Liabilities – amendments to IAS 37

The Board continued its redeliberations of the proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, concentrating on the distinction between a liability and a business risk, and the definition of a 'stand ready obligation'.

Distinguishing between a liability and a business risk

The discussion was based on several examples presented in the staff paper (for details see Agenda Paper 3B available in the Observer Notes section of the IASB's website).

The Board acknowledged that a business risk itself existing at the balance sheet date does not meet the definition of a liability. It was noted that an entity does not have a present obligation as a result of a business risk since the entity can choose to take action to avoid or mitigate the impact of a risk.

The Board reaffirmed the conclusions inherent in the ED that a liability requires both an irrevocable action or event that occurs on or before the balance sheet date and a mechanism that establishes an external party's right to claim from the entity.

By agreeing to the staff's conclusions on Examples 1A to 3A in Agenda Paper 3B the Board acknowledged that:

• Laws (including contractual law) and regulations by themselves are not present obligations. But they may be mechanisms that establish an external party's right to call upon the entity to complete a particular action.
• Planning a future irrevocable action or event in a jurisdiction where there is a mechanism that establishes an external party's right to call upon the entity exists does not give rise to a present obligation and hence, does not satisfy the definition of a liability.
• A revocable action or event or a non-binding offer does not satisfy the definition of a liability, even in a jurisdiction where a mechanism that establishes an external party's right to call upon the entity when that action is taken.
• Making or receiving an offer that can be refused because the offer is not legally binding does not give rise to a present obligation and hence, does not satisfy the definition of a liability.

The Board then discussed the following fact pattern (Example 3B in Agenda Paper 3B):

A vendor sells hamburgers in a jurisdiction with no minimum food hygiene standards. But the law of that jurisdiction stipulates that if a customer is hospitalised as a result of eating a contaminated hamburger, the supplier of that hamburger must pay compensation of £100,000 to the customer. On 31 December 200X the vendor has sold one hamburger to a customer. The customer has eaten the hamburger, but is not hospitalised. The key issue is whether the sale of the hamburger establishes a present obligation or whether it illustrates uncertainty about the existence of a present obligation (element uncertainty).

View 1

The sale itself does not give rise to a present obligation. A liability arises if the hamburger is contaminated and the customer is hospitalised. It was noted that past experience may provide useful information in addressing the uncertainty about the existence of a liability. (7 Board members were in favour of this view)

View 2

Same as view 1 but the liability arises when the hamburger is contaminated irrespective of whether the customer is hospitalised. (2 Board members were in favour of this view)

View 3

The sale gives rise to a present obligation. It was noted that past experience may provide useful information in addressing the uncertainty about the measurement of the liability. (5 Board members were in favour of this view)

No consensus was reached and the Board decided to continue the discussion at a future meeting.

Stand ready obligations

The Board reaffirmed that the notion of a stand ready obligation describes those unconditional obligations whereby an external party has a present enforceable right to call upon an entity to act in a certain way in the future, but may not do so.

The Board acknowledged that the notion of a stand ready obligation also applies to non-contractual scenarios (e.g. enforceable laws and statute/regulations).

Based on comments received from constituents the Board discussed whether the term 'stand ready obligation' is useful or whether it should be eliminated. There seems to be a consensus that the concept of stand ready obligation should remain unchanged. However, some Board members were indifferent on the labelling. It was tentatively decided to keep the term.

Post-employment benefits – Preliminary Views

The Board discussed how to address the financial statement presentation of gains and losses arising on defined benefit plans in the Discussion Paper (DP).

The Board unanimously decided without much discussion that the preliminary view for the DP is that all gains and losses on defined benefit post-employment plans should be recognised in comprehensive income. It appears unlikely that this view is going to be revised.

The Board then discussed three approaches regarding the presentation of these gains and losses in the statement of recognised income and expense including alternatives that would display some components outside net income but in other recognised income/expense.

Approach 1: All in profit or loss

This approach reflects the Board's preliminary view at the February 2007 meeting 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 incur.

Approach 2: Financing approach

This approach presents the costs of service in profit or loss. All other costs are reported as consequences of deferring payment of employee remunerations and financing that deferred payment. Accordingly:

• Service costs, and the gains and losses associated with them are recognised in profit or loss. Thus, service costs, and actuarial gains and losses on the defined benefit obligation except those arising from changes in the discount rate would be recognised in profit or loss.
• All other changes are recognised outside profit or loss. This includes interest cost, changes in the discount rate and all changes in plan assets.

Approach 3: Remeasurement approach

This approach presents only those changes arising from changes in financial assumptions outside profit or loss. Accordingly, profit or loss would include service cost, interest cost, actuarial gains and losses on the defined benefit obligation except those arising from changes in the discount rate, dividends received on plan assets, and interest earned on plan assets (using the current rate inherent in the fair value).

The three approaches can be illustrated as follows:

Approach 1 was reaffirmed as the preferred view by a majority of Board members. However, some Board members acknowledged that many constituents would not like the approach and 'that the world is not yet ready for it'.

No final decision was made but it was decided to include all three approaches in the DP. The approaches should then be discussed at a future meeting considering the responses received

Wednesday 21 March 2007

Financial Instruments – Due process document

The staff prefaced the discussion by reminding the Board that the forthcoming Financial Instruments Due Process Document (the Document) was in two parts:

• the main components of the fair value model for financial instruments, and
• how the IASB and FASB might move to this model.

The staff advanced three possible approaches to advancing work on the project after consideration of comments on the Document.

The approaches advanced by the staff were:

• Move directly to a comprehensive exposure draft of the fair value model for financial instruments;
• Develop one or more interim steps that advance the use of the fair value model for financial instruments. Such an approach might seek to limit existing exceptions to the general principles in IASs 32 and 39 and, where possible, achieve convergence with US GAAP;
• Take a 'wait and see' approach.

Board members did not think the 'wait and see' approach was a viable alternative; it achieved nothing other than the status quo. The Board would continue to be in 'reactive' mode, making small changes to the standards, and IFRIC would continue to be faced with requests for interpretations. In addition, this approach would be contrary to the demands from constituents to remove complexity from the standards. This was unacceptable to many Board members.

Board members seemed to agree that the fair value model for financial instruments was the goal, but they disagreed about how best to get there. Some wanted to adopt the interim steps approach, seeing it as realistic and pragmatic. Others thought that the next step should be to develop an exposure draft, because that would force the Board to define what it means by the 'fair value model for financial instruments' and the accounting it thinks necessary to put that model into effect. Only then would constituents be able to evaluate the Board's position 'rationally and unemotionally.'

Several Board members thought it important to be clear about what the Board means by 'reducing complexity' and what alternatives that might appear to meet the objective of reducing complexity would not be candidates, because they would not advance the intention of the Board to move towards a fair value model. (Thus, introducing more options to measure financial instruments at cost would not be considered by the Board, even though it might reduce complexity.) This idea was termed 'directional consistency.'

The Board moved on to discuss the parameters (or constraints) that might determine the next step(s). Board members had differing views about the relative priority of the staff's suggestions, but the following were generally seen as ways to move towards the fair value model for financial instruments.'

• More financial instruments should be measured at fair value.
• The complexity of the standards should be reduced
• Accounting alternatives should be reduced and the role of management intent eliminated.

The Board agreed that short-term convergence with US GAAP was desirable but should not be a constraint, since the two Boards were starting from different positions. Thus, it would be acceptable to 'leap frog' each other. Also, Board members stressed that 'convergence with US GAAP' implied long-term convergence, not that the IASB would move to FAS 133. Some Board members noted that surrounding this approach was the issue of presentation. Constituents might accept the move to the fair value model for financial instruments provided that not all value changes were reported in operating income. The staff concluded the discussion by saying that they would return at a later Board meeting with examples of approaches that met the Board's objectives.

Annual Improvements Process:

IAS 39 Financial Instruments: Recognition and Measurement

The Board agreed to remove the references to segment reporting in paragraph 73 of IAS 39. These were 'missed' in the consequential amendments to the adoption of IFRS 8 Segment Reporting.

The amendment would clarify that under IFRS 8 an entity that reports its segments to the chief operating decision maker on the basis of its risk management strategy would not be required to designate and document hedge relationships in order to achieve hedge accounting at the segment level. (That is, informal inter-segment hedging is permitted.)

IAS 16 Property, Plant and Equipment – Inconsistency in the definition of recoverable amount

The issue was whether a perceived inconsistency in the definition of 'recoverable amount' in IAS 16 should be removed. This item was removed from discussion by the staff, as it will be addressed as part of Business Combinations Phase II.

IAS 40 Investment Property – Fair value of investment property held under a lease

The Board approved a proposal that paragraph 50(d) of IAS 40 be amended, such that, "it will be necessary to add back any recognised lease liability, to arrive at the carrying amount of the investment property using the fair value model." (emphasis added)

The Board noted that the current wording in IAS 40 is misleading as it implies that the fair value of an investment property under a lease does not include its lease liability.

IAS 19 Employee Benefits – Contingent liabilities

The Board agreed to remove the reference to recognising contingent liabilities in paragraph 32B of IAS 19. The Board agreed that this paragraph conflicts with paragraph 27 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which states that an entity should not recognise a contingent liability.

IAS 19 Employee Benefits – Short term employee benefits

The Board approved a proposal that the definition of short-term employee benefits in paragraph 7 of IAS 19 be amended, such that the term 'fall due' is replaced by 'expected to be settled'. The purpose of the amendment is to remove the perceived conflict with the term 'expected to occur' in paragraph 8 of IAS 19. The Board noted that the expected timing of settlement of the benefit should drive the classification.

Boundaries of the annual improvement process

The Board agreed that any changes to a Standard should be brought to the Board as part of the Annual Improvements Process, whereas the Director of Technical Activities could use her discretion with respect to amendments to Implementation Guidance, etc. However, given that IFRIC is often asked to resolve conflicts between Standards and Implementation Guidance, the Director of Technical Activities would work closely with the Director of IFRIC Activities in exercising this discretion.

IFRS 1 First-time Adoption of International Financial Reporting Standards

Following the decisions made in the February meeting the Board discussed the draft of a restructured version of IFRS 1. The draft itself was omitted from the observer notes.

The Board agreed that:

• The restructured IFRS 1 will be pre-balloted as part of the Annual Improvements Exposure Draft.
• The effective date will be 1 January 2009 with no scope for early adoption
• The new version of IFRS 1 will be approved as a new Standard, i.e. the current version of IFRS 1 will be withdrawn
• Any transitional provisions that are not relevant for an entity that adopts IFRSs for the first time on or after 1 January 2009 will be deleted.
• The exposure draft of the restructured Standard would be in clean-text only, except that:
  • the paragraph number in the current Standard would be included [as struck-out text] so that constituents could identify the source of paragraphs in the restructured Standard; and
  • Mark-up format would be used for deletions or amendments to existing bits of IFRS 1.
• The Basis for Conclusions and the Implementation Guidance will be excluded from the Exposure Draft [because no changes are proposed to these].
• The Appendices will be reordered as follows:
  • Exceptions
  • Exemptions (Business combinations, permanent exemptions and short-term exemptions)

Technical plan

The Board discussed their Technical Plan. The following items were noted:

• Income Taxes: The ED is now scheduled to be published in 4Q2007

• Business Combinations (Phase II): The timetable for approval of the Standard was very tight, if the Boards are to complete balloting the Standard by 30 June 2007 (when several members of both the IASB and FASB retire). A Board member noted that, while he understood the Board turnover problem, the Ballot Draft must be 'viable' before he would sign his ballot.

• Conceptual Framework (Phase A): The staff noted that the timetable states that an ED would be published in 3Q2007; this objective might be inconsistent with the need to address issues arising from the Discussion Paper, in particular holding discussions with constituents to resolve the stewardship issue.
• Emission Trading Schemes: The staff noted that the FASB had added this item to its agenda as a 'short-term issue' and with a scope similar to that of IFRIC 3. The IASB needed to discuss this (and the related project on Government Grants) at the June 2007 IASB meeting.

• Revenue Recognition: Two teams of IASB and FASB members have been working on developing the opposing views (the 'customer consideration' view and the 'fair value' view) using a common set of examples. Tension points continue to exist around the derecognition of assets and the extinguishment of liabilities. In addition, there continues to be discomfort about when passage of title/ legal ownership is not the appropriate trigger for revenue recognition and some form of performance measure (e.g. percentage of completion accounting) would be appropriate. The work plan has the publication of a discussion paper in 4Q2007 and a discussion of the customer consideration chapter of that paper in June 2007. One Board member thought that timing was 'hopelessly silly.'

• Conceptual Framework (Phase D-reporting entity): Sweep issues may come to the Board early in 2Q2007; however the project team is confident that it has all the information necessary to complete the Discussion Paper later in 2Q2007.

• Post-retirement Benefits: A Board member challenged the reasonableness of the timing of the Discussion Paper. The Board member noted that the cash-balance plans part of the project was particularly troublesome and the Board might not complete its discussions until September 2007; this would still enable publication of the Discussion Paper in 4Q2007.

• Derecognition: Board members asked whether the Research Report would be published. The staff stated that they hoped it would be, but that the Memorandum of Understanding requires the Boards only to 'consider' it. As it is the first Research Report published by the Board, appropriate procedures are still being developed.

Business Combinations Phase 2 –

(The FASB staff joined the meeting by video link for this session.)

Non-controlling Interests (NCI)

Fair value measurement

The Board members reaffirmed the measurement principle of NCI, that is, there was no quorum for fair value measurement as the only allowed accounting treatment.

As the FASB is strongly in favour of measuring NCI at fair value in all circumstances the purpose of this meeting was to find a solution that is supported by the required majority of Board members and simultaneously minimises any difference to US GAAP.

The discussion focussed on the following alternatives:

Alternative 1: 'The option'

Allow an accounting policy choice such that NCI may be measured at fair value or at its proportionate interest in the identified assets and liabilities.

Alternative 2: 'The exception'

Require NCI to be measured at fair value unless this accounting treatment requires undue cost and efforts. After a thorough discussion the Board voted 9 to 5 in favour of alternative 2.

Adjusting NCI for subsequent acquisitions

Following the decision on fair value measurement of NCI the Board decided by a majority of 10 votes that any acquisitions or dispositions of NCI should be accounted for as transactions within equity, that is, they would never be reflected in profit or loss while control is retained.

A majority of 8 Board members affirmed that no adjustments to goodwill should be permitted for changes between the carrying amount of the NCI and the fair value of the NCI acquired. Regarding NCI carried forward on transition to the revised Standard

11 Board members agreed to this principle.

Contingent consideration

Some respondents to the Business Combinations Exposure Draft (BC ED) commented that it was not clear if or when a change in the fair value of performance-based contingent consideration would be 'measurement period' adjustments. In addition, the Board was informed that the FASB had changed their view and decided to push back to the acquisition date all changes to contingent consideration occurring during the measurement period. The FASB staff mentioned that this outcome had surprised them.

The Board unanimously disagreed with the FASB's view and reaffirmed its view that only better knowledge about facts and circumstances already existing at the acquisition date give rise to an adjustment as at the acquisition date and that all facts and circumstances arising subsequent to the acquisition date are not part of the business combination but part of subsequent accounting. The Board confirmed that this view relates to changes in identifiable assets or liabilities, goodwill and contingent consideration. In particular, meeting future performance-based or market-based targets and [US] Food and Drug Administration approvals for in-process research and development assets were considered to be subsequent events. Some Board members were concerned that to change this view would open the door for pushing back the results of subsequent events to the balance sheet date in general.

There seemed to be a consensus to change the term 'contingent consideration' to 'conditional consideration' in order to clarify that changes to the initially measured contingent consideration are normally caused by conditions met after the acquisition date.

Additionally, the Board decided to change the disclosure requirements as follows:

• Paragraph 76(b) of the BC ED is changed such that instead of the rollforward, the acquirer be required to disclose changes in the amounts recognized for the conditional [contingent] consideration, changes in the range of outcomes (undiscounted), and the reasons for the changes.
• The acquirer is required to an additional disclosure of the valuation techniques used to measure conditional [contingent] consideration.

Accounting for bargain purchases

In light of the Board's decision regarding the measurement of NCI, three alternatives for measuring NCI and goodwill in a bargain purchase were discussed. An illustrative example is included in Agenda Paper 2C available on the IASB website.

Alternative 1:

Measure NCI at fair value and calculate goodwill or a bargain purchase gain as the final residual. In this case an acquirer would compare (i) the consideration transferred plus the fair value of the NCI and (ii) the recognised amounts of the identifiable net assets acquired. If (i) is larger than (ii), the excess is recognised as goodwill. If (ii) is larger than (i), the excess is recognised as a bargain purchase gain attributable to the acquirer.

Alternative 2:

Measure NCI as its proportional interest in the identifiable net assets. No goodwill would be recognised. A gain attributable to the acquirer would be recognised at the acquisition date for the excess of the acquirer's interest in the recognised amounts of the identifiable net assets acquired over the consideration transferred.

Alternative 3:

Measure NCI at fair value and recognise goodwill attributable to NCI (calculated as the difference between the fair value of NCI and NCI's proportional interest in the identifiable net assets). A gain attributable to the acquirer would be recognised at the acquisition date for the excess of the acquirer's interest in the recognised amounts of the identifiable net assets acquired over the consideration transferred.

The Board agreed that NCI should always be measured at the amount recognised at the acquisition date, that is, to apply alternative 1 when NCI is measured at fair value and to apply alternative 2 when NCI is measured at its proportional interest in the identifiable net assets. Alternative 3 was rejected as it might result in recognising goodwill (that is, the portion of goodwill allocated to NCI) in a bargain purchase situation.

Loss of control of a business resulting from a non-reciprocal transfer to owners

The Board decided not to address this issue as part of the business combinations project. Accounting for non-reciprocal transfers (including also demergers, spin-offs and in-specie distributions) was considered to be a broader issue that would be outside the scope of the business combinations project.

It was agreed to clarify in the guidance on the accounting for the loss of control of a subsidiary that it excludes non-reciprocal transfers to owners.

Assembled workforce

Currently, the BC ED prohibits the recognition of an acquired assembled workforce separately from goodwill. In October the IASB decided not to continue with the guidance in the BC ED but to allow separate recognition. The FASB affirmed the provision in FASB Statement No. 141 stipulating that assembled workforces should not be recognised separately from goodwill. The Board discussed the following approaches to account for an assembled workforce:

Option 1

Preclude the separate recognition of an assembled workforce on the basis that either an assembled workforce is not separable under any circumstances or an assembled workforce would be separable so rarely that it is not worth preparers expending the effort to determine whether or not it should be recognised.

Option 2

Permit the separate recognition of an assembled workforce, but provide application guidance that clarifies that an at-will (non-contractual) assembled workforce is separable only in rare circumstances.

By a majority of 11 votes the Board decided to adopt option 1, that is, the guidance in the IASB's BC ED was reaffirmed.

Valuation allowance disclosure

The Board agreed to a valuation allowance disclosure included in an email sent to Board members. The content of the email was not available to observers.

Based on the statements made during the discussion it appeared that as at acquisition date the nominal/contracted amount of the receivables and the expected uncollectible amounts need to be disclosed.

Thursday 22 March 2007

Financial Statement Presentation

Presentation of changes in assets and liabilities

The Board held a discussion that focused on what information should be presented in the financial statements. The issue of how that information should be presented was left to a subsequent meeting.

Clarification of working principles

The Cohesiveness Working Principle

The Board agreed that the Cohesiveness Working Principle should be applied at the line item level. However, several Board members noted that this Principle should not result in 'reconciling individual accounts', but to keep cohesiveness across statements. By agreeing this Principle, the Board was not advocating masses of information on the face of the financial statements; some of the information would be in the footnotes.

Disaggregation working principle

By a majority, the Board agreed that information related to changes in assets and liabilities should be disaggregated based on whether the information is assigned the same valuation multiple for the same reason. (I.e. Different types of income and expense will have a different multiple assigned to them by analysts related to persistence, estimation error, etc. This Working Principle implies that items of income and expense would be disaggregated on this basis.) The staff agreed that the explanation of this Working Principle needed a bit of work.

Reconciliation of statements of financial position [balance sheets]

Presenting a reconciliation of statements of financial position

The Board agreed that an entity should present a reconciliation of statements of financial position for each period for which financial statements are presented. This reconciliation would be in the footnotes. Board members noted that there are already many reconciliations required for balance sheet items. Some Board members wanted to ensure that any additional reconciliations were justified.

Cash transactions

The Board did not agree a staff recommendation that would have disaggregated cash transactions during the period into various components. Board members thought that the staff's approach would be burdensome on preparers and that there were surrogates, such as 'number of day's sales in accounts receivable', that were easier to prepare and just as useful.

The staff will return to this issue later.

Direct cash transactions and the classification of cash

The Board did not accept a staff recommendation that would require direct cash transactions (cash sales) to be accounted for as two transactions (an account receivable [an asset] followed by an immediate settlement for cash [a financing item]). The Board thought that the staff's approach was unnecessary. If the level of cash sales was important, the cash flow statement should show this.

Disaggregation of remeasurements

The Board agreed that only recurring fair value changes (as those arise as a result of applying FAS 157 Fair Value Measurements should be discerned from other remeasurements. This means that changes in fair values would not be aggregated with changes in carrying amount based on fair value-like measures.

Other comprehensive income items

The Board agreed that there was no need to display the remeasurement of items of other comprehensive income separately from remeasurements of other items. In other words, items displaying the same characteristics would be displayed in the same way, even if they were components of other comprehensive income.

Exemptions to remeasurements

The Board agreed that, for the purposes of the reconciliation, there should be no exceptions to what is presented in the remeasurement component.

Disaggregation of non-cash non-remeasurements that are recognised in income or expense for the current period.

The Board agreed that the initial recognition of an estimate (for example, the initial recognition of a non-financial liability) should be presented separately from other components within non-remeasurements that are recognised in income and expense for the year. The Board agreed that systematic allocation of costs (e.g. depreciation) and other timing differences between the period in which income is recognised and the period in which the cash flow occurs (for example, accrued expenses, deferred income), could be aggregated and need not be presented separately.

The staff will bring to a subsequent meeting examples to illustrate this issue. Some Board members were concerned that the staff were attempting to identify a distinction without a difference.

Non-cash changes in assets and liabilities that are not recognised in income or expense for the current period The Board agreed that changes in assets and liabilities that affect neither income nor expense nor accompany cash should be presented separately.

Statement of Comprehensive Income

A disaggregated statement of comprehensive income

The Board agreed that the reconciliation of statements of financial position [balance sheets] should include information that indicates how the changes in assets and liabilities relate to line items presented in the statement of comprehensive income and the statement of cash flows.

Although the Board agreed the staff recommendation, it was evident that not all Board members understood what the issue was attempting to communicate. The staff suggested that the suggested format of the statement would help to clarify what the staff is attempting to articulate.

Statement of Cash Flows

The Direct Method and the cohesiveness principle

A minority of the Board (six members) supported a mandatory requirement to present the cash flow statement using the direct method, that is, based on the actual cash receipts and payments, disaggregated in a manner that parallels the line items that are presented in the statement of comprehensive income as far as possible.

Reconciliation

As a result of the previous decision, it was evident that a majority of the Board thought that they should require a reconciliation between items in the statement of comprehensive income and the statement of cash flows.

The FASB staff present at the meeting notified the Board that the FASB had discussed the statement of cash flows on 21 March 2007 and had indicated a leaning of being unanimously in favour of mandating the direct method.

Other comprehensive income presentation

Presentation of other comprehensive income items in the statement of comprehensive income

The Board discussed various alternative presentations for the statement of comprehensive income (see Observer Note 9B). The staff was seeking guidance on which presentations it should include in the forthcoming Discussion Paper. The discussion centred on a presentation, designated as 'E-prime' (E1) and other formats in the Observer Note. It was not immediately obvious whether E1 was that reproduced in the Observer Note. E1 was distinguished from other possible presentations in that it presented items of comprehensive income within the business, investing and financing categories on the basis of whether the underlying assets and liabilities were short-term or long-term in nature. Thus, pension expense would be included within Business-operating, long-term; realised gains on available for sale financial instruments in Business-investing, short-term; and interest on long-term debt within Financing Expenses, long-term. The other innovation in this format was that income tax expense was also split between short- and long-term, something that violates a previously-agreed position that income tax expense should not be allocated.

After a lengthy debate, it was agreed that the Discussion Paper would include alternative statement presentations that included a category of 'other comprehensive income' and did not include the category; and examples that provided for the recycling of items of other comprehensive income and not.

Classification of other comprehensive income items in the working format

Classification of foreign currency translation adjustments

The Board agreed that foreign currency translation adjustments should be included in the statement of comprehensive income based on the nature of the underlying assets and liabilities (for example, in investing if the subsidiary is a 'treasury' activity; in business if it is a trading activity, etc). There was little enthusiasm for requiring a more detailed allocation of foreign currency amounts.

Classification of other comprehensive income items other than foreign currency adjustments

The Board agreed that there should be no additional classification guidance for items of other comprehensive income other than foreign currency adjustments.

Plan for achieving the Board's long-term goal

The Board had a brief discussion of this topic but did not make any decisions, thinking such decisions to be premature.

Initial Discussion Document [Discussion Paper]

The Board had a brief discussion about whether the discussion paper should include the Board's Preliminary Views. Although no definitive decision was taken, at least one Board member was fundamentally opposed to including Preliminary Views and would prefer the document to be silent in this respect.

Cash Equivalents

Whether the notion of 'cash equivalents' should be retained in the financial statements After a short debate, the Board voted (by majority) to eliminate the concept of cash equivalents. The statement of cash flows would present flows related to cash alone; items currently classified as cash equivalents would be classified in the same manner as other short-term investments.

Conceptual Framework – Phase C: Measurement

Roundtables summary

The staff presented a paper summarising comments shared by participants at the conceptual framework project – measurement roundtables held in January and February, 2007, with members of the Boards and staff of the IASB and FASB.

One Board member pointed out that the paper also includes 'absolutely absurd statements' and recommended not to publish the document. Senior staff responded that a disclaimer would be included particularly stipulating that the statements were not those of Board members and that they do not reflect the views of the Board.

The Board decided to publish the document in order to fulfil the promise made to participants. However, an appendix might be included to segregate those statements that are considered to be demonstrably wrong.

Plan for using measurement roundtables comments

The Board made the following amendments to the overall project plan for this Phase:

• Not to hold roundtable discussions at the beginning of milestones II (Evaluation of measurement bases using qualitative characteristics) and III (Conclusions and applications) mainly because the roundtables held in January and February 2007 touched every aspect of the measurement phase.
• To issue comprehensive milestone summaries at the end of milestones I and II instead of the originally planned milestone draft (milestone I) and the preliminary views document (milestone II). The milestone summaries will not ask for comments formally but constituents will be encouraged to express their views.
• A preliminary views document will be issued at the end of milestone III. An Exposure Draft would be issued after the Board had analysed the comments on the preliminary views document.

The Board agreed to a number of staff proposals regarding the next steps in the project. These include the preparation of various papers addressing issues raised in the roundtable discussions such as:

• Providing a simpler and clearer grouping of the measurement basis candidates
• Analysing 'high-level issues' such as capital maintenance and monetary unit before evaluating the measurement basis candidates
• Discussing decision usefulness in general and evaluating the measurement basis candidates by using the relevance criterion before considering the other qualitative characteristics

IFRIC update

The IFRIC Co-ordinator reported the results of the March 2007 IFRIC meeting. Deloitte's report on that meeting can be found Here.

Earnings per Share

The FASB staff joined the meeting by video link for this session.

The purpose of this session was to discuss various amendments to IAS 33 Earnings per Share in order to finalise the short-term convergence project. The Board unanimously agreed to all proposed amendments without detailed discussion. The main decisions are summarised in the paragraphs below. Further details are outlined in Agenda Paper 11 and 11A available in the Observer Notes section of the IASB's website.

Fair value method

The Board decided to apply the fair value method to the following instruments and therefore to scope-out these instruments from the computation of diluted earnings per share (EPS):

• all instruments subject to the treasury stock method that can be settled in cash or shares, are classified as a liability on an entity's balance sheet, and are marked-to-market each reporting period through profit or loss
• all instruments subject to the if-converted method that can be settled in cash or shares, are classified as a liability on an entity's balance sheet, and are marked-to-market each reporting period through profit or loss

In addition, the modified treasury stock method would be applied to instruments that are subject to the treasury stock method, can be settled in cash or shares and are not marked to fair value in each reporting period. The modification is to include the end-of-period carrying value of the liability as an assumed proceed and to use the end-of-period market price in the computation of the treasury stock method.

Scoping issues

Among others the following decisions were made:

• To amend paragraph A14 of IAS 33 to clarify that the two-class method is the only acceptable method for computing basic EPS for instruments that participate in earnings with the common shareholders irrespective of whether these instruments are convertible into common shares or not.
• To incorporate into IAS 33 the guidance included in the proposed FSP FAS 128-a regarding the computation of diluted EPS using the two-class method.
• Explicitly to require the use of the two-class method in computing basic EPS for mandatorily convertible instruments that have a stated participation right and to exclude those instruments from the computation of basic EPS that do not have a stated participation right.

Leases

The IASB held its first substantive discussion on the joint project on leasing. The FASB staff joined the meeting by video link for this session.

Identification of assets and liabilities arising in a simple lease

The staff presented a paper identifying the rights and obligations arising on the lessor's and lessee's side in a simple non-cancellable lease arrangement (the example). The current and proposed working definitions of assets and liabilities in the Conceptual Framework project were applied to the identified rights and obligations.

The Board unanimously agreed that the following rights and obligations in the example meet both the current and proposed definitions of assets and liabilities:

Lessee:

• Right to use the machinery during the lease term
• Obligation to make specified payments over the lease term

Lessor:

• Right to receive payments during the lease term
• Right to the economic benefits deliverable from the use of the machinery in the period after the lease term (residual rights)

The Board unanimously agreed that the following rights and obligations in the example do not meet the both the current and proposed definitions of assets and liabilities:

Lessee:

• Obligation to return the machinery at the end of the lease term

Lessor:

• Right to return of machinery at the end of the lease
• Obligation to permit the use of the machinery during the lease term

Even though the Board unanimously agreed to the outcome of the staff analysis some Board members pointed out that the example used ignored many of the complexities of real life leasing transactions. In particular the following comments were made:

• There should be a distinction between the right to use the machinery and the right to use the economic benefits (of the machinery).
• The economic benefits derived by the lessor may be different to those derived by the lessee and this might have implications when calculating fair values.
• Attention should be paid to the question when these rights and liabilities arise. Particularly the Board questioned the statement in the paper that 'under a non-cancellable lease the right to use the machinery and the obligation to pay for its use is unconditional once the machinery has been delivered to the lessee'.
• The obligation to return itself is not a liability but if the machinery has to be returned in a certain condition liabilities may arise.

The staff observed that all these issues will be taken into consideration at a later stage.

Analyses of accounting models for a simple lease

The Board discussed four accounting models:

The right of use model

This model is based upon the premise that once the physical item has been delivered, the lessee has an unconditional right to use that machinery during the lease term.

The lessee recognises as an asset its right to use the machinery during the lease term and a liability for the rentals payable under the lease. The lessee only recognises as an asset its right to use the machinery for the lease term. It does not recognise any rights in respect of the physical item beyond the lease term. Consequently, the lessee does not recognise a liability under the simple lease example in respect of its obligation to return the physical item as this obligation does not give rise to an outflow of economic benefits from the lessee.

The lessor recognises two assets: its right to receive rental payments (a contractual right under the lease); and its interest in the machinery (the residual property rights).

The whole asset model

The whole asset model is based on the premise that during the lease term, the leased item is under the control of the lessee. Accordingly, this model recognises the leased item in full as an asset of the lessee, i.e. both the right to the economic benefits during the lease term and the possession of the asset at the end of the lease term. In effect, the full economic value of the machinery is recognised. To correspond to these assets, the lessee recognises two liabilities; a liability for the payments to be made over the lease term and a liability representing the lessee's obligation to return the asset at the end of the lease term. Where the lease is for substantially all of the leased item's expected useful life, the obligation to return the item at the end of the term is comparatively insignificant. For a short-term lease the obligation to return will be more substantial.

The lessor recognises as an asset its right to receive payments under the lease and an asset representing its right to have the machinery returned at the end of the lease term. The lessor does not recognise its contractual obligation to permit the use of the machinery during the lease term. Instead, the lessor derecognises the machinery.

The executory contract model

Under this model, all leases are treated as executory contracts. It is based upon the premise that the lessee's right to use the machinery is conditional upon making payments under the lease ('day-to-day lease'). Similarly, the lessee's obligation to make payments is assumed to be conditional upon the lessor granting the lessee quiet enjoyment of the machinery throughout the lease term. The model is therefore very similar to the operating lease model used in current accounting standards.

The model adopted in current IFRSs

In contrast to the other three models the current accounting treatment of leases is based on a hybrid model classifying leases as either finance leases or operating leases.

The Board saw no merits in further developing the whole asset model and the executory contract model and decided to focus on the right of use model.

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