Present (IASB): Sir David Tweedie; Tony Cope; Mary Barth; Philippe Danjou; Jan Engstrom; Gilbert Gelard; Tom Jones; Warren McGregor; Tatsumi Yamada; Liz Hickey (staff).
Present (Europe): Stig Enevoldsen (EFRAG); Francoise Flores (EU Roundtable); Liesel Knorr (DRSC, Germany); Jean-Francois Lepetit (CNC, France); Ian Mackintosh (ASB, UK); Jerome Chevy (CNC staff); Paul Ebling (EFRAG staff).

This meeting was the formal semiannual meeting between the IASB and the principal standard-setting bodies in the European Union. The meeting is an opportunity for European standard-setters to raise issues of concern with the IASB, to share progress on EU-level initiatives, and to exchange information. EFRAG had submitted a Memorandum of Issues (PDF 57k) that formed the basis for discussion.

Revenue Recognition

Ms Knorr updated the Board on the work of the Pro-active Accounting Activities in Europe (PAAinE) with respect to revenue recognition. A discussion paper is in preparation, which is hoped will be a stimulus for discussion and debate in Europe.

Henry Rees (IASB staff) responded, noting that both the IASB and the FASB are split on the fundamental issue of what revenue is supposed to represent (delivery of good or service to a customer; or a measure of the activities of the entity).

All sides acknowledged that there was a great deal of contact at the staff level, which had been very helpful. Ms Barth acknowledged that the FASB/ IASB project has tended to mix two bits that really should be considered separately: (i) when do you recognise a credit in profit and loss; and (ii) what label do you use to describe it and where in profit and loss is it reported. Mr Rees noted that there was a tension between wanting to recognise value creation over time (without labelling that 'revenue') and the triggering event of receiving cash inflows generated by delivering something to the customer.

Equity and Liabilities

Ms Knorr noted that some in Europe think that the distinction between liabilities and equity in IAS 32 is contrary to the IASB Framework and that there is a growing need to resolve the issue. This issue is becoming increasingly political, especially in Germany. There is a high level of interest in the IASB's IAS 37 amendments project, the FASB's project on liabilities and equity and the joint work on the definition of elements being undertaken as part of the Conceptual Framework project.

Participants were assured that the staff on all of the projects concerned were in contact with each other, and that progress on the projects was informing all of the projects. With respect to the situation in Germany, there was sympathy at the IASB but also a high level of concern about 'unintended consequences' of 'quick fix' solutions.

Constructive Obligations

Ms Flores highlighted the concern that there were conflicts between the forthcoming Insurance discussion paper and the proposed changes to IAS 37 with respect to constructive obligations.

The IASB staff noted that, as a matter of policy, discussion papers are based on the standards in force at the time the discussion paper is issued. The IASB has not yet redeliberated the proposals on constructive obligations in the IAS 37 exposure draft, so it would have been premature to base the Insurance discussion paper on those proposals. As with the previous item, both projects would inform each other.

Business Combinations

There was a brief review of where the IASB and FASB are with respect to the measurement of goodwill and non-controlling interests. The FASB is firmly (6-1) in favour of measuring non-controlling interests at fair value. The IASB is split. Some favour fair value only; others favour introducing an 'undue cost or effort' filter. The problem is that neither view has a sufficient level of support to approve an IFRS. In the view of many Board members, the undue cost or effort filter defeats comparability, since it is applied selectively (not as a policy choice).

It is evident that many in Europe do not favour measuring non-controlling interests at fair value. When pressed, the EFRAG Chairman urged the IASB to do what they thought was right. However, he reminded the IASB that the goal is convergence, 'but not at any cost.'

On the related topic of common control transactions, the IASB staff noted that an agenda proposal has not yet been prepared, but will be (when was not stated). Bringing the topic on to the IASB's agenda would depend both on the availability of resources and the likelihood of being able to achieve a standard in a reasonable period of time.

Conceptual Framework

It was evident that the Conceptual Framework project generally is causing much anxiety in Europe. There are PAAinE initiatives on stewardship and elements underway, and the ongoing concern about element definition and measurement highlight that changes to the Framework are contentious. One suggestion from the European side of the table was to delay issuing the Exposure Draft on Chapters 1 and 2 (Objectives and Qualitative Characteristics) scheduled for later in 2007.

The IASB Chairman did not seem disposed to this idea, noting that the IASB and FASB wanted to issue Chapters as they were finalised. He noted that if, as a result of subsequent work on another Chapter, one of the finalised chapters needed amendment, that would be done as a consequential amendment. The staff on the project had identified (and continue to identify) 'cross-cutting issues' of which the Board is made aware. In addition, if a standards-level project developed a principle that conflicted with a Framework concept, both the principle and the concept would be re-evaluated. If the Framework concept was out of date, it would be the one that was changed. Such an approach would require careful management.

The European participants encouraged the Board to publicise its on-going outreach activities in this area.

Fair Value Measurement Guidance

Much of the discussion on the fair value measurement guidance project served to demonstrate that there is a great deal of confusion among IASB constituents about the inter-play between the 'FAS 157 guidance' project and the conceptual framework chapter on measurement. That they are concurrent is not helping matters. There is a great deal of disquiet in Europe over this project and a growing level of distrust over the IASB's motives with respect to the use of fair value.

IASB members were at pains (several times) to clarify that the 'FAS 157 guidance' project was a 'how to do' fair value project and did not address 'when'. The 'when' was already addressed in IFRSs. However, an important question raised in the Invitation to Comment accompanying the Discussion Paper on Fair Value Measurement was whether, when a current IFRS uses fair value as a measurement attribute, the exit value notion proposed in FAS 157 was appropriate. If not, the IASB wanted to hear from constituents and welcomed their proposals if an exit value was thought inappropriate.

Post-Retirement Benefits

Mr Mackintosh noted that the ASB staff are preparing a discussion paper on the topic. European constituents are concerned that the IASB and FASB are pursuing projects separately. The IASB Chairman noted that this was the case and that some 'leap-frogging' is likely, but that both Boards had a converged standard as the ultimate goal.

Income Taxes

EFRAG wanted to understand why there had been such a long delay in issuing an exposure draft and what issues remain to be resolved. During a short discussion, the IASB staff noted that several sweep issues were to be brought to the IASB at the April 2007 meeting, after which it was hoped that an exposure draft of proposed changes to IAS 12 and FAS 109 could be published.

User Needs and Interaction with Standard-Setting

The IASB noted that it has well-established links with four user/analysts groups and is developing links with a fifth. Those groups include the Analysts Contact Group, Corporate Reporting Users Forum (CRUF), the Corporate Reporting and Accounting Group (CRAG), the CFA Institute, and the Association of Certified International Investment Analysts. For its part, EFRAG has established its own User Panel, which has quarterly meetings. Both EFRAG and the IASB have noticed an increased interest in their activities from users.

With respect to users' views on the financial statement presentation project, Mr Cope noted that users' views are mixed. There is strong support for the notion of 'cohesiveness' between the primary financial statements; for separating remeasurements from other earnings; and for separating financing activities from business activities. There is some angst over the 'no net income' notion – although, Mr Cope observed, the measure of 'Headline Earnings' used in some countries is not net income, either. There is mixed support for mandating the direct method in the cash flow statement.

The IASB Chairman closed the meeting after thanking the European participants for their contribution and continued endeavours towards achieving global accounting convergence.

Tuesday 17 April 2007

Discontinued Operations – Agenda decision

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

The Board discussed whether to separate the definition of a discontinued operation from the Financial Statement Presentation project in order to issue guidance on this topic on an expedited basis.

The FASB staff noted that this issue needs urgent attention in the United States and that the FASB will most likely address this in a separate project.

The Board members were in two camps. Some Board members pointed out that this is mainly an US issue and that the IASB should not do anything at this stage but to continue to issue the guidance as part of the Financial Statement Presentation project. Other Board members raised the concern that the FASB might come to a conclusion differing from the tentatively agreed definition of discontinued operations (the operating segment criterion) and that this might result in changes to the Financial Statement Presentation project.

Finally, by a majority of 9-5, the Board voted in favour of a separate joint project with the FASB.

Short-term Convergence – Income Taxes

The IASB redeliberated two issues discussed by the FASB in its recent meeting.

Should the existing exception to the temporary difference approach in IAS 12 Income Taxes prohibiting the recognition of deferred tax liabilities on the initial recognition of goodwill be removed?

In December 2005 the IASB tentatively decided to remove this exception and to require deferred tax liabilities as well as deferred tax assets to be recognised for temporary differences arising on the initial recognition of goodwill. However, the Board noted that it did not wish to diverge with the FASB on this issue.

Since the FASB had decided to retain the exception the Board revised its tentative decision and unanimously decided to also retain the exception.

Treatment of acquired assets and assumed liabilities that have a tax base different from their initial carrying amount, both in a business combination and outside a business combination

In December 2005 the IASB tentatively decided that, in such cases, an asset should be recognised at 'fair value assuming full deductibility for tax purposes'. The corresponding deferred tax asset or liability should be recognised as the difference between the fair value of the asset and its tax base multiplied by the tax rate. Any difference between the consideration paid and the sum of the so determined fair value of the asset and the recognised deferred tax amount is recognised as a purchase discount or premium on the deferred tax. In addition, the Board decided to extend this principle to all assets and liabilities that are remeasured at fair value.

One Board member noted that the decision in December 2005 was based on the question how to measure an asset at fair value when the tax basis of 'somebody else' has to be considered. The Board unanimously decided that the concept of hypothetical tax deductibility should be limited to these cases. Accordingly, in all other cases the fair value should represent the amount that market participants would pay in the respective jurisdiction.

Post-employment Benefits

Cash Balance and similar plans: Treatment of benefits with fixed and inflationary increases

The Board had a lengthy and wide-ranging discussion about the classification of benefit promises into the three categories: defined contribution, defined benefit and asset-based promises.

As a result the Board reaffirmed that a defined contribution promise is one for which the entity has no further obligation in respect of current and prior periods once the defined contributions have been paid into a separate fund. Alternatively, if the entity is still subject to risks regarding past services the promise is a defined benefit promise.

There seemed to be a consensus that any guarantee promise with respect to returns included in the defined benefit or defined contribution promise should be carved out and accounted for under IAS 39.

The question whether the kind of guarantee can influence the categorisation into defined benefit or defined contribution promise was raised but postponed for discussion at a future meeting.

Settlements and curtailments

Presentation of gains or losses

The Board discussed the presentation of gains and losses on settlements and curtailments under the three approaches presented in the March 2007 meeting. These are:

• Approach 1: All gains and losses recognised in profit or loss
• Approach 2: Financing costs recognised outside profit or loss
• Approach 3: Changes arising from changes in financial assumptions recognised outside profit or loss

The Board reaffirmed that approach 1 is the preferred view. According to the nature of this approach also gains and losses on settlements and curtailments would be shown in profit or loss.

By a majority of 10 votes the following decisions were made with regard to approaches 2 and 3:

• Gains and losses on curtailments represent service costs and are therefore to be shown in profit or loss under both approaches.
• Gains and losses on settlements (after having remeasured the obligation in accordance with paragraph 110 of IAS 19) should be shown outside profit or loss as they represent finance costs (approach 2) and changes in financial assumptions (approach 3) respectively.

Curtailments and negative past service costs

The Board discussed an issue referred by the IFRIC, namely, whether plan amendments that reduce benefits are curtailments or negative past service costs.

The staff recommended amending IAS 19 Employee Benefits such that the notion of negative past service costs is eliminated. Those amendments would treat plan amendments that improve benefits as giving rise to service costs (past or current). All plan amendments that reduce benefits would be curtailments. The proposed amendments were omitted from the observer notes.

Some Board members disagreed with the staff proposal and pointed out that the amendments of IAS 19 should focus on the distinction of future and past service cost – that is, that curtailments are reductions in future service cost and that the concept of past service cost relates to positive and negative amendments of past service cost. One Board member mentioned that in practice there are amendments to plans that result in negative past service costs but are not curtailments.

This issue was pushed back to the staff.

However, the Board unanimously agreed to address this issue as part of the Annual Improvement Process 2006-2007.

Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation

The staff informed the Board about its intended next steps in this project.

The staff proposed to separate the issues raised in the comment letters on the Exposure Draft (ED) Financial Instruments Puttable at Fair Value and Obligations arising on Liquidation into two work streams:

1. Finalisation of the ED by addressing those issues raised in the comment letters that would not require a re-exposure of the ED

This will relate to issues such as:

• Clarification of what is meant by reference to fair value in the equity classification criteria
• Clarification of 'the most subordinated class' requirement
• Whether the issue price of financial instruments puttable at fair value must be at fair value, and whether transitional guidance needs to be included as to what that means
• The disclosure of the fair values of financial instruments puttable at fair value
• The effective date of amendments

Staff intends to bring a paper to the May 2007 meeting requesting decisions on these issues.

2. Research on those issues raised in the comment letters that might require a re-exposure of the ED

These issues relate to the scope of the amendments. Some respondents noted that criteria for equity classification within the ED are too restrictive and do not cover a number of instruments (such as partnership interests, membership interests in co-operatives, and development banks).

It is intended to bring preliminary considerations on these issues to the Board in June 2007.

Some Board pointed out that the narrow scope of the project had been well-considered and that under no circumstances it should be widened. Other Board members expressed the view that no further research should be performed on issues outside the scope but that this should be part of the equity and liabilities project.

With a majority of 9 votes the Board decided to go ahead with the current scope and to bring back in May 2007 a revised ED addressing the issues outlined under (1) above. In addition, the Board directed the staff to further investigate the issues outlined under (2) above for discussion at a future meeting.

The issues raised in the comment letters were not discussed at this meeting.

Wednesday 18 April 2007

Conceptual Framework – Phase A: Qualitative Characteristics

Redeliberations: Qualitative characteristics of decision-useful financial reporting information

Following the analysis of comments received related to the Discussion Paper (DP) Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, the staff presented four issues requiring decisions by the Board.

Faithful representation

The following issues were raised by respondents:

• Some objected to the Board's decision to replace reliability with faithful representation
• It was noted that substance over form should be included as a component of faithful representation
• Some respondents suggested that verifiability should not be a component of faithful representation

The Board unanimously made the following decisions:

• Retain faithful representation as a primary qualitative characteristic

  The Board noted that the characteristics of reliability outlined in the current Framework are fully covered by faithful representation and that this should be clarified.

  Additionally, some Board members assumed that some constituents might see the term faithful representation as a back door to full fair value measurement and therefore object to it. It was decided to make explicit that this is not the intention of the Board.

• Clarify the description of faithful representation to make clear that faithful representation requires depiction of the economic substance of the underlying phenomenon regardless of its form and that neutrality and completeness are necessary but not sufficient to achieve faithful representation.

  Board members were of the opinion that the paragraphs BC2.17 and BC2.18 in the Basis for Conclusion already appropriately addressed this issue and that reference should be made to this guidance.

• Separate verifiability from faithful representation and describe it as a primary enhancing qualitative characteristic.

Understandability

Some respondents noted that there is incongruence between the primary user group identified in the DP and the discussion of understandability as a qualitative characteristic.

The Board acknowledged that they should be more explicit in linking this qualitative characteristic to the objective outlined in chapter 1 of the DP, particularly, the primary user group identified in the objective. In addition, the material in the DP should be expanded to address the role of advisors in understanding financial reporting.

Constraints on financial reporting

Some constituents thought it illogical to consider timeliness to be a component of relevance while materiality is considered a pervasive constraint.

The staff recommended that timeliness be separated from relevance and identified instead as a pervasive constraint since it is much more closely related to materiality than it is to the components of relevance with which it has been associated in the DP.

The Board had a lengthy discussion and mixed views were expressed whether timeliness should be a constraint or a separate 'enhancing qualitative characteristic'.

Tentatively a majority of 10 Board members was in favour of having a separate enhancing qualitative characteristic. However, the issue was pushed back to the staff for further investigation.

Prudence/Conservatism

Many constituents argued that prudence, or conservatism, should be included as a qualitative characteristic or as component of the qualitative characteristic of faithful representation.

The Board affirmed its decision that conservatism is incompatible with neutrality and therefore should not be included in the qualitative characteristics.

For clarification one Board member pointed out that the exclusion of prudence as a qualitative characteristic does not mean that uncertainty is not considered. Rather uncertainty should be addressed on a balanced basis in the measurement process.

Redeliberations on issues related to the conceptual framework project in general: Applicability of the framework to not-for-profit and public sector entities

Some respondents criticised the Boards' plan to address not-for-profit and public sector entities toward the end of the conceptual framework project as there would be the risk that adequate consideration of not-for-profit and public sector issues would not be provided; or that amendments to the Framework established for profit-seeking entities necessary to fully reflect the needs of the not-for-profit and public sectors might be more difficult to accommodate.

The Board affirmed its decision to defer consideration of not-for-profit and public sector entity issues and continue to focus currently available resources on the first four phases of the project. No decisions were made regarding the starting point of deliberations for not-for-profit and public sector entities.

One Board member raised the concern that particularly in the governmental area there may be numerous issues that have never been contemplated before by the Board, for example, the accounting for potential stand-ready obligations of NATO member countries to defend certain other countries. Therefore, the Board should not promise to cover all issues related to public sector entities within this project.

Financial Instruments – Comprehensive Project

At the March 2007 meeting the Board considered different approaches to moving towards the 'fair value model' which is the Board's long term objective in respect of the accounting for financial instruments. One approach discussed was the 'interim steps approach'.

At this meeting the Board discussed a model that could represent a possible interim step. The starting point of this model is the fair measurement principle rather than certain components of the existing standards (hedge accounting, derivatives, etc.). The reason for choosing this approach was that the existing mixed cost-fair value measurement requirements were considered to be the main source of complexity.

The key features of the model are:

• Set fair value measurement as the default for financial instruments.
• As an exception, financial instruments with certain cash flow characteristics that are not traded in an active market can be designated on initial recognition to be measured at amortised cost.

The consequences of this model were discussed in detail for the component 'hedge accounting'. Further details and illustrative examples are outlined in Agenda Paper 10 and 10A available in the Observer Notes Section of the IASB Website.

No decisions were made in this session. However, there appears to be a consensus regarding the following issues:

• An 'interim steps approach' is in general a valid alternative to the one-step introduction of the fair value model and should be considered further.
• Any interim step should result in more financial instruments being measured at fair value as anything else is considered to be a step back.
• When considering 'complexity' the different forms of complexity should be taken into account. For example the reduction of complexity in applying (that is, understanding) the Standards might increase complexity in implementing the Standards in practice as new valuation models might need to be implemented.
• If an interim step provides exceptions from fair value measurement for certain financial instruments a subsequent move towards fair value measurement should be allowed for these instruments.

Thursday 19 Aprill 2007

Annual Improvements 2006-2007 – Advertising and promotional expenditure

IAS 38 Intangible Assets - Advertising and promotional expenditures

The Board considered a proposal referred to it from the IFRIC that IAS 38 should be amended to clarify at what point training and advertising and promotion expenditure should be recognised as an expense. The issue arises from an apparent conflict in IAS 38 paragraphs 68-70. (For a detailed explanation of this issue, please see IAS Plus Notes from the March 2007 IFRIC Meeting.)

It was evident that the drafting proposed by the IASB staff did not adequately clarify the issue. IASB members who participated in the IFRIC's discussions explained what the IFRIC was trying to achieve, and the IFRIC's intention had a large degree of support around the Board table.

The Board referred the issue back to the staff, asking them to clarify the principles that the IFRIC had identified and to make drafting changes that reflected those principles.

Short-term Convergence – Joint Ventures [Education session]

The staff used this session to introduce the approach they had adopted in drafting the proposed amendments to IAS 31, and to discuss examples intended to illustrate the application of the Board's decisions regarding the definition of a joint venture.

In addition to proposing the principal change of eliminating the proportionate consolidation method for joint venture entities, the Board will take the opportunity to rearrange IAS 31 to make it more logical and to clarify the language. As it did with the exposure draft of proposed changes to IAS 8 in the 2002 Improvements Project, the ED of IAS 31 will be presented as 'clean text' with a table of concordance, rather than use extensive 'mark-up' text, which might obscure the changes in principle being made.

The Board affirmed their proposed approach to accounting for contractual arrangements that 'establish shared decision-making over the activities of a joint arrangement.' Board members noted that there was an inconsistency between the flow chart (paragraph 9 of Observer Note 9 on the IASB Website) and the staff proposals. Both should refer to rights to individual assets and obligations for individual liabilities, rather than the phrase used in the flow chart. The Board agreed the approach outlined by the staff.

The Board discussed the examples (see Observer Note 9). Example 1 was agreed without discussion. The staff proposed to withdraw Example 3 but to include certain variations to Example 2 (joint interests in an asset). Examples 4, 5 and 6 were discussed briefly and minor changes proposed. Examples 7 and 8 (relating to extractive activities) attracted more attention. Constituents as well as Board members had proposed changes, so these examples will be comprehensively re-written. Board members wanted to the examples to demonstrate that the imposition of a company structure can have accounting effects; however, the presence of a company is not determinative. That is, not all jointly-owned companies are 'joint ventures' and joint asset and joint operation arrangements can be carried on through companies.

Liabilities – Amendments to IAS 37 [Education session]

In this education session the Board discussed two documents prepared by representatives of the General Counsel 100 Group (GC 100) addressing issues regarding recognition and measurement of liabilities for litigations.

Three representatives of the GC 100 commented on several specific Board queries and gave an overview on how commercial legal teams approach the uncertainties often associated with legal proceedings. The issues were illustrated by three real cases.

The key statements made by GC 100 were:

• The question of whether or not a liability exists in respect of litigation is frequently very complex. In many cases there is not a distinction that can easily or logically be drawn between a general business risk on the one hand and risk in respect of a liability on the other. In addition there is uncertainty about the development of the relevant law over the period of the litigation.
• Particularly at the early stage of a litigation, it is usually not practicable for a legal team to examine whether a present obligation exists. Very often a complex multi-factor analysis with dozens of co-dependent elements has to be performed ('There is no right or wrong in the early stages').
• Because of the complexity inherent in most cases, even when a liability exists the measurement is simply not possible. Therefore, in most cases legal teams are not in the position to give a view as to what outcomes are possible or even to estimate probability-weighted cash flows.

The Board was not happy with these statements.

Some Board members noted that accounting based on these statements would result in liabilities for lawsuits being recognised only in the late stages of a litigation and therefore would not result in improved financial statements.

With regard to the complexity some Board members noted that only information available at the measurement date needs to be taken into consideration, particularly, no estimation of the future development of the underlying law is required. Therefore, a measurement of the liability should be possible in most cases. One Board member pointed out that his practice experience showed that it was always possible to measure the liability ('Bring together the controller, the chief accountant and the lawyer and at the end of the day you always have a number').

One Board member asked what consequences the statements of GC 100 would have for the measurements of insurance contracts as the outcome of insurance contracts often also requires the evaluation of litigations. The representatives of GC 100 were of the opinion that there is a fundamental distinction between litigation and insurance contracts as there are accepted proceedings using statistical data in measuring insurance contracts that do not exist for litigation.

No decisions were made but the Board seemed to reaffirm that except in rare cases, an entity will be able to assess whether a liability exists and to determine a reliable measure of the liability.

Business Combinations II

The FASB staff joined the meeting by video conference.

Comparison of fair value measurements in IFRS and US GAAP

The staff reported on the results of an investigation undertaken at the request of the IASB and FASB about whether the different definitions of fair value (that in FAS 157 and the existing definition in IFRS) might result in different valuations of assets acquired and liabilities assumed in a business combination depending on whether it is accounted for in accordance with IFRSs or US GAAP.

The staff and a working group had identified areas in which GAAP differences might occur, depending on the facts and circumstances of the asset or liability. Some respondents commented that the following might result in differences in fair value:

• when an asset is acquired in a business combination for defensive purposes and market participants would similarly lock up the asset and that use would maximise the value of the group of assets in which asset is used (for example, brands or in-process research and development projects);
• potential differences in the settlement definition of fair value for liabilities under IFRSs and the transfer definition under US GAAP;
• references to different markets under IFRSs and US GAAP, particularly with regard to Level 3-type financial instruments;
• differences in the application of highest and best use concepts; and
• differences in guidance regarding non-performance risk and credit standing.

With only brief discussion, the Board:

• Affirmed that the measurement attribute in a business combination is fair value, as defined in IFRSs: Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction;
• Decided that the GAAP differences identified by participants, as above, should be addressed as part of the IASB's Fair Value Measurement Guidance project.
• Noted that some of the matters identified above were not GAAP differences, but were situations in which the IASB and FASB have consistent concepts, but have used different words to articulate those concepts. Board members asked the staff to investigate drafting IASB-specific application guidance that would explain this (the FASB would rely on FAS 157, for which there is currently no IASB equivalent).

Classification and designation of assets, liabilities and equity instruments acquired or assumed in a business combination

The Board agreed that the Standard should state that an acquirer should classify or designate the assets, liabilities, and equity instruments acquired or assumed at the acquisition date based on the conditions that exist at the acquisition date (for example, the contract terms, the economic conditions and the acquirer's intent and accounting policies).

However, the IASB will clarify that the classification of the following items shall be determined at the inception of the contract and shall not be reassessed, unless there has been a substantive modification in the original terms and conditions as a result of the combination):

• Leases
• Insurance contracts
• Embedded derivatives

The staff noted that the FASB had tentatively decided to require reassessment of embedded derivatives, in accordance with existing guidance in FAS 133. This will be addressed as a sweep issue.

Disclosure

The Board confirmed the disclosure package in Observer Note 2C on IASB Website.

Effective Date

The effective date for the IASB standard was agreed as business combinations occurring in annual periods beginning on or after 1 January 2009. (The FASB statement will be effective for annual periods beginning on or after 15 December 2008. The Board discussed this, but concluded that the allowance in IAS 1 for a 52/53 week financial year should not result in a difference in practice.)

The Board agreed to permit early adoption of the new standard. It was noted that the FASB had voted to prohibit early adoption. IFRS preparers with a US GAAP reconciliation requirement could avoid a reconciling item by not adopting the standard early.

Replacement share-based payment awards

The Board agreed to modify the guidance in the BC ED to be consistent with the principles underpinning IFRS 2 and to require that excess fair value in the acquirer's replacement award over the acquiree's award be recognised over the post-combination requisite service period of the acquirer's replacement award along with any portion of the award attributable to future services. This will align the accounting for the excess fair value in the acquirer's replacement award over the acquiree's award with its treatment under US GAAP.

In order to clarify how an acquirer should allocate the remaining fair value of the acquirer award between consideration transferred in the business combination and compensation cost the Board agreed to modify the wording in A103(c) of the BC ED as follows:

Of the remaining fair value based measure of the replacement award the portion attributable to past services is equal to the remaining fair-value-based measure of the replacement award (or settlement) multiplied by the ratio of the portion of the vesting period completed to the greater of the total vesting period or the original vesting period of the acquiree award.

The Board agreed that an acquirer's replacement award be allocated between consideration transferred and post-combination expense in the same manner that awards classified as equity instruments would be.

The Board agreed not to address the accounting for share-based payment awards with graded vesting schedules as part of the business combinations phase II project.

The Board agreed that a forfeiture estimate be included in the fair value of unvested replacement awards deemed to be consideration transferred in a business combination.

The Board affirmed the guidance in the BC ED that post-combination forfeitures of awards considered to be consideration transferred in the business combination do not affect the purchase price.

The Board affirmed the guidance in the BC ED requiring an acquirer to account for the post-combination effects of replacement share-based payment awards classified as liabilities through adjustments to compensation cost and income tax expense in the period in which they arise.

The Board decided not to address the accounting for income tax effects arising from replacement awards as part of the business combinations phase II project. Instead it was agreed to point out in the Standard that income taxes on replacement awards should follow the existing guidance in IAS 12 Income Taxes and IFRS 2 Share-based Payment.

Insurance contracts

The Board discussed various issues related to insurance contracts acquired in a business combination (see IFRS 4 paragraphs 31-33).

The Board agreed that the expanded presentation described in paragraph 31 of IFRS 4 should continue to be optional.

The Board agreed that phase II of the business combinations project should not specify whether the acquirer should present pre-acquisition contract balances of the acquiree as a separate asset or should include them in the intangible assets presented using the expanded presentation.

The Board agreed that phase II of the business combinations project should not address contingent commissions, subsequent accounting for the fair value intangible asset and guarantees for adequacy of insurance liabilities.

The Board agreed that the following issues should not be revisited for insurance contracts acquired in a business combination as they are addressed by more general principles in phase II of the business combinations project:

• When does a reinsurance arrangement qualify as a business combination?
• Mutual insurance entities
• Fair value measurement
• Classification of an insurance contract

Board's tentative conclusion on the Amendments to IFRS 3 as a whole

The staff notified the Board that one FASB member had indicated an intention to dissent from the final FASB statement.

The staff summarised the most significant changes from the current version of IFRS 3 as follows:

• Acquisition costs would be expensed;
• Contingent consideration would be assessed at fair value at the date of acquisition; any subsequent changes would be reflected in profit or loss;
• In a step acquisition, goodwill would be assessed at the time control is acquired; any subsequent increases in ownership would be treated as transactions between equity participants [one IASB member has indicated an intention to dissent on this issue];
• Any historical holding (for instance, as an investment) in an entity for which control is later acquired would be re-measured at fair value at the date of acquisition of control, and a gain recognised in profit and loss;
• The measurement of non-controlling interests.

The IASB chairman addressed the measurement of non-controlling interests. At the March 2007 meeting, a possible compromise had been suggested of an exception to the measurement of non-controlling interest at fair value based on 'undue cost and effort.' It had since become evident that such an exception was not viable. Consequently, the Board was faced with three alternatives:

1. Measure non-controlling interest at fair value (Alternative A)
2. Measure non-controlling interest at the proportionate share of the interest in net assets (Alternative B)
3. An explicit option of either Alternative A or B, available on an acquisition-by-acquisition basis (Alternative C)

The Board was asked who would dissent from a standard including each of the Alternatives. The votes were as follows:

• Alternative A: eight Board members indicated they would dissent;
• Alternative B: six Board members indicated they would dissent;
• Alternative C: four Board members indicated they would dissent.

Based on this vote, the IASB version of the final standard would contain an explicit option as explained above, because only Alternative C commanded the required majority of the IASB. A Board member asked the staff, when drafting the Basis for Conclusions, to make it very clear that the IASB had voted in this way as an expedient to approve the Standard; that there was no conceptual basis for the option; and that it was possible to avoid a reconciling item between IFRS and US GAAP by adopting Alternative A.

On a related issue, the Board was asked for an indicative vote on the amendments to IAS 27. Two Board members indicated an intention to dissent; two more reserved their position, pending review of the pre-ballot draft.

IASB/FASB Sweep issues

The staff reviewed various sweep issues to be discussed at the joint meeting with the FASB on 24 April. No decisions were taken at this meeting. (The joint meeting will be reported on www.iasplus.com.)

Cost/benefit assessment

The staff reviewed the cost/benefit assessment prepared by the IASB and FASB staff. The overall conclusion is that the benefits of the amendments to IFRS 3 and IAS 27 outweigh the costs.

This assessment will be discussed at the joint meeting on 24 April. It will form part of the formal feedback report to be prepared for the IASB Trustees.

JOINT MEETING OF THE IASB AND THE FASB

23 April 2007

Intangible Assets – Agenda proposal

The Boards discussed the draft agenda proposal for a joint project to develop a new or revised accounting standard on intangible assets. The project is a Memorandum of Understanding item.

The draft agenda proposal was omitted from the observer notes.

Scope

The project will address the initial accounting for internally generated intangible assets and the subsequent accounting for all intangible assets. It will not encompass the requirements for the initial accounting for intangible assets acquired separately (in or outside a business combination) and the initial and subsequent accounting for goodwill.

Some IASB and FASB members were concerned about the scoping out of initial accounting for intangible assets acquired separately. One FASB member noted that particularly the initial accounting for intangible assets acquired by way of a government grant has not been adequately addressed in the existing guidance. Others raised the concern that addressing subsequent accounting without looking at initial accounting might lead to inconsistent outcomes.

The staff responded that the reason for scoping out initial accounting for separately acquired intangible assets was that this area is considered to be less problematic whereas there is indication that initial accounting for internally generated intangible assets and the subsequent accounting require immediate attention. In addition, the staff noted that the existing guidance on initial accounting would, of course, be considered.

The Boards agreed to explicitly point this out in the agenda proposal. Finally, there seemed to be a consensus to proceed with the scope as currently outlined in the draft agenda proposal. The Boards will provide offline suggestions for rephrasing the draft agenda proposal.

Assessment against IASB agenda criteria

The potential Intangible Assets project was compared to the IASB agenda criteria in the IASB's Due Process Handbook.

The Boards noted that the project meets all the criteria for an IASB project and that therefore the similar FASB agenda criteria would also be fulfilled.

Project plan and next steps

The IASB staff will revise the draft agenda proposal with a view to reviewing it with the Trustees and SAC in the third and final quarters of 2007 such that the IASB can take a formal Agenda Decision in December 2007.

In addition it was agreed that the revised draft agenda proposal is sent to the Boards for discussion at the next joint meeting in October 2007.

The FASB noted that it will appoint staff shortly to work together with the project team of the IASB.

Given the significance of the possible changes to IAS 38, the Boards tentatively agreed that the preliminary views of the Boards should be set out in a Discussion Paper. The target date for this Discussion Paper is October 2009.

Liability and Equity

The Boards discussed an alternative view of the liability and equity distinction labelled as the Loss Absorption Approach.

The approach was prepared by staff of the Accounting Standards Committee of Germany on behalf of the European Financial Reporting Advisory Group (EFRAG) and the German Accounting Standards Board (GASB) under the Pro-active Accounting Activities in Europe Initiative (PAAinE) of EFRAG and the European National Standard Setters.

The staff pointed out that the basic principle for the classification of equity and liability has been established but that all other components still represent work-in-progress.

The core principles of the Loss Absorption Approach are:

• Dichotomous approach that classifies equity and liability from an entities perspective and seeks to define the term equity rather than the term liability.
• The distinction between equity (risk capital) and liabilities is based exclusively on the ability or inability of capital to absorb losses incurred by the entity with losses being tentatively understood as accounting losses.
• Accounting losses are defined as 'net negative total recognised income and expense before conditional servicing costs and related tax impact on and remeasurements of capital provided'.
• Both capital that is fully loss-absorbing and capital that is not fully loss-absorbing classifies as (partial) equity. If an instrument is not fully loss-absorbing, the instrument is bifurcated into a fully loss-absorbing portion and a non loss-absorbing portion (split accounting). Only the fully loss-absorbing portion is allocated to equity.
• An instrument is classified solely by reference to its terms and conditions and independently of the classification of other instruments, that is, all instruments within the same class of capital and across entities will be accounted for in the same way, thereby not taking into account what other instruments had been issued or at which point in time an investment was being made.
• Classification of an instrument would has to be made at inception and will not be changed unless either its terms and conditions are changed or settlement of the instrument gives rise to a new instrument. In particular, no reclassification is made over the term of the instrument following recognition of additional instruments, derecognition of existing instruments, or passage of time. Embedded conditional features (such as the exercise of a conversion option or a condition to absorb losses only if these exceed a certain threshold) would not be considered a change to the terms and conditions of the instrument. Rather, they are conditions already implicit in the terms and conditions that may come into force and that, hence, would have to be tested for each reporting date as to whether they have actually come into force.
• Retained earnings and measurement reserves such as revaluation reserves and cash flow hedging reserves are regarded to be loss-absorbing capital.

The session was held in form of an educational session with the Boards questioning the application of the model.

The discussion particularly focused on the following issues:

• The definition of accounting loss and the potential circularity in this definition
• The definition of loss absorption
• The treatment of convertible instruments and derivatives, in particular, the point in time at which these instruments fulfil the criterion of loss-absorbing capital
• The impact of the approach on the classification of puttable instruments
• The Boards identified various weaknesses in the approach and thought that, overall it was not superior to the approaches discussed by them so far. However, they noted that the Loss Absorption Approach was a 'work in progress' and encouraged the PAAinE/GASC group to continue its work. If there was a workable solution to one of accounting's most intractable problems, the Boards wanted to know about it.

No decisions were made.

Conceptual Framework – Measurement Bases

Inventory of measurement bases

The Boards discussed a revised staff analysis of measurement basis candidates, which was prepared after considering comments and other input derived from suggestions made by Board members and Roundtable participants. The discussion focussed on Appendix B in Observer Note 14. The staff analysis re-grouped the array of possible measurement bases of entry and exit prices into broad categories of 'past', 'present' and 'future'. This analysis was represented the original 19 bases presented at the January-February 2007 Roundtables plus three others: modified past entry amount, current equilibrium price, and value in use.

Board members appeared confused about the purpose of the analysis and some had specific misgivings both about the past- present-future split and some of the items included. Some of the confusion was over terminology. For example, it was suggested that 'current equilibrium price' was not far from Level 1 measures in FAS 157 Fair Value Measurements. Others challenged the staff because measurement bases for liabilities had not been considered.

The staff responded that the array was an inventory of potential measurement bases for inputs. As the measurement project progresses, that inventory will be reduced as various measurement bases are eliminated as not appropriate. Some Board members responded to this clarification by saying they thought the rearrangement could be useful.

There was a brief discussion of deprival value and value in use. There seemed to be agreement between the staff and Board members that deprival value was more of a decision tree that helped to determine the appropriate measure rather than a measurement basis itself. The inclusion in the inventory of value in use was an attempt to respond to constituents, many of whom are willing to accept a mixed-measurement model, especially for operating assets.

Definitions

The staff reviewed the definitions (Observer Note 14 Appendix C). Board members had specific concerns about some aspects of the definitions, especially with respect to the extinguishment of liabilities. However, the staff attempted to reassure the Boards that future meeting papers would help to put all the possible measurement bases in context; the current exercise was an attempt to arrange the inventory in a logical order and add some discipline to it.

Some Board members were uncomfortable with some of the expressions used to describe and explain the bases, for example identifying a 'future cost/proceeds' (see item 8) seemed to confuse measurement with estimation. However, the staff encouraged the Boards to allow them to use the inventory as it had been presented.

The Board agreed.

Conceptual Framework – Project plan

Status report

The Boards discussed progress on the various phases in the Conceptual Framework project and addressed issued raised by the staff. The staff reported that there were six substantive projects and two 'tasks' – the latter being the determination of authoritative status and the 'unifying phase'. The next due process document expected is the Chapter on the Reporting Entity, for which a pre-ballot draft is expected in May 2007, sweep issues in June, and a final Discussion Paper in July 2007.

Work on the assets and liabilities chapter is taking longer than expected, and the Boards have still to complete their initial deliberations on the asset definition and have not yet considered that for liabilities.

Project processes

The staff discussed the constraints that it is currently experiencing and the possible approaches to relieving those constraints to enable better progress to be made.

The principal constraint is the availability of staff. At present the conceptual framework staff is at least two or three full-time equivalents short and suitable staff members are either committed to other projects or not available at all. Therefore, a choice must be made: either accept that progress will be made more slowly than planned or else get creative.

One staff suggestion generated a significant amount of controversy. There was a suggestion that it might be possible to combine certain phases or due process documents. Several IASB members commented that, for IASB constituents, this would not be acceptable. The IASB was already under considerable pressure to slow down on the conceptual framework project and to have more consultation on all steps. It would simply not be possible to eliminate a due process step (especially a due process document).

The suggestion that there should be better coordination between the conceptual framework team and related standards-level teams also generated comment. Board members acknowledged that work on standards-level projects would inform the conceptual framework team and vice versa. However, no one particularly wanted to see a standards-level project delayed significantly because the conceptual framework project was not complete. However, there was also the danger that a standards-level project might suggest an approach that was contrary to the current direction of the related conceptual framework project. Board members suggested that judicious use of Board advisors and regular meetings between project teams were ways of avoiding both pitfalls.

Ultimately, the Boards gave their support to the staff directors to assign staff and schedule the projects as they thought best. Recruitment would continue. In addition, it was expected that the business combinations team would shortly complete their work and be available for other assignments.

The Boards also discussed the next stage for Chapter 1 (Qualitative Characteristics and Objectives of financial reporting).

After some discussion, it was agreed that the Boards should proceed to an Exposure Draft as scheduled. This Chapter would also help forthcoming standards-level projects and was becoming critical to the future work programme of the Boards.

There was a short discussion of the consideration of not-for-profit reporting issues and the conceptual framework project. While it was agreed that the insights provided by not-for-profit entities were often very useful, the Boards did not have the luxury to examine such issues: it was under pressure to develop the framework in the context of profit-seeking entities.

24 April 2007

Business Combinations

The staff notified the Boards that, subject to the discussions that followed, they would be seeking permission to draft a pre-Ballot Draft of a final Standard (and, in the case of the IASB, revisions to IAS 27 Consolidated and Separate Financial Statements).

Sweep issues

The Boards discussed various issues for which they had individually reached different, non-convergent answers.

Off-market portions of operating leases

The IASB agreed to change its original decision and adopt the FASB's tentative position. Thus, an acquirer should measure and recognise an asset subject to an operating lease at its acquisition-date fair value without considering the terms of the operating lease (that is, the acquirer accounts for the above- or below-market value of the lease separately). If the terms of the operating lease are favourable (unfavourable) relative to market terms at the acquisition date, the acquirer would recognise an intangible asset (liability) separate from the asset subject to the operating lease. This decision (a) affirms the guidance that was proposed in the business combinations Exposure Draft, (b) is the same as the requirements of FASB Statement 141, and (c) is consistent with an example provided in EITF Issue No. 01-3 Accounting in a Business Combination for Deferred Revenue of an Acquiree.

Classification of long-lived assets as held-for-sale in a business combination

The FASB agreed to change its tentative decision and adopt the IASB's tentative decision. Thus, an acquirer would classify long-lived assets as held for sale if the sale is expected to be completed within one year and the other criteria are probable of being met within a short period from the acquisition date (usually within three months). That is, the guidance in paragraph 32 of FASB Statement 144 is retained.

Recognising and measuring an indemnification asset when the related liability is recognised or measured on a different basis

The Boards agreed that an acquirer, at the acquisition date and subsequently, should recognise an asset for an indemnification at the same amount as the related liability. In other words, the entity should measure the liability first and then recognise the indemnification asset at the same amount as the liability.

Designating an effective date other than the acquisition date

The Boards agreed not to permit an acquirer to designate as the effective date the end of an accounting period between the date a business combination is initiated and the date that combination is consummated. In agreeing this, the Boards asked the staff to ensure the Basis for Conclusions discussed this decision in sufficient depth to avoid restatements over otherwise immaterial amounts.

Reclassifications of assets and liabilities

The Boards discussed a paper that was tabled at the meeting and was not made available to Observers.

The issue was whether the Business Combination Standard should require reassessment of all contracts, including embedded derivatives, to which the acquirer becomes a party on the acquisition of the acquiree. There is existing guidance in FASB Statement 133 that requires reassessment, and the FASB did not wish to revisit this principle. Staff asserted that enquiries made had determined that much of the reassessment was undertaken as part of the due diligence process and that, with respect to those contracts containing embedded derivatives, many were closed out prior to the consummation of the business combination.

The Boards agreed that the Standard should state that the acquiree should reassess all contracts acquired as a result of the business combination other than leases and insurance contracts.

Cost-benefit assessment

The Board reviewed the cost-benefit assessments of the changes to US GAAP and IFRS made as a result of the Business Combinations package. Overall, the significant improvement to US GAAP and IFRS made by the package was thought to outweigh the short-term costs.

Non-controlling interests

The staff summarised the quandary facing the IASB: that no single measurement approach commanded a qualifying majority of the Board. Consequently, the IASB had concluded, with great reluctance, that an acquirer would be permitted a choice, to be made on a transaction-by-transaction basis, to measure non-controlling interests (a) at fair value or (b) at the non-controlling interest's percentage of the fair value of the acquiree's identifiable assets and liabilities. All subsequent increases and decreases of non-controlling interests (provided that control was not lost) would be treated as transactions among owners within equity. Consequently, if an entity does not recognise non-controlling interests at fair value and subsequently increases its ownership interest, goodwill will not be recorded for the subsequent purchase.

FASB members expressed distress that the Boards' flagship convergence project was reaching a non-converged answer on a significant principle. However, none was willing to lose the considerable progress and improvement to financial reporting being achieved as a result of the overall package.

A formal poll was taken independently by each Board.

FASB: Six in favour (no option to measure non-controlling interests based solely on the acquiree's identifiable assets). Ms Seidman indicated her intention to dissent. She cited several reasons, including using the consummation date as the accounting date (rather than agreement date) – too much market noise would be translated into the measure goodwill. Mr Herz, who had dissented to the Exposure Draft, stated that he was voting in favour primarily because he wanted a common answer to a pervasive accounting issue. He saw the package as a major step towards convergence, but not necessarily as an improvement.

IASB: Amendments to IFRS 3 (with the option to measure non-controlling interests based solely on the acquiree's identifiable assets): 11 in favour; 3 opposed. Amendments to IAS 27: Nine in favour; five opposed.

Mr Garnett (dissenting to both documents) supported the comments of Ms Seidman. He noted that goodwill is a 'sink' into which all the measurement error is placed and thought that the costs of measuring this sink at fair value outweighed any benefits it might provide. Professor Barth and Mr Smith (IFRS 3 only) supported the principle in IFRS 3 and did not support the introduction of an option, which would impair comparability. In addition, the operational application of the exception was likely to be small, and to provide an exception in such circumstances, in their view, sent the wrong message about the IASB's commitment to convergence and principle-based standards.

Messrs Engstrom, Gelard, and Yamada (IAS 27 only) objected to the counterintuitive effects on equity produced by the Board's decisions. Mr Danjou (IAS 27 only) was not convinced that the accounting for post-control transactions with non-controlling interests was appropriate.

Re-exposure

Independently, the Boards agreed unanimously that the business combinations package did not meet the requirements for re-exposure. Consequently, formal approval was given to the staff to begin preparation of a Pre-Ballot Draft.

Leases – scope of a discussion paper

The Boards discussed the scope of the Leases project. The staff suggested two possible approaches: a 'narrow' approach and a 'broad' scope. The narrow scope would accept the scope in the current set of standards – FAS 13 Accounting for Leases and IAS 17 Leases, plus EITF 01-8 and IFRIC 4, both called Determining whether an Arrangement Contains a Lease.

Board members expressed support and frustration in equal measures. Some thought that the scope was crucial and needed to be examined rigorously now. These Board members saw that putting off significant questions until later was sub-optimal. The scope should be thoroughly considered at the outset. If it is not, constituents would criticise the Board for not doing so.

Others wanted the leasing model fixed and then tested against a wider scope subsequently. One FASB member objected that the project seemed to be addressing the wrong kinds of transactions and should have as a priority the lease of intangible assets.

Other Board members noted that the staff's preferred approach (narrow scope) was pragmatic, especially given that the project would address both lessor and lessee accounting.

One FASB member thought that leasing crossed over so many other contentious issues, including revenue recognition, that to do a narrow-scope project would be a waste of time and resources.

With the exception of one FASB member, the Boards agreed to a narrow scope approach to the Leases project. They appeared to support the idea that once a model was developed it should be tested against other types of arrangements to determine whether it would be suitable for those arrangements.

Thanks and Farewells

Sir David Tweedie paid tribute to four Board members who were around the joint Board table for last time. Ed Trott (FASB), Hans-Georg Bruns, Tony Cope, and Tricia O'Malley (IASB) would each retire on 30 June 2007. Sir David thanked them individually for their contributions, dedication and (in Mr Cope's case) putting off retirement to serve their Boards. Their contributions had been significant and at a critical time, and their presence would be missed.

Each responded. Messrs Trott and Cope stressed the need to continue the efforts towards convergence, even if (or after) the IFRS-US GAAP reconciliation is removed. The convergence journey is important, and the benefits in terms of reduced costs to investors, analysts, and preparers are already evident. Mr Trott also stressed the importance of a truly independent standard-setter, one that operated free of regulatory interference, and encouraged both Boards to maintain this independence. Mr Bruns noted that he was proud to have been part of the Board during a critical phase in the convergence journey. With the approval of a converged standard on Business Combinations, a pervasive accounting issue (and one that had caused him headaches as a preparer) was resolved and he could retire a happy man. Ms O'Malley noted that she very pleased that she would continue to work in London as the IFRIC Co-ordinator. She saw this as 'fitting punishment' for a Board Member: to be charged with interpreting the Standards she helped to write.

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