IASB Meeting 15-18 May 2007

Tuesday 15 May 2007

Leases [Education Session]

The Board discussed an analysis of a lease contract in which the lessee has either an option to extend the term of the lease for an additional period, or an option to terminate the lease early.

The staff analysis aimed to assess the terms and conditions of a standard lease and attempted to re-characterise a long-term lease with an option to cancel early as a short-term leased with an option to extend; and to identify the assets and liabilities that arose. At a conceptual level, several Board members noted that the manner in which a lease is described should not affect the assets and liabilities recognised.

Although no decisions were requested or made at this session, Board members indicated that they favoured the staff undertaking further exploration of two possible approaches:

• Approach 1 – The lessee obtains the right to use the asset up until the option exercise date and an option to extend the lease; and
• Approach 2 – The lessee obtains a right to use for the full lease period and an option to terminate the lease.

Many Board members thought Approach 1 was the most conceptually pure and preferred it, but were willing to explore Approach 2 further. It was noted that some participants in the Leases Working Group were concerned that Approach 1 was potentially open to abuse and structuring. However, Approach 2 also had problems associated with it-particularly in the measurement of options. However, measurement difficulties should not, at this stage, preclude further examination of the Approach.

The Board indicated that it was highly unlikely to support either an approach under which the lessee obtains a right to use either for the full lease period or for the period to the option exercise date; or one under which the lessee obtains a right of use whose measurement is based upon the expected value of the payments under the lease. Both of these were criticised for being too intent-based, lacking a clearly-articulated measurement attribute and for departing from the previous assessment of the assets and liabilities identified in the lease.

Annual Improvements 2006-2007:

IAS 20 – Terminology

The Board agreed to propose amendments to IAS 20 Government Grants and the Disclosure of Government Assistance to substitute terms used in that Standard with more widely used terms for equivalent items used elsewhere in IFRS as follows:

• 'taxable profit (tax loss') instead of 'taxable income';
• 'recognised in profit or loss' instead of 'recognised as income';
• 'recognised directly in equity' instead of 'credited directly to shareholders' interests'
• 'change in accounting estimate' instead of 'revision to an accounting estimate'.

Board members noted that the third item might better be accomplished as a consequential amendment arising from the forthcoming amendments to IAS 1.

IAS 27 – Measurement of a subsidiary held for sale in separate financial statements

The Board agreed to propose an amendment to IAS 27 paragraph 37 to remove an apparent conflict between IFRS 5 and IAS 27. IAS 27.37 would be amended in a manner similar to:

37 When separate financial statements are prepared, investments in subsidiaries, jointly controlled entities and associates that are not classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 shall be accounted for either:

• (a) at cost, or
• (b) in accordance with IAS 39.

The same accounting shall be applied for each category of investments. Those investments that were accounted for at cost shall be accounted for in accordance with IFRS 5 on classification as held for sale (or inclusion in a disposal group that is classified as held for sale). Those that were accounted for in accordance with IAS 39 until classification as held for sale (or inclusion in a disposal group that is classified as held for sale) shall continue to be accounted for in accordance with IAS 39. Investments in subsidiaries, jointly controlled entities and associates that are classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 shall be accounted for in accordance with that IFRS.

The Board noted that the staff intends to clarify IN7 in the Introduction to IAS 27, which currently suggests that a subsidiary acquired exclusively with a view to resale is not consolidated. This is inconsistent with the requirements of IAS 27 paragraph 12 and IFRS 5 paragraph 16. As the Introduction is not part of the IFRS, this matter will be treated as an editorial change.

IAS 28 – Impairment of an investment in an Associate

Impairment testing of an investment in an associate is performed by testing the entire carrying amount of the investment in the associate under IAS 36. IAS 28.33 is clear that goodwill included in the carrying amount of an associate is not tested for impairment separately under IAS 36. The guidance in IAS 28.33 treats the investment in the associate as a single asset for impairment purposes. This suggests that the fact that goodwill is included in the carrying amount of an investment in an associate does not prevent the full reversal of impairment if the recoverable amount of the associate increases in a subsequent period.

The Board agreed that there was a conflict in the guidance in IAS 28.33. The guidance should be clarified to say that the trigger for impairment testing is that in IAS 36. However, because IAS 28 treats the associate as a single asset, IAS 39 provides the more appropriate measurement guidance. This did imply that if an investment in an associate has been impaired, any reversal can be reversed against the notional 'goodwill' associated with that Associate.

The Board will discuss this proposed amendment again at a later meeting.

IAS 29 – Terminology

The Board agreed to propose amendments to IAS 29 Financial Reporting in Hyperinflationary Economies to replace the term 'market value' in IAS 29.14 and .19 with 'fair value'; to replace the term 'results of operations' and 'net income' in IAS 29.20 and .28 with 'profit or loss'; and to modify IAS 29.6 as follows:

6 Entities that prepare In most countries, financial statements are prepared on the historical cost basis of accounting do so without regard either to changes in the general level of prices or to increases in specific prices of assets held. The exceptions to this are those assets that the entity is required to or chooses to measure on a fair value or revaluation basis, for example except to the extent that property, plant and equipment and investments may be revalued and biological assets must be measured at fair value. Some entities, however, present financial statements that are based on a current cost approach that reflects the effects of changes in the specific prices of assets held.

Board members noted that some of these amendments might better be accomplished as consequential amendments arising from the forthcoming amendments to IAS 1.

IAS 38 – Advertising and Promotional Expenditure

In April 2007, the Board discussed a matter referred to it from the IFRIC relating to a potential proposed amendment to IAS 38 Intangible Assets paragraphs 69-70 in respect of the accounting for advertising and promotional activities. The Board was unable to reach agreement at that meeting and requested that the staff do further analysis and return with a proposal.

The Board considered that the accounting suggested by IAS 38 might seem counter-intuitive; however they were not in a position to undertake a comprehensive review of the Standard now. Consequently, the existing Standard must be the frame of reference. After a considerable debate, the Board agreed to add to the Annual Improvements Project a proposal to amend IAS 38.69-70 such that:

• IAS 38.69 would be amended to state that expenditure on advertising and promotional activities would be recognised as an expense when those activities are rendered to the entity; and
• IAS 38.70 would be clarified to state that, to the extent that there is a prepayment for such services, an entity is not precluded from recognising a prepayment asset between the time the payment is made and the time the service is rendered to the entity.

Thus, if an entity pays for the preparation of a television commercial in advance, the entity is not precluded from recognising that payment as a prepayment asset in the balance sheet. Once the commercial has been completed and is ready for transmission (that is, the service has been rendered), any prepayment asset is written off to profit or loss.

IAS 39 – Inconsistency in disclosure requirements for associates and investments in jointly-controlled entities accounted for in accordance with IAS 39

The Board discussed an apparent inconsistency in the disclosure requirements for those entities that account for investments in associates and jointly controlled entities at fair value in accordance with IAS 39. Investments in associates and jointly controlled entities held by certain investment-type entities are excluded from the scope of IAS 28 and IAS 31. These entities are therefore not required to give the disclosures that those standards would otherwise require. However, IAS 32 and IFRS 7 both require entities that account for investments in associates and jointly controlled entities in accordance with IAS 39 to give the disclosures required by IAS 28 and IAS 31 in addition to the disclosures required by IAS 32 and IFRS 7. The staff had proposed to provide relief from the IAS 28 and IAS 31 requirements in the investor's separate financial statements.

The Board modified the staff proposal and agreed to propose amendments to IFRS 7 and IAS 32 to provide limited relief from the disclosures in IAS 28 and IAS 31 when investments in associates and investments in jointly-controlled entities are measured at fair value. However, the following disclosure would be retained:

• IAS 28.37(f)
• IAS 31.55-.56 (first sentence only; the second sentence is not applicable)

Wednesday 16 May 2007

Conceptual Framework – Phase D: Reporting Entity

The IASB was joined by the project staff from New Zealand via video link.

Determining the composition of a group reporting entity for financial reporting purposes

The Board discussed the following approaches:

• Controlling entity model

Under this model, the area of economic interest is circumscribed by the extent of one entity's control over other entities. A group entity comprises the controlling entity (i.e. the parent) and other entities under its control (i.e. its subsidiaries). Accordingly, the model is broadly similar to the control model currently used today, but with control defined to include both a power element and a benefits element.

• Common control model

Under this model the area of economic interest comprises those entities that are under the common control of the same controlling entity or controlling body. The key difference between the common control model and the controlling entity model is that, under the controlling entity model, the parent entity is always included in the group reporting entity, whereas the inclusion of the parent entity or controlling body is not essential under the common control model. This allows for the possibility of preparing 'group' general purpose external financial reports (GPEFR), prepared by combining the assets, liabilities and activities of the entities under common control, even though the parent entity or controlling body might not be required to (or might not choose to) prepare GPEFR.

• Synergistically managed assets approach

This approach was discussed by the Board for the first time. The area of economic interest, both for an individual entity and group entity, is circumscribed by the group of net assets that are managed synergistically together to generate returns to investors, creditors and others. Accordingly, the boundary of the reporting entity would not necessarily correspond to the boundary of a legal entity.

The staff pointed out that last week the FASB has reaffirmed that they prefer the controlling entity model but that the common control model should not be ruled out. The FASB did not pursue the synergistically managed assets approach. The Board expressed mixed views and was nearly equally split between controlling entity model or the common control model as preferred model but it appeared that no one wanted to rule out the respective other model. One Board member noted that the controlling entity model is a particular case of the common control model.

The synergistically managed assets approach was not pursued but some Board members pointed out that this approach might be useful in determining the reporting entity under the common control model.

Finally, there appeared to be a consensus that on a conceptual level the composition of the group reporting entity should be based on 'control' with the controlling entity model as 'main driver'. The decision whether the controlling entity model or the common control model should be required in certain circumstances should be made at the standards level.

Parent-only financial statements and consolidated financial statements

The Board continued its deliberations regarding the following issues:

Entity issue:

This issue addresses the question whether both sets of financial statements relate to the same entity, or two different entities. In previous discussions the following views were expressed:

View 1: Parent is the Group View

This view comprises the views formerly labelled 'One Entity - Two Alternative Displays' and 'One Entity - One Display'. The parent entity and the group entity are regarded as one and the same entity. The subsidiary entity is regarded of being part of the parent entity, for the purposes of the parent entity's financial reporting, akin to an unincorporated branch.

View 2: Parent not the same as Group View

This view represents the 'Multiple Entities' view. Under this approach, the subsidiary entity and the parent entity represent two separate entities (two separate 'circumscribed areas of economic interest'), while the group entity is a third entity (that is, a third 'circumscribed area of economic interest[) that encompasses within its boundary both the parent entity and the subsidiary entity.

The Board decided to no longer focus on this issue but to address exclusively the presentation issue. According to staff the FASB decided in the same way.

Presentation issue:

This issue determines which set of financial statements (or both) meets the objective of general purpose external financial reporting, by providing decision-useful information to present and potential investors, creditors and other external users with a financial interest in the parent entity.

The following views were discussed:

View A:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users. The parent entity can have only one set of general purpose external financial statements (GPEFS), but it can include other financial information within its single set of GPEFR. In particular, the parent's GPEFR could include both consolidated and parent-only financial statements. For example, there could be 'parent' and 'group' columns in each of its primary financial statements, or one set of financial statements presented as its GPEFS with another set of financial statements provided as supplementary information, all within a single set of GPEFR.

View B:

Both parent-only financial statements and consolidated financial statements are capable of providing decision-useful information to external users. However, the parent entity can have only one set of GPEFS and it would be a standards-level issue to determine how the parent should present information about the subsidiary's assets, liabilities and activities. That standards-level issue is to determine, in a given set of circumstances, whether users' information needs would best be served by presenting, in the parent's GPEFS, information about its net investment in the subsidiary (as is done now in parent-only financial statements) or information about the underlying assets and liabilities of the subsidiary (as is done now in consolidated financial statements).

View C:

The parent entity can have only one set of GPEFS, which are its consolidated financial statements, because consolidated financial statements present information about all the parent's assets, liabilities and other activities, whereas parent-only financial statements do not. Parent-only financial statements present information about the parent's investment in its subsidiaries, not the underlying assets, liabilities and activities. Therefore, assets, liabilities, revenues and expenses are omitted (or offset), which is not a relevant or faithful representation of the parent entity's assets, liabilities, revenues and expenses. This should be explained at the concepts level. Parent-only financial statements should be treated as special purpose financial statements, and should be precluded from being described as GAAP-compliant, that is, should not be described as prepared in accordance with IFRS or US GAAP.

The staff informed the Board that the FASB was somewhere in between views B and C, that is, that an entity should only have one set of (consolidated) financial statements. The FASB acknowledged that there might be circumstances when parent-only financial statements should be permitted but that such exceptions should be addressed on standards-level only.

The Board was nearly equally split between view A and view C while view B was unanimously turned down. Those in favour of view C noted that there might be circumstances where parent-only financial statements could provide decision-useful information but they disagreed to require parent-only financial statements in all circumstances. One Board member in favour of view A noted that this approach would resolve the issue with investment companies, that is, to have the value of the investments in one line and to provide dividend information.

The Board did not come to a conclusion. For purposes of the Discussion Paper the Board decided to include a preliminary view that consolidated financial statement are considered to be the more important set of financial statements and to ask the constituents whether parent-only financial statements should be required in all circumstances or only occasionally.

The Board directed the staff to proceed drafting the Discussion Paper.

IFRS 2 Vesting Conditions and Cancellations

The Board discussed several proposed amendments to the second pre-ballot draft of the ED. (The pre-ballot draft was omitted from the observer notes.)

In general the Board decided not to address any divergence issues in relation to SFAS 123 (revised) within the scope of this project since such issues should be addressed within the liability and equity project.

Without detailed discussion the Board agreed to the following changes to the second pre-ballot draft of the ED:

• Change paragraph 26 to clarify that a cancellation cannot occur before the grant date.
• In Implementation Guidance [a new IG (IG24) is being prepared] to confirm that the required treatment of a true cancellation by the counterparty or the entity only applies if the cancellation occurs after the grant date, that is, that the entity would revise earlier estimates to reflect the grant date value of zero in case of 'cancellations' before the grant date.
• Add a sentence to the Basis for Conclusions to clarify that 'a share-based payment may vest even if some non-vesting conditions have not been met'.
• Not to include a flowchart illustrating vesting conditions in paragraph IG 4A [new] (the flowchart was included in the Observer Note).

Update on the IFRIC meeting held on 3 and 4 May 2007

The IFRIC Co-ordinator reported the results of the May 2007 IFRIC meeting. Deloitte's report on that meeting can be found on Our May 2007 News Page.

Thursday 17 May 2007

Financial Statement Presentation

The Board discussed issues to be discussed in the forthcoming joint IASB/FASB Discussion Paper Preliminary Views on Financial Statement Presentation.

Presentation of liquidity information

Revisions to the Working Principle

At previous meetings, the Board agreed that:

• entities that are not financial institutions should be required to classify the assets and liabilities in each of the categories on the statement of financial position into short- and long-term subcategories. An asset or liability would be classified as short-term if the shorter of (a) the contractual maturity or (b) the expected realisation or settlement of the asset or liability is within one year. Otherwise, the asset or liability would be classified as long-term; and
• financial institutions should not be required to present short- and long-term subcategories for each category on the statement of financial position. The Board asked the staff to develop a principle for presenting liquidity information that would apply to all entities.

The Board first discussed a revision to the Liquidity Working Principle. Board members noted that solvency and liquidity are related but not the same. Solvency refers to an entity's ability to meet its financial commitments as they come due. Solvency is both long- and short-term. The short-term bit is a function of liquidity; the long-term is a function of the entity's ability to withstand financial shocks and surprises.

After a lengthy debate, the Board agreed to amend its Liquidity Working Principle along the lines of (staff and Board members agreed to discuss detailed drafting outside the meeting):

Financial statements should present information in a manner that helps a user assess an entity's ability to meet its financial commitments as they come due and to invest in business opportunities.

Application of the Working Principle

(a) Quantitative disclosures

The Board confirmed their view that the Preliminary Views would suggest that:

• Entities that present a classified statement of financial position (balance sheet) would present short- and long-term subcategories for operating, investing, and financing activities. An asset or liability would be classified as short-term if the shorter of (a) the contractual maturity or (b) the expected realisation or settlement of the asset or liability is within one year.
• Entities that present their statement of financial position based on liquidity because it provides information that is reliable and more relevant should present a detailed maturity schedule for short-term contractual assets and liabilities.
• All entities should present a maturity schedule for long-term contractual assets and liabilities (much of this information is already disclosed, such as for leases, pensions, and long-term debt.)
• The Board thought that using the approach to determining the classified/unclassified presentation that is in IAS 1.51 currently was better than trying to define a 'financial institution'. The staff will present this suggestion to the FASB at a later date.

(b) Qualitative disclosures

After a short and curtailed debate, the Board decided that it would not include a discussion or preliminary view on qualitative disclosures about capital adequacy and financial flexibility in the Discussion Paper. Rather, it would leave the existing disclosures required by IAS 1 paragraphs 124A-C and IFRS 7.33 alone for the time being.

Classification in consolidated financial statements by entities with significantly different businesses

The Boards' proposed working format for the primary financial statements disaggregates financial information between value creating ('business') activities, and the funding of that value creation ('financing activities' and 'equity'). The Boards' preliminary view is that an entity should classify its assets and liabilities as business or financing based on how it manages its activities or functions. In January 2007, the Boards decided to include their preliminary view on how a consolidated reporting entity consisting of significantly different businesses should apply the classification guidance. 'Entities consisting of significantly different businesses' are those entities that classify assets and liabilities of the same nature (for example, receivables) in different places (that is, in operating and financing).

In particular, the Board discussed how a consolidated reporting entity that is comprised of significantly different businesses should:

• Apply the classification criteria to separate its value creating assets and liabilities from financing assets and liabilities.
• Present the financial information for those different businesses in its consolidated financial statements.

The Board discussed three alternatives that would enable an entity presenting consolidated financial statements to report the activities of significantly different businesses (for instance, manufacturing activities for motor vehicles or airplanes and financing/leasing activities). There was clearly some degree of confusion about what the three alternatives would report and how they differ. Part of the confusion was because the Board was using terminology from IFRS 8 Operating Segments but not in the manner in which IFRS 8 uses it; part was a lack of clarity over the objective of the alternatives.

The Board asked the staff to do further work, but did suggest that:

• The classification ('tagging' in XBRL) of assets and liabilities should be done at the segment level according to the nature (operating or financing) of those assets and liabilities in that segment. How the assets and liabilities are aggregated for consolidated financial statement purposes is a separate issue.
• The Discussion Paper should propose that information about assets and liabilities in consolidated financial statements reporting the activities of significantly different businesses additional to that required by IFRS 8 be required; and that such information be required for operating and financing activities.
• If different segments classify assets and liabilities in the same way, those segments could be aggregated in the balance sheet.
• An illustration of the staff proposals compared with what is required now might help the Boards understand the effect of the staff proposals.

Liabilities – Amendments to IAS 37

Uncertainty about the existence of a present obligation

The Board continued its deliberations on distinguishing uncertainty about the existence of a present obligation from a stand-ready obligation. The issue raised in the March 2007 meeting was whether the sale of a hamburger establishes a present obligation or whether it illustrates uncertainty about the existence of a present obligation (element uncertainty). The discussion was based on the following modified fact pattern:

Vendor sells hamburgers in a jurisdiction where the law stipulates that the vendor must pay compensation of £100,000 to each customer that purchases a contaminated hamburger. On 31 December 200X (the balance sheet date), Vendor has sold one hamburger to Customer. Past experience indicates that one in a million hamburgers sold by Vendor is contaminated. No other information is available.

The staff presented the following alternatives reflecting the views expressed by Board members in March:

View A

A present obligation arises when the hamburger is contaminated and all available evidence is used to determine whether or not a present obligation exists. Under the fact pattern outlined above no present obligation exists because the available evidence (here: past experience) does not indicate that Vendor sold a contaminated hamburger.

View B

The sale itself gives rise to a present obligation and all available evidence is used to reflect uncertainty in the measurement of that present obligation.

The Board remained nearly equally split between the two views. Some Board members holding view B made reference to incurred but not reported (IBNR) situations in the insurance industry, in which they saw the issue as a question of 'do I or do I not have a claim?'.

A member of the senior staff raised the question about what measurement implications the different views would have. He asked Board members whether, under View A, a liability of zero would be acceptable if it is concluded that no present obligation exists; and whether under view B, based on the degree of probability, a liability always has to be recognised (even if it is measured at a small amount). The Board discussed this issue for a while but did not reach an agreement.

After a lengthy discussion there seemed to be a consensus that the crucial question is to determine 'whether a contaminated hamburger has been sold' and the labelling as currently outlined under view A and view B is of less importance.

No conclusion was reached, but the staff was asked to redraft the paper by focusing on the identified crucial question.

Constructive obligations

The Board redeliberated the definition of a constructive obligation in order to reflect the outcome of the redeliberations regarding the distinction between a liability and a business risk.

In March 2007 the Board tentatively concluded that a present obligation exists when (a) an entity is irrevocably committed to act in a particular way and (b) an external party has an enforceable right to call upon the entity to act in that particular way. IAS 37 ED defines a constructive obligation as a 'present obligation that arises from an entity's past actions'.

Accordingly a constructive obligation is only a present obligation when the external party has an enforceable right to call upon the entity to act in a particular way.

The Board discussed five options to address the term 'enforceable right' in the tentative description of a present obligation in the definition/description of a constructive obligation.

Option 1:

Limit constructive obligations to those that a court would enforce.

Option 2:

Consider amending the tentative description of a present obligation in paragraph 13 and 15 of the IAS 37 ED to explain that an external party may have a right that is 'enforceable by legal or equivalent means'.

Option 3:

Use the explanatory text already in paragraph 15 of the IAS 37 ED as a proxy for explaining 'enforceable by equivalent means'.

Under this option paragraphs 13 and 15 of the IAS 37 ED could be amended in a manner similar to:

Paragraph 13

An essential characteristic of a liability is that the entity has a present obligation arising from a past event. A present obligation exists when the entity is irrevocably committed to act in a particular way and an external party has an enforceable right to call upon the entity to act in that particular way. An external party's right may be enforceable by legal or equivalent means. For a past event to give rise to a present obligation, the entity must have little, if any, discretion to avoid settling it. A past event that creates a present obligation is sometimes referred to as an obligating event.

Paragraph 15

In the absence of legal enforceability, particular care is required in determining whether an entity has a present obligation. that it has little, if any, discretion to avoid settling. In the case of a constructive obligation, tThis will be the case only if:

• (a) the entity has indicated to other parties that it will accept particular responsibilities;
• (b) the other parties can reasonably expect the entity to perform those responsibilities; and
• (c) the other parties will either benefit from the entity's performance or suffer harm from its non-performance.

Option 4:

Continue developing the Board's tentative description of a present obligation in the Conceptual Framework project but drop the description in the IAS 37 project.

Option 5:

Revisit the Board's tentative conclusions in March to see whether it is possible to distinguish a liability from a business risk without introducing the idea of enforceability.

Some Board members raised the concern that a restriction to legally enforceable rights would be too narrow as there is 'something else' that can result in a present obligation. One Board member noted that such a restriction could even result in the necessity to re-exposure the IAS 37 ED.

The discussion focussed on 'what else' other than legal enforceability can establish a present obligation. Some Board members pointed out that in some circumstances economic compulsion could result in a present obligation, in particular when 'doing nothing' would mean that the entity has to give its business. For example, in case of participation contracts reducing payments to the contractual minimum would mean for the insurance company to be pushed out of the market. Other examples mentioned were pensions and jubilee bonus.

No decisions were made but the staff was asked to further elaborate this issue. In doing so options 1 and 3 should be taken into consideration. Eight and eleven Board members, respectively, were in favour of pursuing these options (multiple votes were permitted).

Friday 18 May 2007

Financial Instruments Puttable at Fair Value

Based on issues raised in the comment letters the Board continued its discussion on the Exposure Draft Financial Instruments Puttable at Fair Value and Obligations arising on Liquidation (ED).

The discussion focussed on the basic characteristics (principles) underlying the ED.

The staff outlined that an instrument addressed in the ED:

• a. has a residual interest in that entity throughout the life of the instrument, and
• b. participates fully in the performance of the entity throughout the life of the instrument.

In this context the Board raised the question what fair value is being referenced to in the ED; the fair value of the instrument or the fair value of the entity.

After a thorough discussion there seemed to be a consensus that the fair value referenced to in the ED should be the fair value of the instrument and that this fair value does not necessarily reflect the pro-rata share of the fair value of the entity. It was noted that in many cases in an 'ongoing business' (that is, not a limited life entity at the point of liquidation) the fair value of the instrument is determined based on a formula. The fair value of the entity is not determined or not determinable since the instruments are not listed. Accordingly, the 'formula value' is the only relevant market value to determine fair value.

The Board pointed out that in case the fair value of the instrument differs from the pro-rata share of the fair value of the entity the instrument does not participate fully in the performance of the entity and therefore characteristic b) would not be fulfilled. One Board member noted that the initial wording was discussed in relation to limited life entities only.

The Board decided to stick with the basic characteristics but to improve the wording in the ED; in particular to clarify the fair value implications discussed at this meeting. Senior staff noted that in summary the ED should make clear for the instruments in question that 'absent the put we have an equity instrument'.

In addition the Board agreed the following:

• Partnership interests

  Personal guarantees by partners (either general or limited) should be disregarded for classification purposes and with regard to the ranking among the holders of the most residual class of instrument. Such personal guarantees should be considered to be separate contractual arrangements.

• Presence of non-puttable instruments

  The Board decided to maintain the criteria set out in the ED relating to the presence of non-puttable instruments, i.e. one feature of being most residual is that if an instrument is puttable at fair value, then all other instruments in that class must also be puttable.

• Minority interests

  The Board agreed to maintain the guidance in AG 29A of the ED with regard to the treatment of minority interest at consolidation level.

• Identification of issue price for old instruments / transition guidance

  To be discussed at the June 2007 meeting.

The staff was directed to redraft the ED accordingly for discussion at a future meeting.

Post-employment Benefits

Definitions of defined benefit promises

Based on the comments made at the meeting in April the staff presented the following revised proposed definitions and measurement features of the three benefit promises:

• A defined contribution benefit promise obliges the employer to pay specified contributions to a separate entity (a fund). Payment by the employer of those specified contributions extinguishes the obligation. These benefit promises are accounted for in accordance with current IAS 19 requirements for defined contribution plans.
• A defined return promise (formerly described as 'asset-based') is comprised of a contribution requirement and a promised return on those contributions.

The contribution requirement obliges the employer to pay specified actual or notional contributions to an actual or notional fund. Payment by the employer of those specified contributions extinguishes that obligation.

The promised return component obliges the employer to provide a defined return on the specified contributions. That defined return is linked to the change in an asset or index.

The employer's liability for the contribution requirement is measured as the sum of the accumulated unpaid contributions. The employer's liability for the promised return component is measured as the fair value of the promised return less any plan assets available to satisfy that liability.

All other benefit promises are defined benefit. Typically, defined benefit promises change in line with service or salary or include demographic risks to the employer while the benefit is in payment. These benefit promises are measured in accordance with the current IAS 19 requirements for defined benefit plans.

The Board generally agreed to the proposal. Suggestions to improve the wording will be provided to the staff offline. The following issues were discussed in detail:

• Definition of defined return promises: 'notional fund'

  The Board agreed to clarify that 'notional' means that contributions to the fund are deferred; the fund itself is not notional.

• Measurement of the components of defined return promises

  Some Board members raised the question whether the contribution component should also be measured at fair value, that is, taking into consideration the credit risk of the entity for notional contributions. The majority of Board members expressed the view that this component is a 'defined contribution piece' and should be measured in accordance with current IAS 19 requirements for defined contribution plans.

Finally, the Board unanimously agreed to the staff proposal that plan assets and the promised return component should be measured at fair value while the contribution component should not.

Promises with guaranteed fixed returns compared to salary-related promises

The Board decided that salary-related promises that can be expressed wholly in terms of contributions based on current salary should be treated as defined return. Salary-related promises that cannot be so expressed should be classified as defined benefit.

Accordingly:

• benefit promises with guaranteed fixed returns are classified as defined return,
• current salary and full career average benefit promises are classified as defined return,
• other salary-related promises, when the benefit earned in previous years is affected by future salary increases, are classified as defined benefit.

Curtailments and negative past service cost

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

The Board decided with a majority of 10 votes that paragraph 98(e) of IAS 19 Employee Benefits should be interpreted in a way that if a plan amendment results in reduction in benefits for past and future service, the reduction relating to future service is a curtailment (not past service cost) while the reduction relating to past service is negative past service cost.

One Board member noted that it would be desirable to eliminate the need to allocate the reduction in defined benefit obligations between past and future service but that this would go beyond a clarification of IAS 19.

Additionally, the Board unanimously decided to replace the term 'material" by 'significant' in paragraph 111(a) and 111(b) of IAS 19 and to delete the third sentence in paragraph 111 of IAS 19 ('An event is material enough...') as it was considered to be redundant.

The staff was asked to draft an amendment to be included in the annual improvement process.

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