that is, it was possible that an entity might make a current estimate of the amount to settle the obligation as 100, but to transfer that obligation to a third party would cost 120. This was because, depending on the nature of the liability, the third party might demand a higher risk premium than the entity would incur. Alternatively, the higher premium might be the amount the entity would be prepared to pay to transfer the liability at the balance sheet date.

Board members seemed to accept that, for many obligations, measurement would have to include entity-specific inputs. Some Board members were very uncomfortable with this, but seemed to accept that imposing the alternative markets requirements in FAS 157 was impractical (and would trigger re-exposure).

The Board did not reach a conclusion on the staff's proposals and asked the staff to consider further the matters raised in the debate.

  IFRS 2 Share-based Payment - Exposure Draft IFRS 2 Share-based Payment: Vesting Conditions and Cancellations.

Vesting conditions and cancellations

(a) Definition of 'vesting condition'

The Board discussed how best to respond to constituent requests that the definitions of 'vesting conditions' and 'performance conditions' should be clarified. The Board discussed a staff proposal (see paragraph 6(a) in Observer Note 19). However, the Board seemed to agree that the definition as drafted was trying to do too much and should be broken down to state that

• Vesting conditions are those conditions that entitle the counterparty to receive cash, other assets or equity instruments of the entity under the terms of a share-based payment arrangement. Vesting conditions can be service conditions and [non-service] conditions (see below)
• Service conditions require the other party to complete a specified period of service.
• [One possibility] All other conditions are non-service conditions.
• [Another possibility] All other conditions are performance conditions (as currently defined).

The staff will think about this idea, although it did have a lot of general support around the table.

(b) Definition of 'performance condition'

Board members expressed concern that the current definition was circular, and preferred to be explicit that 'performance conditions' was the residual category (i.e. 'non-service' conditions). This was not a definition as such but an explanation of the two broad categories of conditions in a share-based payment arrangement. It was noted that the 'non-service' conditions were also distinguished from service conditions because they were always entity-specific conditions.

(c) Treatment of cancellations

The Board agreed not to provide a definition of 'cancellation' in IFRS 2. What constitutes a cancellation would be determined by the terms and conditions of the share-based payment agreement. The Board reaffirmed its previous decision that it does not matter which party to a share-based payment arrangement cancels the arrangement, either would be treated as a cancellation. However, the Board agreed with the staff that, with respect to Save As You Earn schemes, the effect of the cancellation would be the repayment of the savings component and the reversal of the compensation element. The staff suggested that the savings component was the far larger component, which should mitigate the effect of the reversal. The Board agreed and will include an example in the Implementation Guidance (along the lines of the example in paragraph 87 of Observer Note 19).

(d) Resolution of existing differences with FAS 123(R)

The Board agreed not to attempt to resolve existing differences with FAS 123(R) as this was beyond the scope of this amendment and do not arise because of the Board's conclusions in this project.

(e) Effective date

The Board agreed that the amendments to IFRS 2 would be effective for financial years beginning on or after 1 January 2008.

(f) Re-exposure

The Board agreed that the proposals did not need re-exposure as there had been no fundamental change in the proposed amendments from those exposed.

The Board concluded its redeliberations and directed the staff to proceed to drafting a pre-ballot draft of the amendments. No Board members indicated an intention to dissent from the Standard.

  Conceptual Framework – Elements of financial statements

The Board held a brief discussion of what might constitute an 'element' of the financial statements. The staff noted that before the IAS and the FASB considered the issues of identifying and defining potential missing elements or seeking to converge the existing definitions of elements, they should be clear about what an element was.

Basic elements

The Board agreed that:

• The elements definitions should continue to define the economic things (resources and claims) and changes in them that pertain to a particular entity. (Those things and changes in them are also called "stocks" and "flows.")
• The elements definitions should focus on the most fundamental of the real-world economic phenomena that pertain to an entity. Distinctions that are made for purposes of financial statement display or presentation go beyond the notion of basic elements.

At least one Board member expressed some disquiet about this conclusion. The member accepted that if one adopted this approach, there would be only assets and liabilities; that was conceptually pure but not especially helpful. In particular, 'flows' needed to be defined more closely than simply 'changes in resources and claims' so as to distinguish revenue from contributions by owners and expenses from distributions to owners (i.e. 'equity' items). The staff acknowledged that this was a debate still to come; noting that the conclusion reached was on the basic elements and that there might be subsidiary elements as well.

Procedures for finalising the Framework

The Board reviewed the procedures for finalising the Framework. Specifically, the Board considered whether each of the IASB and the FASB should issue the new common conceptual framework as a single document after completion of all phases or issue each chapter as they complete their final round of redeliberations and balloting for individual chapters. The staff suggested that the issues concerning the finalization of the conceptual framework related to the standing of the framework within the hierarchy of authoritative guidance. Thus, the finalization may need to be readdressed when the Boards discuss the placement of the framework within the IASB and FASB hierarchies at the April joint meeting.

The Board agreed that this issue needed to be addressed at the April 2007 joint meeting, by which time both Boards would have begun redeliberations of the chapters on Objectives and Qualitative Characteristics.

Project status and planning

The US-based staff introduced a short document outlining the work plan for the period to May 2007. There was no discussion.

Phase B-Elements and Recognition

The Board concurred with a suggestion from the Canada-based staff that there should be consultations with selected technical experts and others such as the IASB's Standards Advisory Council (SAC) and the FASB's Financial Accounting Standards Advisory Council (FASAC) on the milestones related to work on asset definitions and options over assets, without waiting for completion of the remaining milestones.

  International Financial Reporting Standard for Small and Medium-sized Entities

Staff presented four documents for Board review:

• a marked draft of an exposure draft of an IFRS for SMEs, reflecting changes to the draft discussed in September 2006,
• an exposure draft of implementation guidance comprising illustrative financial statements and disclosure checklist [these are similar to the Draft ED available on the IASB Website],
• a draft basis for conclusions [not available to Observers], and
• a draft invitation to comment [not available to Observers].

The Board discussed those documents and made the following decisions.

Exposure Draft

• Permit SMEs to use a liquidity presentation on their balance sheet.
• Do not require an SME to make special disclosures relating to amendments to the IFRS for SMEs that have been adopted but are not yet effective.
• Replace the term 'net realisable value' with 'selling price less costs to complete and sell'.
• Clarify in the financial instruments section that ancillary costs incurred in connection with the arrangement of borrowings should be reflected in calculating the effective interest rate (that is, they should not be charged to expense in their entirety at the time of the borrowing).
• Add guidance on the appropriate accounting when an entity moves from full IFRSs to the IFRS for SMEs.
• With regard to hedge accounting, require simplified effectiveness testing rather than the 'shortcut method' under which ineffectiveness is not measured or recognised.
• In the section on first-time adoption of the IFRS for SMEs, include all of the exemptions in IFRS 1 from retrospective restatement. Also add guidance on designation of financial instruments to be measured at amortised cost or at fair value through profit or loss, where the IFRS for SMEs allows such designation.

Illustrative financial statements and disclosure checklist

• Staff should consider whether any of the disclosures currently presented in the illustrative notes might be more clearly presented on the face of the financial statements.
• Identify one or more persons to do a final 'cold review' of the illustrative financial statements.

Basis for conclusions

• Explain the Board's approach to deciding which disclosures in full IFRSs could be eliminated for SMEs
• Acknowledge the encouragement of the Standards Advisory Council to undertake the project
• Explain that addressing the needs of SMEs is part of the IASB's mission as set out in the IASC Foundation Constitution
• Explain the hierarchy for choosing an accounting policy when the IFRS for SMEs does not specifically address a transaction, other event or condition.

Invitation to comment

• Add a general question on the volume of proposed disclosures
• Where full IFRSs allow accounting policy options, the IFRS for SMEs include only the simpler option, and the other option(s) are available to SMEs by cross-reference to the full IFRS. Add a question about whether the Board has chosen the appropriate options to include in the IFRS for SMEs.
• Add a general question on whether the transition guidance is adequate both for an entity that is moving from national GAAP to the IFRS for SMEs and for an entity that is moving from full IFRSs to the IFRS for SMEs.
• Add a general question on cross-references to full IFRSs that are in the IFRS for SMEs.
• Clarify that in making recognition and measurement simplifications, the Board's criteria were user needs and cost-benefit considerations.
• Add a question about whether the few remaining circumstances in which items of income and expense are recognised directly in equity should (with the exception of hedges of future cash flows) be eliminated, requiring instead that they be recognised in profit or loss.

Indicative Board vote

After discussion of the four documents, Board members indicated their support for issuing the Exposure Draft by a vote of 11 in favour, 1 against, and 1 preferring to review the pre-Ballot draft before deciding. Comment deadline is expected to be 30 June 2007. The Board asked the staff to prepare a pre-ballot draft.

Thursday 19 October 2006

  Intangible Assets Research Project

The purpose of the session was to seek the Board's agreement with the scope and approach and the project plan. The project is led by the Australian Accounting Standards Board (AASB). The AASB staff presented the intended scope and approach and the draft project plan.

Background

The project is an IASB project, with FASB being kept informed of progress, rather than a joint IASB/FASB project.

Scope

The AASB staff identified the following topics that could be the subject of this research project.

• Topic A: Initial accounting for intangible assets acquired other than in a business combination (internally generated and separately purchased intangible assets)
• Topic B: Initial accounting for intangible assets acquired in a business combination
• Topic C: Subsequent accounting for intangible assets
• Topic D: Initial and subsequent accounting for goodwill

The AASB staff identified Topic A as the most suitable as a focus for the purposes of the Memorandum of Understanding (MoU), that is, achieving improvements to current requirements in the short term. This is mainly because the requirements for internally generated assets have not been subject to review for some time.

Topic B was considered not be a suitable topic for the Intangible Assets research program since this topic has been subject to relatively recent review as reflected in IFRS 3 Business Combinations and SFAS 141 Business Combinations.

Topic C was considered also to have potential to improve current requirements, but the AASB staff was of the opinion that improvement was unlikely to be achievable in the short term.

Topic D was excluded because of the degree to which current accounting for acquired and internally generated goodwill is entrenched under both IFRSs and US GAAP.

Accordingly, staff was suggested that the project should focus on Topic A comprising definition/identification, recognition, measurement, and disclosure/presentation with a particular emphasis on issues relating to identification and measurement.

Board members noted that the project should include Topic C, since Topics A and C interact, and improvements on both issues are required in the short term. The Board asked the AASB staff to prepare a discussion paper by January 2007.

Next steps

The Board intends to discuss the project again at the beginning of 2007 before making a final agenda decision.

  IFRIC X Service Concession Arrangements (Drafts: IFRIC D12-D14)

At its September 2006 meeting the IFRIC decided to present the revised draft text of IFRIC X Service Concession Arrangements to the Board as a final draft and that the Board should be asked for approval to issue the Interpretation (see our Report of This Meeting elsewhere on www.iasplus.com.

The Board briefly discussed the revised draft text without making other than editorial changes to it.

The Board unanimously supported the revised draft. It was decided to post the revised draft on the IASB website and to give constituents an opportunity to comment on it within a short comment period. The Board intends to approve a final Interpretation at its November 2006 meeting.

  IFRIC X IFRS 2–Group and Treasury Share Transactions (Draft: IFRIC D17)

At its September 2006 meeting, the IFRIC decided to present the revised draft text of D17 IFRS 2–Group and Treasury Share Transactions to the Board as a final draft and that the Board should be asked for approval to issue the Interpretation.

The revised draft text of D17 reflects the decisions taken by the IFRIC during its post-exposure deliberations, particularly the decisions taken at the September 2006 meeting (see our Report of This Meeting elsewhere on www.iasplus.com.

The Board unanimously approved the final draft of D17.

  Amendments to IAS 14 Segment Reporting

The staff presented a paper addressing the two issues raised by Board members on the pre-ballot draft expected to become IFRS 8 Operating Segments.

Disclosure of information about major customers - entities under common state control

Paragraph 33 of ED 8 Operating Segments stated that an entity shall provide information about the extent of its reliance on major customers. Thus, if revenues from transactions with a single external customer exceed 10 per cent of an entity's revenues, the entity shall disclose that fact. In this connection a group of entities known to a reporting entity to be under common control shall be considered a single customer, and a national government, a local government, or a foreign government each shall be considered a single customer.

Some respondents to the ED argued that difficulties could arise in relation to entities that are state-controlled. They suggested that a group of entities under common control should be treated as a single customer for this purpose only when prices or other material terms of trade are negotiated on a group basis.

The staff agreed in principle with this comment, and the amendment is reflected in paragraph 34 of the pre-ballot draft of IFRS 8.

The staff also noted that in September 2006 the Board agreed that the wording in ED 8 should be consistent with that used for a similar issue arising on IAS 24 Related Party Disclosures. At its September 2006, meeting the Board tentatively decided that when an entity qualifies as a related party of another entity simply because of the existence of common control from the State, IAS 24 should provide relief from the requirement to disclose related party transactions between those two commonly controlled entities.

In comments on the pre-ballot draft, two Board members argued that the amendment reflected in paragraph 34 should not be made as the wording has not yet been exposed as part of the IAS 24 amendment. Although the Board did not say so explicitly in the meeting, it seemed to accept that this issue would have to be treated as a consequential amendment to the expected IFRS 8 as a result of the forthcoming proposed amendments to IAS 24.

Definition of listed companies

The staff recommended to changing the wording of the scope of IFRS 8. Thus, IFRS 8 shall apply to:

• a. the separate or individual financial statements of entities:
  • whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets) or
  • that file, or are in the process of filing, their financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market and
• b. the consolidated financial statements of groups with a parent:
  • whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets) or
  • that files, or is in the process of filing, the consolidated financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.

The Board agreed to the staff's recommendation.

  IAS 39 Financial Instruments: Recognition and Measurement – Identification of a portion of an exposure eligible for hedge accounting

The Board discussed an issue that had been referred to the Board from the IFRIC. The issue is whether risks associated with a specific portion of cash flows or fair value can be designated as hedged portions and qualify for hedge accounting under IAS 39.

The IFRIC has received several submissions regarding this issue, but has been unable to define a principle for identifying what is a portion with regards to the requirements in IAS 39 on hedge accounting. The IFRIC has noted that this issue is widespread and has resulted in diversity in practise.

Board members identified three possible approaches:

a. The IFRIC could decline to address the issue and allow practice to develop. This approach would be consistent with the approach taken by the Board in 2004.

b. Guidance could be developed which sets out a principle for identifying portions that can be hedged under IAS 39. This guidance could take the form of an amendment to IAS 39 that would be produced by the Board.

c. Get rid of portions. This would be done by the Board amending IAS 39 to not allow hedge accounting for portions.

The Board was strongly opposed to proposal b. As the Board indicated that it did not want to consume too much staff time, the staff was asked to go back and look at the different proposals. However, it was made clear that this issue had to be addressed in the current financial instruments project.

  Amendments to IAS 24 Related Party Disclosures

The Board discussed proposals for clarification of the requirements in IAS 24 to disclose relationship and transactions between an associate and a subsidiary of that associate's significant investor. The Board considered four issues:

Issue 1: A relationship between a Subsidiary (C) in a group and an Associate (B) where the parent (A) of entity C also has significant influence over entity B. What are the disclosure requirements in entity B's separate financial statements?

The Board agreed that the opportunity should be taken to amend IAS 24 to clarify that transactions between entity C and entity B should be disclosed in entity B's separate financial statements.

Issue 2: A relationship between entity B and entity C. Does the current IAS 24 require these transactions to be disclosed in Entity A's consolidated financial statements?

The Board agreed that these transactions should be disclosed in entity A's consolidated financial statements and that this requirement should be clarified.

Issue 3: A relationship between entity B and entity C. Does the current IAS 24 require disclosure of these transactions in entity C's individual financial statements?

The Board confirmed that the separate financial statement of C does not include the operations of the group of which it is a part. Therefore, current IAS 24 does not require disclosure of the relationship between B and C in this situation, because C is the reporting entity. The Board agreed that control could be exercised through the parent and that A could compel C to transact with B in a way that did not benefit C the most (rather A or the group). It would therefore be inconsistent with the objective of IAS 24 not to require disclosure.

The Board decided that IAS 24 should be amended to reflect that a transaction as described in issue 3 should be disclosed in entity C's individual financial statement.

Issue 4: A relationship between entity B and entity D (another associate of A). Does the current IAS 24 require disclosure in either entity B, entity D or group AC's financial statements?

The Board confirmed that this is a situation where it is a relationship between two entities not controlled by any entity in the group (absence of control). It also confirmed that this is a situation that is not within the definition of a related party and should be scoped out of IAS 24.

As a result to this the Board confirmed that the relief should include associates of a fellow subsidiary.

  Revenue Recognition

The Board held a short session to discuss a revised approach for the joint IASB-FASB Revenue Recognition project. This revised approach will be discussed at the joint meeting with the FASB on 23-24 October 2006.

The proposal is to work to develop both the customer consideration model and the fair value model instead only focusing on one model. This is proposed because each of those models has support from members of both the FASB and the IASB without any clear majority among either Board favouring either of the two models. In addition, the development would best be performed by establishing two small groups of Board advisers, from both Boards, that should advise and assist the staff in developing the models. That would mean that the development but not deliberation would be done mostly outside the Boards' open meetings.

The Board indicated agreement with the proposed approach but emphasised that such a project should be brought to Board meetings at certain stages during the development for review and discussion. Staff indicated that the FASB had already indicated agreement with the proposal.

Friday 20 October 2006

The topics originally scheduled for this day were discussed on other days, and the Board did not meet on 20 October 2006.

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