12-14 December 2006, London

Tuesday 12 December 2006

IFRIC: Draft IFRIC Due Process Handbook

Agenda Committee

The IFRIC Chairman and Co-ordinator asked the IASB for their views on the report from the IFRIC to the IASC Foundation Trustees arising from the IFRIC's analysis of comments received as a result of the Trustees' exposure of the Draft Due Process Handbook. The Board's discussion focused on the role and operation of the IFRIC Agenda Committee.

Board members observed that many of the comments received that were critical of the Agenda Committee demonstrated that the commentators did not understand the nature of the Agenda Committee's work. The best way to dispel those misunderstandings was to absorb the Agenda Committee back into the IFRIC. Although there was much more discussion around this topic, the consensus was that the Board would recommend to the IFRIC that:

• The Agenda Committee be abolished and its role subsumed within IFRIC
• IFRIC meet as a 'committee of the whole' to discuss potential issues with the IASB staff. These meetings would be open to all members of IFRIC, but all members of IFRIC would not be expected to attend (i.e. IFRIC members would be invited but not required to attend).
• These 'committee of the whole' meetings would not make decisions, but would help the staff to make a recommendation to the IFRIC as to whether an issue meets the requirements for it to be taken to the IFRIC's agenda (that is, the role currently undertaken by the Agenda Committee).
• These 'committee of the whole' meetings would be open to the public.

Status of Agenda Decisions

Board members discussed the authoritative status of Agenda Decisions. The IFRIC and the IASB are clear that Agenda Decisions are not Interpretations and do not have a place within the IAS 8 hierarchy. However, several Board members suggested that they do form low-level guidance and, in some jurisdictions, IFRIC's description of its Agenda Decisions would be ignored 'at your peril'. Because the Agenda Decisions are the views of reasonably experienced people who are familiar with financial reporting under IFRSs, so as such they may reasonably inform users' views.

Some Board members were concerned that Agenda Decisions might result in restatements of prior financial statements. Others saw no problem – sometimes the treatment criticised by the IFRIC was an unreasonable application of an IFRS and should be corrected via restatement.

Ultimately, the Board agreed that the IFRIC should continue to publish Agenda Decisions, being sensitive (as now) to the wording of those decisions.

The IFRIC will have the opportunity to discuss the IASB's recommendations before the staff make final recommendations to the IASC Foundation Trustees at their January 2007 meeting.

Post-employment Benefits – Discussion Paper

Cash balance and similar plans

The staff introduced three possible approaches the Board might take in determining the most appropriate accounting treatment for cash balance and similar plans:

• The approach in Draft IFRIC Interpretation D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions
• An embedded derivative approach
• A deconstruction approach

Several Board members noted that the reason that the IFRIC could not conclude on D9 was because they were constrained by the Standard as written. These Board members saw the issue as one with a very clear cut: if the sponsor guarantees the asset side of the transaction, it has written a derivative. If the sponsor guarantees anything to do with salary, benefits, or service, the plan is a defined benefit plan.

The staff was concerned about plans with a guaranteed return on assets. For example, if a plan contains a benefit promise of ten per cent of salary plus a guaranteed return of four per cent, the staff suggested this was a mix of defined contribution (ten percent of salary) and defined benefit (the guaranteed four per cent return).

Board members disagreed. In their view, the plan is still a defined contribution plan. If the plan earns more than four per cent and this is not available to the plan participants, the plan has current income in profit or loss; if the plan earns less than four percent, it has a current loss.

The Board agreed that the staff should explore splitting asset risk from salary-service-benefit risk, and that anything not captured by asset risk should be accounted for in accordance with IAS 19.

Clarifications

IASB Update October 2006

IASB Update for October 2006 reported the Board's discussion of the intangible assets research project and noted that 'The project will not encompass the requirements for the initial accounting for intangible assets acquired separately or in a business combination, or the initial and subsequent accounting for goodwill' (page 5).

The Board clarified that the intangible assets project should address intangible assets purchased separately; all others mentioned would be addressed in the business combinations project.

IFRS for SMEs: Reporting-level within the SME GAAP hierarchy of the 'mandatory fall-back' to IFRS

In response to an issue that had arisen as a result of the Board's consideration of a pre-ballot draft of the Exposure Draft of an IFRS for SMEs, the Board agreed that the GAAP hierarchy for an SME (in paragraph 10.3 of the draft ED) should not include a 'mandatory fallback' to full IFRSs. The hierarchy should be:

• (a) the requirements and guidance in this IFRS dealing with similar and related issues; and
• (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles; and

The Board's reasons included the following:

• SMEs are likely, in most cases, to conclude that they can find answers using (a) and (b), so a 'mandatory fallback' will not normally be invoked;
• requiring SMEs to look to full IFRSs imposes two sets of standards with some recognition and measurement differences on a single entity; and
• leaving the mandatory fallback in 10.3 creates a potential conflict between auditors – who are likely to be aware of the provisions of full IFRSs – and SME managers – who are responsible for preparing the financial statements and may have done so based solely on the IFRS for SMEs.

In making the judgement described in paragraph 10.2, management may also consider the requirements and guidance in full IFRSs and Interpretations of full IFRSs dealing with similar and related issues. If additional guidance is needed to make the judgment described in paragraph 10.2, management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 10.3. The Board concurred that paragraph 10.4 as revised reflects the decision reached in October 2006.

Technical Plan

The Board discussed the latest version of the Technical Plan (a copy of which was not available to Observers). Of interest:

• Concepts Phase B, Elements of Financial Statements, Discussion Paper is expected in 4Q 2007
• Concepts Phase H has been re-branded as 'Other issues, if necessary'
• The Research Agenda will include dates of expected Board discussion and/or due process documents as that information becomes available.

Board members noted, in particular, that there is a need for the IASB and FASB to be consistent about how they each classify projects ('joint', 'modified joint', etc). Currently, the two organisations (for reasons that respond to their various constituencies) classify some projects differently, which can be confusing to constituents.

Consolidations

Managed funds and investment companies

The Board discussed issues surrounding consolidation in the context of managed funds and investment companies.

The Board noted that, by law, many mutual funds and unit trusts cannot hold interests that exceed a certain percentage of an entity, something that usually prevents consolidation from being an issue. However, the question of control does arise at the fund manager level. Of more concern to some Board members were private equity funds, for which the risks may be quite different.

The Board did not appear sympathetic to providing an exception from consolidation based on where within the group a shareholding resides. Board members saw that approach as leading to inconsistencies in a parent's consolidating entities that it controls.

The Board then addressed 'investment companies'. The staff was of the view that if an entity controls another, it should consolidate the controlled entity. The staff was also concerned about the consequences of not consolidating on other aspects of financial reporting, such as the elimination of inter-company transactions.

The staff noted that IFRS 8 provides entities an opportunity to explain how they managed their investment operations, but they do not recommend excluding those operations from the consolidation model.

Those constituents most concerned about this issue want consistency with US GAAP. However, US GAAP uses a definition of 'investment companies' that is in securities legislation, not accounting standards. It was also noted that the American Institute of Certified Public Accountants had issued recently a document of well over 200 pages that sought to clarify the US investment company material. This was not considered an example of principles-based standard setting.

The Board noted that the investments of private equity and venture capital funds are often classic subsidiaries, actively managed by the investor. As such, the Board thinks that consolidation, not fair value, is the appropriate accounting treatment. The Board agreed that the forthcoming discussion paper should state this conclusion.

Short-term Convergence: Borrowing Costs – Comment letter analysis

Whether to proceed with the amendments to IAS 23

The Board continued its redeliberations of planned amendments to IAS 23 Borrowing Costs. In particular, the Board discussed a staff recommendation that, notwithstanding the large-scale opposition from users, preparers, and other constituents, the Board should proceed with the amendments substantially as exposed and eliminate the option to expense interest as incurred, thereby mandating the capitalisation method.

The Chairman asked Board members whether any had changed their view on this essential question since the November meeting.

Ms O'Malley noted that she had changed he mind and now opposed continuing the project. She believed the ED had the correct answer and wanted to converge on the principle that capitalising interest was the correct approach, but she was concerned that the IASB had complicated the financial reporting of the very constituents it was trying to assist. Because it was not converging with US GAAP with respect to the definition of a 'qualifying asset' and measurement, it would force those IFRS entities filing in the US on Form 20F (or Form 18 for state-owned entities) to capitalise interest on two different bases and to reconcile material differences between them. This was unfair and unhelpful. She would vote for the amendment if the effective date is far enough in the future that this would not be an issue (that is, after the SEC's IFRS-US GAAP reconciliation is no longer required). Mr Cope and Mr Garnett noted that they still opposed the amendment, for various reasons.

Professor Barth was firmly in favour of the amendments: they removed an option in IAS 23, which would aid comparability, and moved IFRS closer to US GAAP in this area. Capitalising interest is consistent with the historical cost approach of measuring an asset at initial recognition at cost. She did not think that delaying the effective date would help. Mr McGregor thought the amendment would be an improvement, but was concerned about the disruption to IFRS preparers. However, if rejecting the staff's view would jeopardise the IASB's Memorandum of Understanding with the FASB, US Securities and Exchange Commission and the European Commission, he was prepared to vote in favour. Other Board members expressed this general view.

Senior staff suggested that it might be possible to ask the SEC whether they would require reconciliation of amounts of interest capitalised (at the moment, these amounts must be reconciled when material).

The Board voted by a majority of 10-4 to accept the staff recommendation and proceed with the amendments.

Amendments proposed by the staff

The Board considered two amendments proposed by the staff. The first was whether the revised IAS 23 should provide an exception from the general principle for certain inventories. The issue was raised by a constituent in the whisky and wine-making industry, who noted that while the effect on profit and loss was minimal, the effect on the balance sheet would be material because the inventories must mature for several years. Board members noted that it was exactly these types of inventories that should include interest cost in their carrying amount. However, having decided to converge in principle with US GAAP, the Board agreed to provide the same exception as in FAS 34 paragraph 10, such that 'interest cost shall not be capitalized for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis'.

The Board also considered whether to amend the scope of the revised IAS 23 to include assets that are carried at fair value (except those within the scope of IAS 41 Agriculture). The issue concerns 'geography' within the statement of profit and loss and how the fair value adjustment is recorded: as the total change in fair value from period to period or the change between items (such as interest) included in the historical cost carrying amount and the fair value. After debating this issue at some length, the Board confirmed the position exposed in the ED (paragraph 3A) that there would be a scope exception for all assets measured at fair value, including biological assets.

Conceptual Framework – Phase D: Reporting Entity

Status, Outstanding issues and next steps

The IASB was joined by the project staff from New Zealand and the FASB via video links.

The staff told the Board that the FASB is not yet in a position to move forward on Phase D because they are concerned that they did not fully understand the IASB's views and how they had reached those views. An IASB member noted that the IASB was not in agreement on the issues in Phase D. Consequently, it would be very useful to discuss with the FASB the areas of disagreement. The staff countered that they wanted to speak with both Boards in smaller groups first.

Parent entity approach

The staff asked the Board for guidance about whether a discussion of the parent entity approach should be included in the Discussion Paper for Phase D, and if so, how extensive that discussion should be.

Some Board members thought that although it is important to discuss the parent entity approach somewhere in the Conceptual Framework package, Phase D was not the place to do so. Others saw the parent entity issue as a consolidation project issue and preferred it be discussed in the forthcoming Discussion Paper on that topic. Several Board members noted that the parent entity approach had nothing to do with the boundaries of the reporting entity, which was the topic of Phase D of the Conceptual Framework.

The Board agreed to prepare a separate Discussion Paper on the parent entity approach. How best to do this was left in the hands of the staff, who will return with suggestions at a later meeting.

Consistency with the Consolidation Project

The Board decided to defer detailed discussion of this issue pending developments in the Consolidation project. Board members expressed the view that conclusions in the two Discussion Papers should be consistent.

Initial draft of the Discussion Paper

Although the staff did not ask the Board to discuss the initial draft of the Discussion Paper (not available to Observers), some discussion took place.

Much of the discussion surrounded whether parent-only financial statements could be 'general purpose external financial reports.' Several Board members thought that there can be only one set of general purpose external financial reports – the consolidated financial statements; all other financial statements are special purpose financial reports. However, other Board members thought that parent-only financial statements can be general purpose financial reports.

The Chairman asked for an indicative vote on this issue. Nine Board members thought that the parent and its subsidiaries should always be regarded as a single entity for the purpose of general purpose external financial reports, and that this principle could be elaborated either at the Concepts level or at a Standards level. The remaining Board members thought that there could be multiple entities within a group (for example, parent-only and group) that could prepare general purpose external financial reports.

Wednesday 13 December 2006

Financial Instruments: Interest Margin Hedging

The IASB held an educational session on financial instruments where three representatives of the European Banking Federation (FBE) presented an alternative hedge accounting model.

The European banking industry has said that the IAS 39 fair value hedge accounting model does not adequately accommodate portfolio hedging of interest rate risk done by some banks. As a result of this the FBE has developed an interest margin hedging (IMH) model, which is an alternative to the IAS 39 model developed by the IASB and that the FBE believes better reports the underlying risks that banks are managing.

The objective of the IMH model is to reduce volatility in interest margins arising from the interaction of interest income and interest expense. The FBE view is that these interest margins will only be at risk when there is an asset/liability mismatch (that is, when the assets and the liabilities do not have the same repricing dates) in combination with a variable rate asset and a fixed rate liability (or vice versa). The IMH model has two intentions:

• To reduce interest margin volatility by securing today's interest rate levels for existing floating rate items, and
• To reduce interest margin volatility on future transactions that are done to fill the asset/liability mismatch.

The FBE believes this model will align 'state of the art' interest risk management and consideration of core deposits as an integral part with hedge accounting.

The session included a debate where the Board asked questions to get a better understanding of the proposed model. Thereafter, Board members stated that they did not think the proposal would require changes to what is currently allowed for hedging purposes under IAS 39. The meeting then discussed several specific paragraphs in the Implementation Guidance of IAS 39 that the FBE had addressed as a problem.

The Board did not take any specific decisions on the IMH model at this meeting, but asked the FBE to address those paragraphs that it had identified as problematic by proposing revised wording to the IASB.

Annual Improvements - 2006

The Board discussed three issues for its annual improvement process.

Reporting compliance with IFRSs

The Board continued its discussion on the issue of whether IAS 1 Presentation of Financial Statements should be amended to provide guidance for situations where an entity is stating that its financial statements are in compliance, but not in full compliance with IFRSs.

The Board did not agree with the proposed amendment presented at the last Board meeting and had asked the staff to amend the wording and bring back.

Staff proposed the following revised amendment to IAS 1:

14A When an entity refers to IFRSs in describing the basis on which its financial statements are prepared but is not able to make an explicit and unreserved statement of compliance with IFRSs, the entity shall:

a. describe each difference between the basis on which its financial statements are prepared and IFRSs that is relevant to its financial statements; and

b. describe how the reported financial position and performance of the entity would have differed if the entity had complied with IFRSs.

The Board voted in favour of including the proposed amendment to IAS 1 with minor editorial amendments.

Point-of-sale costs

The Board debated an issue on whether the term 'point-of-sale costs' in IAS 41 Agriculture should be replaced with 'costs to sell' to improve consistency with other IFRSs. This issue had been referred to the Board from the IFRIC as it believed the issue would be best resolved through the annual improvements process.

The Board agreed to the proposed changes to IAS 41.

Unit-of-production method of amortisation

When the Board reviewed the IFRIC interpretation on service concessions, it raised an issue of whether IAS 38 Intangible Assets should be amended to clarify that it permits the use of production method of amortisation for intangibles.

The Board decided that the last sentence in paragraph 98 of IAS 38 should be deleted to clarify that the unit of production method could be permitted, even if it results in a lower amount of accumulated amortisation than under the straight-line method.

Financial Instruments – Hedging of portions of cash flow or fair value exposure

The Board previously concluded that additional guidance is required regarding what can be designated as a hedged portion under IAS 39. IAS 39 permits an entity to hedge all cash flows of a financial instrument for one or more specific risks, but does not specify what risks are eligible for hedge accounting. The Board therefore addressed two issues at the December meeting:

• The first issue was whether IAS 39 should be amended to specify risks that are eligible to be designated for hedge accounting.
• The second issue was, since IAS 39 permits 'other portions' of the future cash flows on a financial instrument for its whole life or part of its time period to maturity to be designated as a hedged item, should the Board amend IAS 39 to clarify which specific 'other portions' of a financial instrument that are eligible for designation as a hedged item.

On the first issue the Board decided that IAS 39 should be amended to specify those risks which are eligible for designation as a hedged item.

On the second issue the Board voted and agreed to specify which 'other portions' of a financial instrument that would be permitted for designation as a hedged portion under IAS 39.

The Board also decided that these amendments should be developed directly through the Board as a stand-alone amendment to IAS 39.

Financial Instruments – Due Process Document: Recognition and Measurement

The Board continued its discussions on issues relating to recognition and measurement for its Due Process Document. Four main issues were addressed at the December meeting.

Loan with prepayment options and credit card agreements

First the Board discussed the issue on how a loan with a prepayment option should be characterised by the holder of the instrument.

Board members discussed whether the prepayment option is a non-financial component that the holder should recognise separately from the loan. The Board expressed reservations about this approach. The Board expressed a preliminary view that the entire asset should be recognised at fair value. The Board acknowledged that the prepayment option affects the fair value but that fact does not lead to recognising the non-financial portion of the value as a separate asset.

Secondly the Board discussed the issue on how credit card contracts should be assessed from the perspective of the issuer of the credit cards, and specifically whether the credit card company should separately report the portion of the value of a credit card contract with a cardholder that would not exist if the cardholder made his judgement solely based on interest rate considerations.

The paper presented to the Board identified two alternatives that had support from some Board members. One approach would recognise a single non-financial asset at fair value on the balance sheet. The other approach would split the contract into two portions, recognising a non-financial asset and a financial liability. Board members supporting the second approach said they would separate the two components of if the financial liability is material and separation is justified on a cost/benefit basis.

Bank deposit agreements

The Board discussed whether bank deposit agreements between a bank and the holder of the demand deposit would be within the definition of a financial instrument for the purposes of the Due Process Document. The Board's preliminary view was that since the bank did not have a stand-ready obligation to accept deposits from the depositor, bank deposit agreements should not be regarded as financial instruments. However, the Due Process Document should include a discussion of these agreements and seek views from constituents.

Liabilities with a demand feature

The Board debated how to remeasure liabilities that have a demand feature. The issue was whether the liabilities should be remeasured based on the immediate settlement value of the liabilities or whether it should be measured based on market expectations about the timing and amount of cash flows, the discount rate and incremental service costs on the liabilities.

The Board expressed a tentative view that these liabilities should be remeasured based on the market conditions, taking timing, discount rate and service costs into consideration.

Guaranteed liabilities

The Board discussed how third-party contractual guarantees would affect how a debtor should measure liabilities. Board members' views were divided. One view was that as long as the debtor was not released from its obligation if the guarantor has to settle the obligation, this should not affect measurement of the liability. The other view was that the existence of a guarantee always will affect the value of the liability.

The Board decided that it would need to assess specific examples before it would be able to express a tentative view on how contractual guarantees affect fair value measurement of liabilities for the debtor. The Board directed the staff to develop some examples which will be considered at a later meeting.

Note that the paper presented to the Board also includes a discussion on statutory guarantees, but in light of the conclusion regarding third-party guarantees this discussion was postponed.

Thursday 14 December 2006

Financial Statement Presentation phase A – Exposure Draft of Proposed Amendments to IAS 1 Presentation of Financial Statements

The staff presented an analysis of comment letters received on the Exposure Draft of Proposed Amendments to IAS 1 Presentation of Financial Statements (A Revised Presentation) (ED IAS 1). The following decisions were made and the staff was directed to amend ED IAS 1 accordingly.

Titles of a complete set of financial statements

Paragraph 81 of ED IAS 1 states that:

"An entity shall present all components of income and expense recognised in a period: (a) in a single statement of recognised income and expense; or
(b) in two statements: a statement displaying components of profit or loss and a second statement beginning with profit or loss and displaying components of other recognised income and expense."

The Board confirmed to maintain the two-statement approach and the single-statement approach as alternatives. After having discussed several alternatives the Board decided that in case of the single statement approach the statement should be titled 'Statement of comprehensive income'.

In case of a two statement approach the statements should be titled 'Income Statement' and 'Statement of recognised income and expenses'. This is the same terminology used in the existing IAS 1. The Board pointed out that it intends to await the outcome of phase B of the project before changing the titles.

The Board decided to keep the names in ED IAS 1 proposed for 'statement of financial position' (previously balance sheet), 'statement of changes in equity' and 'statement of cash flows'. In response to concerns expressed in various comment letters the Board agreed to explicitly define the term "financial position" in the framework.

Further the Board agreed to the staff recommendation to keep the changes in nomenclature non-mandatory in ED IAS 1.

Statements of financial position at the beginning of the period

ED IAS 1 proposes that a complete set of financial statements should include a statement of financial position as at the beginning of the period. Therefore, an entity presenting comparative information should be required to present three statements of financial position in its financial statements.

The Board decided that the third statement of financial position should only be required when the statement of financial position as at the beginning of the period had been subject to reclassifications and/or restatements. Segregation of owner and non-owner changes in equity

The ED proposes that 'non-owner changes in equity' (components of recognised income and expense) be referred to as 'recognised income and expense' (bearing in mind that an entity is not required to use this term in its financial statements).

Some respondents noted an inconsistent use of the terms 'equity holder' and 'owners' within ED IAS 1. The Board agreed that the definition of these terms is outside the scope of this project but decided to clarify in the introductory paragraphs of ED IAS 1 that the statement of changes in equity should apply to transactions with equity holders acting in their capacity as equity holders and to refer to these equity holders as owners within ED IAS 1.

Other recognised income and expense

Reclassification adjustments

ED IAS 1 requires the disclosure of the reclassification adjustments relating to each component of other recognised income and expense.

The Board confirmed the current guidance in ED IAS 1 on reclassifications. To make it consistent with paragraph 93 and the wording in FAS 130, the Board decided to define reclassifications as follows: 'Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other recognised income and expense in current or previous periods'.

Related tax effects

The Board confirmed the provisions in paragraphs 90 and 91 of ED IAS 1.

Presentation of per-share measures

Some respondents interpreted the current requirements of paragraph 73 of IAS 33 Earnings per Share to allow presentation of alternative per share measures on the face of the income statement.

The Board confirmed that ED IAS 1 does not propose changes to IAS 33. Therefore, earnings per share will be the only per-share measure presented on the face of the statement of recognised income and expense. If an entity presents any other per share measure, that information is required to be calculated in accordance with IAS 33 and presented in the notes. The Board indicated that an amendment of paragraph 73 of IAS 33 might be necessary to clarify this.

Definition of general purpose financial statements

Paragraph 7 of ED IAS 8 states:

"General purpose financial statements include those that are presented separately or within other public documents such as a regulatory filing or report to shareholders".

A large number of respondents alleged that the reference to 'regulatory filing' could be interpreted as defining all financial statements filed with any regulator to be general purpose financial statements. This may lead to controversy considering that a great number of registrants, public or not, report to various types of regulatory authorities (e.g. in Australia small private companies and subsidiaries of public companies with no external users of financial reports, will be required to prepare general purpose financial reports because they are required to place their financial statements as a public file).

The Board noted that this was not the intention and decided to clarify this by amending paragraph 7 of ED IAS 1.

Financial Statement Presentation phase B:

Other comprehensive income

The staff identified alternative formats for presenting other comprehensive income (OCI) that could serve until the IASB and FASB can achieve their long-term goal of eliminating the separate presentation of some OCI items.

The staff developed the following alternatives for presenting OCI items on the statement of comprehensive income (the alternatives are illustrated in the observer notes):

• Alternative A Present OCI items within the functional section or category to which the events or transactions relate and recycle (if necessary) within the section or category.

• Alternative B Presentation is the same as Alternative A, except that each category or section that has an associated OCI item would have a subcategory to distinguish OCI items from non-OCI items.

• Alternative C Present OCI items in a separate section (that would be presented with equal prominence as the business, financing, income tax, and discontinued operations sections). OCI items that are recycled would be recycled among sections and categories. The OCI section would include operating, investing, and financing categories. The OCI section would have a subtotal like the other sections.

• Alternative D. Presentation is the same as Alternative C, except that OCI items would be presented on a net of tax basis. This presentation is the most consistent with the current presentation of OCI items and the sum of the business, financing, discontinued operations, and income taxes sections would equal net income, as currently presented.

The Board discussed the alternatives and was nearly equally divided between the positions 'A or B' on the one hand and 'C or D' on the other side. Those who supported 'A or B' noted that this presentation would be closer to the long-term goal of eliminating the separate presentation of OCI items.

A Board member presented an additional alternative with no label OCI but with income and expense items classified as long-term and short-term similarly to the current/non-current classification in the balance sheet (statement of financial position). This concept could be presented using the formats of Alternatives B or C.

The staff noted that a majority of the FASB agreed with Alternative B with minority votes for A and C.

No decisions were made.

The statement of cash flows

Proposed working principles

The staff recommended that the objectives of the statement of cash flows in FAS 95 Statement of Cash Flows be adopted in this project as working principles, modified in part, as follows. Information should be presented in the financial statements in a manner that will help investors, creditors, and others to assess:

• (a) an entity's ability to generate future cash inflows;
• (b) an entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing;
• (c) the differences between cash transactions and accrual accounting; and
• (d) the effects of non-cash activities during the period on an entity's financial position.

The Board agreed to these principles but said that it should be made clear that the objectives can only be achieved by financial statements as a whole not by cash flow statements alone.

Direct method versus indirect method

At the April 2004 joint Board meeting, IASB and FASB decided that the financial statement presentation project should address whether the statement of cash flows should be required or permitted to be prepared under the direct method or the indirect method.

The current guidance in FAS 95 formed the basis of the discussion. FAS 95 describes the direct method as a method which reports 'major classes of gross cash receipts and gross cash payments and their arithmetic sum' (paragraph 27) and the indirect method as a method which determines and reports 'net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities' (paragraph 28).

Many Board members felt that the direct method provides more useful information. However, some raised the concern that the direct method might be too complex and that the cost might outweigh the benefits.

The Board decided that the direct method as outlined in an Agenda Paper (not provided to observers) should be applied.

Reconciliation from operating income to cash flows from operating income

Currently, FAS 95 requires a reconciliation of net income to cash flows from operating activities if the direct method is used. That reconciliation is not required by IAS 7 Cash Flow Statements.

The Board agreed that the information needed to reconcile (comprehensive) operating income to cash flows from operating activities should be required to be presented in the financial statements.

The staff was asked to explore whether similar information should be provided for the investing, financing and other categories.

Non-cash activities

The Board agreed that all relevant information about significant non-cash activities should be provided. The issue was not discussed in detail.

Application of the working format of cash flow statements to financial institutions

At the outset of the convergence project on financial statement presentation, the IASB and FASB agreed that issues related to financial statement presentation should be addressed first for non-financial institutions and second for financial institutions. While that is the approach that has been taken, the staff's underlying goal was to develop, if possible, principles for presentation that would apply to all entities.

The staff presented a paper based on meetings with the Financial Institutions Advisory Group (FIAG).

The Board agreed to the staff's recommendations on the following issues (without discussing them in detail):

• An eyes-of-management approach should be used to classify information in the financial statements. The Board noted that this is the same approach as for non-financial institutions.
• The criteria for classifying items in the financing, investing and operating section should similarly apply to financial institutions
• Cash and cash equivalents are required to be classified in a single category.

Business Combinations Phase II – Redeliberations of the proposed revised IFRS 3:

The IASB was joined by the FASB via video link.

Non-controlling Interests and Goodwill

The Board was asked to decide on the measurement principle for non-controlling interests (NCI, historically called minority interest) in a business combination.

Paragraph 58 of the Business Combinations Exposure Draft (BC ED) states that NCI should be recognised and measured at acquisition date based on its proportional share of the fair values of the identifiable assets and liabilities plus its share of the fair value of goodwill.

The Board members in favour of this principle pointed out that measuring NCI at fair value follows from measuring all identifiable assets acquired (including the acquirer's share of goodwill) and liabilities assumed at its acquisition date fair value. Five Board members disagreed with the principle mainly for the reasons already outlined in the Alternative Views of the BC ED.

The Board members in favour of this principle pointed out that measuring NCI at fair value follows from measuring all identifiable assets acquired (including the acquirer's share of goodwill) and liabilities assumed at its acquisition date fair value. Five Board members disagreed with the principle mainly for the reasons already outlined in the Alternative Views of the BC ED.

Board members voted 9 to 5 in favour of the principle of full goodwill. However, the Board was then asked whether any exceptions to fair value measurement of NCI can be justified. The Board decided by majority of 9 votes to allow exceptions, particularly on the basis of measurement reliability.

The Board directed the staff to conduct further research on alternative measurement principles for NCI. This issue will be discussed at a future meeting.

Combinations between Mutual Entities

During their initial deliberations IASB and FASB concluded that the attributes of mutual entities are not sufficiently different to justify an accounting treatment different from that provided for other entities. Therefore, the boards decided to include mutual entities within the scope of the BC ED.

The Board reaffirmed its conclusion and clarified that the definition of mutual entities in the BC ED also includes cooperatives.

Accounting for business combinations achieved by contract alone or in absence of a transaction involving the acquirer

The BC ED proposes that business combinations that occur by contract alone or in the absence of a transaction involving the acquirer should be accounted for by applying the acquisition method.

The Board reaffirmed its conclusion.

In addition the Board was asked how to account for NCI under stapling arrangements. Interpretation 1002 of the Australian Accounting Standards Board describes a stapling arrangement as a situation in which a legal entity has "issued equity securities that are combined with ('stapled' to) the securities issued by another legal entity by virtue of a contractual arrangement between the entities". Consequently under the acquisition method the NCI would amount to 100% of the acquiree's fair value.

The Board indicated that the presentation of NCI under stapling arrangements should not result in a second category of NCI but that the definition of NCI might need to be modified. The staff was directed to conduct research on this issue.

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