Tuesday 20 February 2007 (afternoon only)
 Conceptual Framework
Phase B: Elements
The Claims Approach
(FASB staff participated by video link from Norwalk.)
The FASB staff introduced a lengthy paper prepared in response to the request from the Boards in November 2006 that, with respect to the existing definitions of liabilities and equity, it should develop the 'single element approach and to determine the potential implications of adopting that approach.' The paper focused on developing a single element, called for the purposes of the discussion 'claims', that would replace the liability and equity elements. The paper is available in the Observer Notes section of the IASB's website.
The Board thanked the staff for the analysis and the work that had been done in response to the Boards' request. However, beyond that, the IASB members were divided. Some thought that the analysis should not be developed further (in the words of one Board member: 'close the door; lock it; lose the key'); others thought that the analysis should be taken a bit further, as it would help to inform the debate on elements. Some Board Members thought that the staff analysis would be an excuse not to answer difficult questions, mainly related to items in profit and loss arising from changes in claims. To develop the Claims Approach could delay any resolution on real accounting issues for several years. Others disagreed, noting that it would not solve all problems, but it would be a useful start. The chairman appreciated the staff's work, but thought the Claims Approach held more problems than promise.
The FASB staff assigned to the FASB's Liabilities and Equity project noted that the FASB had not discussed whether to include a discussion of the Claims Approach in the forthcoming FASB Preliminary Views Document. To do so would delay the issue of that document by several months. IASB members generally did not like the idea that exploring a conceptual issue should delay a Standards-level project that was needed.
IASB staff asked the IASB for proper direction. The vote that followed was characterised by a Board Member as follows:
- 7 Board Members would stop work on the Claims Approach now
- 4 Board Members want the staff to pursue the Claims Approach further
- 3 Board Members would not want exploration of the Claims Approach to hinder the progress on the FASB's Liabilities and Equity project, but would not want to lose the benefit of the work and analysis done to date.
This would seem to suggest that the IASB would not want additional staff effort to be expended on the topic. However, given that the FASB has not discussed this issue, and the project is a joint project, a final decision will not be made until the FASB had the opportunity to discuss it.
Phase A: Objective and Qualitative Characteristics
Comment Letter Analysis
The IASB staff introduced their analysis of comments received on the IASB's Discussion Paper Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The objective of financial reporting and the qualitative characteristics of decision-useful financial reporting information. The staff suggested that the Board defer debating the issues raised in the comment letters until future meetings. The staff analysis is available in the Observer Notes section of the IASB's website.
Objective of financial reporting: Stewardship
This was one of the most contentious aspects of the Discussion Paper, and 86% of respondents who commented on this aspect of the DP did not support the Board's proposals. There was general agreement among Board Members that they had not expressed themselves well: Stewardship is important in that management is responsible for the resources committed to it. How well management has used those resources is important when making decisions about future resource allocations. However, Board Members noted also that there was no consensus among commentators on what 'stewardship' means; respondents clearly had different notions in mind. It was important to some Board Members that the notion of stewardship being equated with 'things under the control of management' ('operating' performance) be rejected.
Later in the session, the staff suggested that, in addition to informal discussions with individual respondents aimed at understanding their comments, there might be an opportunity to hold a public meeting to discuss this issue. This might be held either (a) after the Boards redeliberate the issue, but before exposure, or (b) during the exposure phase of this part of the Framework. No decision was made.
Users
Some commentators had asked that internal users be identified as potential users of general purpose financial reporting. Board Members noted that, in large corporate groups, some managers relied heavily on the external reporting, because to develop special internal reporting systems would be too costly. Board Members acknowledged this, but did not think that this changed the objective of general purpose financial reporting, nor the primary focus on external users.
The Board acknowledged that it had probably contributed to respondents' confusion by issuing its Discussion Paper at about the same time as the CFA Institute's Comprehensive Business Reporting Model: Financial Reporting for Investors. The two documents defined their user groups differently, although both concentrated on the information needs of the residual equity holders as being the class of users most reliant on general purpose financial statements.
The comment letter analysis discussed various other issues raised on the Objective section of the Discussion Paper, but these issues were not discussed at this session. They will be addressed when the Board redeliberates this section.
Qualitative characteristics
Relevance. The Board noted that a substantial proportion of respondents had criticised as vague the proposed description of relevance – something 'capable of making a difference'. The respondents suggested that the vagueness might inappropriately broaden the definition. However, Board Members noted that the phrase was used by securities regulators, which is why the Board had used it.
Faithful representation. Again, a substantial majority of commentators had opposed the Boards' proposals to use the term 'faithful representation' instead of 'reliable' as a principal qualitative characteristic. Board Members took note, but also thought that some commentators might have been thinking of 'reliability' in terms of a recognition principle. The Board asked the staff to undertake further analysis of how commentators understood 'reliable', so that they might respond to the criticisms in a more informed way.
Understandability. A significant proportion of commentators had argued that the 'understandability' characteristic should require making financial statements understandable for the common user and should place less emphasis on sophisticated users. Board members noted that the word can be used to mean 'understandability of a Standard', 'understandability of the accounting it produces', and 'understandability of the financial reporting'. The Board appeared to have sympathy for these issues and would look at them in more detail when it redeliberated the topic.
Constraints in financial reporting
There was a brief discussion of the analysis of comments on the constraints on financial reporting and whether additional qualitative characteristics should be added.
Next steps
The staff intends to return to the Board with issues for redeliberation on at least three occasions:
- at the Joint IASB/FASB meeting in April 2007, when issues such as the authority and place in the [IAS 8] hierarchy will be discussed;
- at the separate Board meetings to be held in April 2007, at which matters in Chapter 2 (Qualitative Characteristics) will be discussed
- at the separate Board meetings in May/June 2007, at which Chapter 1 issues (Objectives, etc) will be discussed.
The staff is still hopeful that an Exposure Draft of the two chapters will be issued in the third quarter of 2007, but is aware that the timetable might slip a bit.
Wednesday 21 February 2007
Insurance Contracts – Continued discussion of a draft Discussion Paper
Unbundling
In September 2006, the Board tentatively concluded that an insurer should not unbundle the insurance, deposit, and service components of insurance contracts if the components are so interdependent that the components can be measured only on an arbitrary basis, but should unbundle them for measurement if such interdependencies are not present.
Based on concerns raised by constituents that unbundling would be arbitrary, artificial, and burdensome in most cases and that the practical effect would not be apparent, the staff brought the issue back. (The issues are outlined in the Observer Note available on the IASB's Website.)
The Board had a thorough debate on the relationship between unbundling and measurement of the different components of an insurance contract and finally reaffirmed the tentative decision on unbundling with a majority of 8 in favour and 6 opposed.
It was noted that the following scenarios should be considered in this connection:
- (a) The contract consists of components that have no interdependence. In this case the contract should be split into an insurance contract measured under the insurance model and other contract(s) to be accounted for under the respective IFRSs. Scenarios (b) and (c) would then be relevant for the insurance contract.
- (b) The components of the insurance contract are fully interdependent. The contract should be measured under the insurance model and, since in this case unbundling is not feasible, the components should be measured and presented together.
- (c) The components of the insurance are interdependent to some extent. The contract should be accounted for under the insurance model. To the extent unbundling is possible, the components should be measured and presented separately. The measurement consequences are that for the deposit and service components, IAS 39 Financial Instruments: Recognition and Measurement, IAS 18 Revenue, and probably other IFRSs apply.
Sweep Issues – substantive issues in Board members' comments on pre-ballot draft
Measurement attribute – Cash flow estimates
The Board was asked whether it wants to retain the measurement attribute 'current exit value' or whether this term should be changed to 'current exit price' as used, for example, in the Discussion Paper on Fair Value Measurements (DP FVM).
The pre-ballot draft of the Insurance Contracts Discussion Paper requires estimation of future cash flows taking into account the insurer's strategy for determining the level of service provided to policyholders and its approach to claims management, as well as the insurer's efficiency in providing that level of service and implementing its selected approach to claims management.
The Board noted that referring to entity-specific data rather than market data could but does not necessarily lead to different outcomes than under DP FVM. In absence of observable market data the DP FVM allows the use of entity specific data ('Level 3 inputs').
The Board decided to continue to use the term 'current exit value'. The staff was directed to explain in more detail in the Discussion Paper how current exit value differs from fair value and to point out that the Board is currently not aware of significant differences.
Other issues
The Board asked the staff to amend the Discussion Paper with regard to the guidance on determining risk margins, the interaction of the insurance contracts project with the revenue project, and customer relationship. The rephrasing was not discussed in detail.
Project plan – Issuance of the Discussion Paper
The Board decided (12 in favour, 2 opposed) to issue the Discussion Paper as amended above within the next several months.
Liability and Equity – Educational Session
In this first education session on this topic, the Board discussed the three models for distinguishing liabilities and equity in the FASB Preliminary Views Document, namely:
- Ownership
- Ownership–settlement
- Reassessed expected outcome (REO)
The staff provided a detailed analysis and comparison of the three models covering the following aspects:
- Definition of equity
- Linkage and separation principles
- Initial and subsequent measurement
- Other issues: substantive features principle, separate presentation in equity, consolidation, reassessment and reclassification
- Illustrative examples for the equity/liability classification of different types of common stock, preferred stock, hybrid instruments and options/forwards
Further details are available in Observer Note 4 to 4H, available on the IASB Website.
The session consisted of Board members questioning the application of the three models, and comparing them with each other. The discussion particularly focused on the definition of equity, the treatment of convertible instruments, the linkage and separation criteria, and the definition of transaction price.
No decisions were made, and no strong views were expressed at this stage.
IAS 39 Definition of a Derivative – Indexation on an entity's own revenue or EBITDA (issue referred from IFRIC)
The IFRIC had been asked to provide guidance on whether a contract that is indexed to an entity's own revenue or earnings before interest, tax, depreciation and amortisation (EBITDA) meets the definition of a derivative in accordance with paragraph 9 of IAS 39.
Paragraph 9 of IAS 39 states:
A derivative is a financial instrument or other contract within the scope of this Standard with all of the following characteristics: (a) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract... (emphasis added).
The Board discussed the following questions submitted by the IFRIC:
- (a) whether changes in an entity's own revenue or EBITDA should be considered as financial or non-financial variables; and
- (b) whether the exclusion from the definition of a derivative in paragraph 9 of IAS 39 of a contract linked to non-financial variables that are specific to a party to the contract is restricted to contracts accounted for under IFRS 4 Insurance Contracts.
The Board noted that the exclusion from the definition of a derivative in paragraph 9 of IAS 39 is restricted to contracts that are accounted for under IFRS 4. The Board decided to amend paragraph 9 of IAS 39 for clarification purposes. The proposed amendment was omitted from the observer notes.
As a result of the proposed amendment, the definition of a derivative for the instruments in question would be met. Therefore, the Board decided not to address the question whether the underlying was financial or non-financial, as the underlying would be in the scope of IAS 39 anyway.
The Board decided to include the amendment in the amendments to IFRSs resulting from its 2007 Annual Improvement Process, which the Board plans to issue on 1 October 2007 effective for period ends beginning 1 January 2009.
Thursday 22 February 2007
Annual Improvements Process 2007:
IAS 41 Agriculture: Measurement of Biological Assets in accordance with IAS 41
The Board approved a proposal that the guidance in IAS 41.21 be amended, such that, in determining the present value of expected cash flows, an entity should include the net cash flows that market participants would expect an asset to generate in its most relevant market.
The effect of this amendment would be to ensure that a biological asset is measured during its biological transformation at an appropriate fair value.
In addition, minor modifications will be made to the definition of 'biological transformation' in IAS 41.5 and to the guidance in IAS 41.17.
Status of Implementation Guidance
The Board agreed to propose an amendment to IAS 8.7 to delete the phrase 'and considering any relevant Implementation Guidance (IG) issued by the IASB for the Standard or Interpretation'. In addition, the Board will propose amendments to IAS 8.11(a) and 12 to address more clearly where within the IAS 8 hierarchy Implementation Guidance falls.
The Board agreed that the current requirements in IAS 8 are problematic. IAS 8.7 has the effect of raising Implementation Guidance to 'standards-level' (mandatory) material, which is expressly not the IASB's intention: The current rubric in all IG sections states 'this guidance accompanies but is not part of IFRS x'. However, without addressing where within the IAS 8 Hierarchy IASB-developed material should fall would allow industry practice to override the IASB's Implementation Guidance. The IASB asked the staff to develop the wording of the amendments.
Restructuring IFRS 1 First-time Adoption of IFRSs
The Board agreed to restructure IFRS 1 by moving to appendixes the specific exemptions and exceptions, leaving the body of IFRS 1 to address the main principles of the Standard. Exemptions in IFRS 1 will be identified as either permanent (for example, IFRS 1.23) or temporary (for example, IFRS 1.25G). The temporary exemptions would be deleted from the Appendix as part of the Annual Improvements Project.
The Board discussed briefly whether, in light of experience, the general requirement to restate an entity's financial statements is appropriate and confirmed that it is, except when the use of hindsight is pervasive.
Post-employment benefits – Preliminary Views
Cash Balance and similar plans: Definition of benefit promises
The Board had an inconclusive discussion about how to account for cash balance plans in the context of the current requirements of IAS 19. The staff recommended that IAS 19 be amended to identify three categories of benefit promise:
- defined contribution,
- defined benefit and
- asset-based promises. An asset-based promise would be one whose amount changes in response to the change in an asset or index, other than assets or indices that yield fixed increases.
Several Board members were unhappy with the staff proposal, which some thought added more complexity to IAS 19, making it 'almost Byzantine'. Board members proposed an alternative approach that would bifurcate an asset-based pension promise into the contribution and the guarantee/derivative promise. Put another way, everything that is related to salaries and service would be accounted for under IAS 19; any guarantee with respect to returns during the accumulation phase would be accounted for under IAS 39.
The Board discussed the alternatives, noting that there are strong similarities between asset-based promises and both some types of insurance contracts and deposits. The staff agreed that they were not in a position to comment on the model proposed during the meeting and would bring this issue back at a subsequent meeting.
Recognition of changes in defined benefit pension obligations
The Board agreed that the forthcoming Discussion Paper on employee benefits should present the presentation proposals in the context of IAS 1 – that is, possible presentation changes that might result form the financial statement presentation project would be ignored for the purposes of the employee benefits DP.
Presentation issues
The Board's preliminary view is that all changes in post-employment benefit obligations and in the value of plan assets should be presented in profit or loss in the period in which they are incurred.
The Board discussed a staff proposal that the forthcoming Discussion Paper should present at least one alternative. One alternative proposed by the staff (Alternative 2 in the Observer Notes) was withdrawn at the meeting. The Board discussed two other proposals:
- Only service costs would be presented in profit or loss; all other changes in the benefit obligation and plan assets would be presented as components of income outside profit or loss.
- Report price variances (including changes in the discount rate applied to the closing balance of the pension obligation and changes in the fair value of plan assets) in income but outside profit or loss; all other recognised changes in the pension obligation would be recognised in profit or loss.
Some Board members were opposed to presenting any alternative to the Board's preliminary view. Others disagreed, noting that eliminating all smoothing mechanisms would be controversial. In addition, other Board members noted that a consistent message received in their work on financial statement presentation was that users want a presentation that distinguishes how the business is financed (or funded) from all other activity.
The Board developed an alternative that is a hybrid of the two proposals above. Under this approach, all changes in the post-employment benefit obligations and in the value of plan assets would be reported in comprehensive income. All actuarial gains and losses, other than those arising from changes in the discount rate, would be reported in profit or loss. Actuarial gains and losses arising from the change in the discount rate and returns on plan assets would be reported in comprehensive income outside profit or loss. This alternative will be included in the forthcoming discussion paper.
Business Combinations Phase 2 – Redeliberations of proposed revisions to IFRS 3 Business Combinations
Assets acquired in a business combination that are subject to an operating lease to which the acquiree is the lessor
The Board discussed the valuation of an asset acquired in a business combination in which the acquiree is a lessor under an operating lease.
Alternative 1:
The acquirer separately assesses whether each of the acquiree's operating leases are at market terms as of the acquisition date, regardless of whether the acquiree is the lessee or lessor. If an operating lease is not at market terms as of the acquisition date, the acquirer recognises an intangible asset (liability) separate from the asset subject to the operating lease if the terms of the operating lease are favourable (unfavourable) relative to market terms.
Alternative 2:
The fair value of an acquired asset that is subject to an operating lease reflects the favourable or unfavourable terms of the operating lease and a separate asset or liability is not recognised.
The staff noted that alternative 1 is consistent with the FASB's previous decision in this project while alternative 2 reflects the current practice under IFRSs.
The discussion mainly focused on the implications the two alternatives would have on assets for which a fair value model is applied; particularly assets measured at fair value under IAS 40 Investment Property. Some Board members pointed out that alternative 1 would be inconsistent with IAS 40 and, therefore, should not be applied. Others expressed the opinion that it is just an aggregation issue and that no divergence to US GAAP should arise.
Finally, a majority of the Board voted for alternative 2.
Reassessments
Several respondents to the Business Combinations Exposure Draft (BC ED) commented that the BC ED does not provide guidance on whether, and in what circumstances, a business combination triggers a reassessment of the acquiree's classification or designation of assets, liabilities, equity, and relationships acquired in a business combination. The types of reassessment issue include:
- Classification of leases as operating or finance leases;
- Classification of contracts as insurance contracts;
- Classification of assets as held for sale;
- Whether embedded derivatives should be separated from the host;
- Continuation or de-designation of hedge relationships;
- Classification of financial instruments (for example, as held-to-maturity, available-for-sale, or at fair value through profit or loss).
The staff proposed to develop a general principle to address this issue and presented two views.
View 1
The classification by the acquirer should be the same as it would have been had the particular assets and liabilities been acquired outside a business combination. This view is likely to result in many of the items outlined above being reassessed.
View 2
A business combination is different from other acquisitions and in many cases it is the continuation of an existing business by a new owner. This view is likely to result in many items remaining intact from a group perspective.
It appeared that the majority of Board members would prefer a general principle with the following key elements:
- If the acquiree holds long term contractual positions such as leases and insurance contracts no reassessment should be made to these contracts and the treatment of the corresponding assets and liabilities as at the acquisition date since the business combination itself does not change the terms of the contracts.
- If the acquiree holds assets and liabilities that have to be reassessed on an ongoing basis (for instance, assets held for sale, hedging, classifications for held-to-maturity) a reassessment should be made as at the acquisition date taking into account the implications of the business combination (e.g. the strategy of the acquirer).
The Board did not make a decision. The Board asked the staff to further elaborate this issue and to bring it back at a future meeting.
Proposed Amendments to IAS 27 and Proposed Replacement of US ARB No. 51
Attribution of profits and losses to controlling and non-controlling interests (NCI, historically called minority interest)
(a) Attribution of profit or loss and changes in equity/OCI in general
The Board decided to add guidance to the BC ED similar to the guidance in paragraph 21 of the FASB exposure draft.
Paragraph 21 of the FASB exposure draft states:
Net income or loss and each component of other comprehensive income shall be attributed to the controlling and non-controlling interests. That attribution shall be based on relative ownership interests unless the controlling and non-controlling interests have entered into a contractual arrangement that requires net income or loss or the components of other comprehensive income to be attributed differently between them. In that case, net income or loss and the components of other comprehensive income shall be attributed to the controlling and non-controlling interests based on the contractual requirements of that arrangement.
The Board did not discuss the wording in detail.
(b) Attribution of losses in excess of the equity of the non-controlling interest
The Board reaffirmed the guidance in paragraph 35 of the BC ED of proposed amendments to IAS 27 Consolidated and Separate Financial Statements (ED IAS 27) that losses applicable to a non-controlling interest (NCI) should be attributed to them, even if doing, would result in NCI being reported as a deficit.
The Board decided not to require additional disclosures explaining contractual and other factors regarding the recoverability of those deficits.
Multiple arrangements that should be accounted for as a single transaction
Based on comment letters received on the ED IAS 27 the staff proposed to improve the guidance in paragraph 30F of the ED IAS 27 as follows:
A parent may lose cControl of a subsidiary may be lost in two or more transactions or arrangements (transactions). In some cases, An entity shall account for each such transaction or arrangement separately unless circumstances indicate that the transactions or multiple arrangements are part of a single transaction or arrangement. In determining whether to account for the transactions or arrangements as a single transaction or arrangement, an entity shall consider all of the terms and conditions of the transactions and arrangements and their economic effects. If oOne or more of the following indicators are present, the transactions or may indicate that the multiple arrangements are to shall be accounted for as a single transaction or arrangement:
- (a) they are entered into at the same time
or as part of a continuous sequence and in contemplation of one another.
- (b) they are entered into in contemplation of one another
- (c) they form a single arrangement
that achieves, or is designed to achieve, an overall commercial effect.
- (d) the occurrence of one
transaction or arrangement is dependent on the occurrence of at least one the other transaction(s) or arrangement(s).
- (e) one
or more of the transactions or arrangements considered on their its own is not economically justified, but they are economically justified when considered together. An example is when one disposal is priced below market, compensated for by a subsequent disposal priced above market.
The transactions or arrangements are to be accounted for separately if the entity can demonstrate clearly that they are not parts of a single transaction.
In principle, the Board agreed to the proposal. Rephrasing comments will be provided to the staff offline.
Consequential amendments in ED IAS 27
The Board made the following decision with regard to consequential amendments.
(a) IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures
Paragraphs A6 and A7 of the ED IAS 27 amending IAS 28 and IAS 31 provide guidance on accounting for a step down, that is, the loss of significant influence or the loss of joint control but does not address the achievement of significant influence or joint control and transactions between shareholders once significant influence or joint control has been achieved.
The Board reaffirmed by vote of 13 to 1 the guidance in paragraphs A6 and A7 of the ED IAS 27. The Board member voting against the proposal noted that any guidance on application of IAS 28 and IAS 31 is outside the scope of the Business Combinations project.
In addition, the Board decided by a 12 to 2 vote not to perform any further research in this respect as part of the Business Combinations project.
(b) IAS 21 The Effects of Changes in Foreign Exchange Rates
With regard to changes in the parent's ownership in a foreign subsidiary, paragraph D8 of the FASB ED states:
Upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity that results in a loss of control of that entity, the amount attributable to that entity and accumulated in the translation adjustment component of equity shall be removed from the separate component of equity and shall be reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs. If an entity sells part of its ownership interest in, but does not lose control of, a foreign entity, that transactions should be accounted for as an equity transaction in accordance with paragraph 23 of FASB Statement No. 1XX, Consolidated Financial Statements, Including Accounting and Reporting of Non-controlling Interests in Subsidiaries. In accordance with that Statement, the translation adjustment component of equity should be reallocated to the controlling and non-controlling interests in the foreign entity after the transaction. (Emphasis added)
The Board agreed, without detailed discussion, to add equivalent wording to paragraph A5 of the ED IAS 27 amending IAS 21.
(c) IAS 33 Earnings Per Share
The Board decided not to address any further issues with regard to IAS 33.
Transition and effective date
With regard to the transition provisions of the final Business Combinations standard (BC standard) and the final Noncontrolling Interest Standard (NCI standard) the Board decided that:
- The final BC standard should be applied prospectively to business combinations for which the acquisition date is on or after the date that the standard is applied
- Retrospective application of the BC standard to acquisitions completed before the BC standard is applied should be precluded
- The final BC standard should be applied at the same time the final NCI standard is applied
- The NCI standard should be applied at the beginning of an annual period and the BC standard should be applied at the beginning of the same annual period
- Earlier application of the standards should be permitted
- The transition provision for previously recognised contingent liabilities should be eliminated
Financial Statement Presentation
The Board discussed a principle for presenting liquidity information that would apply to both financial institutions (FIs) and non-financial institutions (non-FIs).
Issue 1: The liquidity working principle
The staff asserted that the liquidity working principle should encompass both short-term and long-term liquidity and proposed the following revised wording of the liquidity working principle:
'Financial statements should present information in a manner that helps a user assess an entity's solvency (the ability to pay debt and other borrowings from external sources as they come due) by providing information about the liquidity of the entity's assets and liabilities (nearness to cash, the means to assessing solvency or time to conversion to cash).'
The Board members disagreed with the rephrasing for various reasons. Some Board members noted that solvency relates to finance planning, that is, the ability of matching future cash inflows and outflows, and doubted that financial statements can be used to assess solvency. Others mentioned that the definition of solvency is too narrow since in assessing solvency future commitments need also to be taken into consideration.
The Board directed the staff to further elaborate the interdependencies between liquidity and solvency for discussion at a future meeting.
Issue 2: Application of the liquidity working principle
The proposed concept requires an entity to provide the following information in the financial statements (further details are available in Observer Note 9, available on the IASB Website):
- Qualitative information regarding liquidity management activities (liquidity management policy and processes).
- Details of maturities of its long-term assets and liabilities with contractual maturities.
- Maturities of its short-term assets and liabilities as described below:
If an entity manages its needs for cash based on a horizon shorter than one year, the detailed maturities of assets and liabilities with contractual maturities should be provided for more than one time band.
If an entity does not manage its needs for cash based on a horizon shorter than one year, the maturity information may be provided either on the face of the statement of financial position or in the notes. However, if it presents the information on the statement of financial position, all of its assets and liabilities should be classified as either short- or long-term.
The Board members expressed mixed views on the proposal. The discussion focused on to what extent this concept differs from the current provisions in IFRS 7 Financial Instruments: Disclosures. The main concerns raised were that the concept is too formalistic and complex, that it is and that costs may outweigh the benefits. One Board member noted that companies with a more sophisticated liquidity management (that is, horizon less than one year) have to provide more detailed information than companies with a less sophisticated one.
No decisions were made but the staff was asked to prepare a detailed comparison of the concept to existing guidance in IFRSs, particularly in IFRS 7.
This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.
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