IASB Meeting 17-20 July 2007

Tuesday 17 July 2007 (afternoon only)

Conceptual Framework – Elements and Recognition

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

The purpose of this discussion was to summarise the status of the project and to agree on the next steps. The staff presented a summary of the informal consultation on the definition of an asset. Feedback was received mainly from the Boards' advisory councils, a conference with academics and a meeting of National Standard Setters. The staff came to the conclusion that the asset definition 'is on the right track' but that better explanation is required. The staff made the observation that responses tended to be more favourable in forums where the staff had the opportunity to explain the concepts, rather than from those who only read the proposals.

The staff proposed to temporarily set aside direct work on the definition issues regarding assets and liabilities and to begin consideration of the cross-cutting issues dealing with unit of account, recognition and derecognition for the following reasons:

• Some of the unresolved cross-cutting issues in the definitions cannot be fully resolved without commencing consideration of unit of account, recognition and derecognition. For example, considering unit of account issues will help to identify what the 'thing' is that is a candidate for meeting the definitions. As another example, consideration as to how to take into account uncertainty as to the existence of an asset or liability requires consideration of both definitional and recognition issues.
• The thinking developed in considering unit of account, recognition and derecognition might help finalising the definitions of an asset and a liability and might help find answers to disputed points. For example, in considering the boundaries between business opportunities and assets and business risks and liabilities we need to consider both definitional and recognition issues.
• Many of the reviewers from informal consultation on the definition of an asset had difficulties considering the definitions without considering unit of account, recognition and derecognition, and perhaps other concepts (some respondents suggested measurement).
• Considering some of the unit of account, recognition and derecognition issues at a conceptual level will increase the likelihood of greater consistency in decisions at the standards level. Several standards-level projects are considering issues presently that relate to those being considered in Phase B.

The Board strongly disagreed with this proposal. Most Board members noted that there needs to be a clear understanding of what assets and liabilities are before addressing any other issues. Any other approach was considered not to be helpful. In addition, some Board members pointed out that the decision to distinguish definition and recognition was made for good reasons. Instead the Board asked the staff to finalise the working definitions of assets and liabilities. In a first step, the working definition of an asset should be applied to a range of examples and it should be analysed to whether or not the working definition makes things clearer. The FASB staff mentioned that the FASB came to a similar conclusion at its recent meeting.

No technical decisions were made. However, some Board members raised the concern that the working definition of an asset simply replaces certain ambiguous terms by other ambiguous terms. One Board member noted that, as an example, different understandings of 'control' led to problems with the existing definition and doubted that the term 'right or other privileged access' would make things better.

Earnings per Share

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

The Board continued with its discussions with a view to finalising the short-term convergence project with the FASB on the amendment to IAS 33.

The Board had previously made decisions to follow the FASB proposal of not adjusting earnings or the number of shares when a derivative over own equity is fair valued through income. This would apply to stand-alone derivatives over own equity, as well as embedded derivatives that fail the definition of equity.

At this meeting the Board agreed to extend that principle to instruments that are potentially convertible into shares where the whole instrument does not meet the definition of equity and is a financial liability that is fair valued through income. An example would be where the entity has applied the fair value option to the whole instrument and therefore does not recognise a separate embedded derivative.

The Board also agreed that, in computing diluted EPS under the two-class method, actual distributions paid to outstanding common stockholders should be used.

The Board discussed potential differences that may exist between US GAAP and IFRSs in the accounting for forward purchase contracts and to a lesser extent, written puts over own equity.

The Board proposed that gross physically settled forward contract were not dilutive as the entity is considered to have acquired the equity upon entering into the arrangement. The Board also believed that any dividends payable on equity shares that are subject to the forward contract would be recognised as an expense. A comparison was made of the IASB's and FASB's approaches for various instruments. In some circumstances the EPS result was the same even though the method of computation differed. In other instances the EPS result was different because the underlying accounting for the potential ordinary share differed.

There was further discussion on an issue not included in the Board paper on forward purchase arrangement where the dividends on the shares were returned to the issuer (the example in the Board paper assumed dividends were retained by the counterparty to the forward contract) and whether a different EPS would result under IFRSs and US GAAP. The Board did not wish to have a difference in this respect and therefore agreed to bring back this issue in September for further.

With regard to convergence, the Board noted that convergence is achieved if EPS is calculated in the same way. However, different EPS amounts under US GAAP and IFRSs could still result from differences in the underlying accounting for instruments.

The amendments to IAS 33 are intended to be effective for annual periods beginning 1 January 2009 to coincide with the FASB's proposed effective date for annual periods beginning after 15 December 2008.

Share-based payment – Vesting Conditions and Cancellations

The purpose of this discussion was to examine concerns raised by one Board member in response to the ballot draft of the ED. This Board member disagreed with the way in which it appears that the grant date is commonly interpreted under IFRS 2.

The definition of grant date is not addressed by the proposed amendment to IFRS 2. However, there is an interaction between the determination of the grant date and the proposed cancellation requirements. At its May meeting, the Board decided that a cancellation cannot occur before the grant date. Since the grant dates in IFRS 2 and SFAS 123 (revised) could be different, the same event could be treated as a reversal of expense by one standard (because grant date has not yet occurred) and an acceleration of expense by the other standard (because grant date has occurred).

The Board acknowledged that the existing definition of grant date (in particular the term 'shared understanding') might be ambiguous.

The Board did not make any technical decisions regarding the grant date definition, but it discussed the following alternatives on how to proceed with the ED:

• Put out the ED as balloted and address the grant date issue in a separate project.
• Hold back the ED and address the grant date issue as part of this project. It was noted that this would require re-exposure.

The Board decided to vote on the way forward at the September 2007 meeting and directed the staff to prepare a paper discussing the grant date issue in more detail.

IFRIC Update

The IFRIC Co-ordinator reported the results of the July 2007 IFRIC meeting. Deloitte's report on that meeting may be found on our July 2007 Past News Page.

Wednesday 18 July 2007 (afternoon only)

Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation – Re-deliberations of Exposure Draft: sweep issues

In May 2007, the Board tentatively decided that for a puttable instrument to qualify for equity classification, the instrument must, among other requirements, participate fully in the performance of the issuing entity in the period the instrument is outstanding (hereafter referred to as 'the Requirement'). The Board tentatively agreed that the full participation in the performance of the issuer can be best demonstrated when the instrument is issued and puttable at the fair value of the instrument.

Demand for an exception to the Requirement

Some constituents noted that the Requirement makes the scope of the proposed amendment too narrow because, in many situations, the issue price and/or the strike price of the put option of a puttable instrument is not simply defined as the fair value of the instrument. Instead those prices are the result of applying a formula or some other method, for example, the result of negotiation between the interested parties. They argue that if there is no exception to the Requirement, the proposed amendment will affect only a very limited number of entities.

In the view of those constituents, 'something less than full economic participation' would be sufficient for a puttable instrument to qualify for equity classification – for instance, participation based on a formula.

The Board decided that any exception should be within the boundaries of paragraph AG 14A of the ED, that is, any exception would not apply to publicly listed companies and entities that hold assets in fiduciary capacity.

Scope of an exception to the Requirement

The Board then discussed what level of participation in the performance of the entity should be demonstrated by the formula to qualify for equity classification.

The staff presented various alternatives, but stated a preference for an approach under which full participation in the accounting performance of the entity (that is, the effect of items that are not recognised for accounting purposes are not taken into consideration) would be required for a puttable instrument to qualify for equity classification should the exception to the Requirement apply, as follows:

• 1. Instrument is both issued and redeemed at the pro rata share of the book value of the entity (as calculated under IFRS).
• 2. Instrument is issued at a fixed price, the comprehensive income of the entity is distributed in its entirety annually, or if not distributed allocated to the partners' or shareholders' capital account (that is, full profit sharing), and the instrument is redeemed at the same fixed price as it was issued at. (If losses have been incurred in excess of other reserves over the period the instrument is outstanding the fixed redemption price would be adjusted accordingly).
• 3. Instrument is both issued and redeemed at the pro rata share of the book value, however that book value is not calculated under IFRS, but instead under local law or local GAAP as dictated by the charter or the instruments terms and conditions.

The Board had a lengthy discussion without concluding on a preferred approach. Some Board members were concerned about widening the scope at all. Others were reluctant to allow book values under local law or GAAP (alternative 3 above). Finally, the staff was directed to try to find a reasonable scope of exceptions taking into account staff views and the statements made at this meeting. If it would not be possible to find a solution the Board intends to release the amendments as as currently drafted.

This issue will be discussed again at the September meeting.

Annual Improvements

IFRS 5 – Accounting in consolidated financial statements of a subsidiary held for sale

The IFRIC was asked to provide guidance on applying IFRS 5 Non-current Assets Held for Sale and Discontinued Operations when an entity is committed to a plan to sell the controlling interest in a subsidiary. The request considered situations in which the entity retained a non-controlling interest in its former subsidiary, taking the form of either an investment in an associate, an investment in a joint venture or a financial asset.

The IFRIC recommended to the Board that IFRS 5 be amended to clarify the following issues:

• What triggers classification of the subsidiary's assets and liabilities as held for sale under IFRS 5?
• When classification as held for sale is required, should all the subsidiary's assets and liabilities be classified as held for sale or only the proportion to be sold?

The Board decided to propose an amendment to IFRS 5 stating:

An entity that is committed to a plan to sell a subsidiary involving loss of control of that subsidiary shall classify the assets and liabilities of that subsidiary as held for sale, regardless of whether the entity retains a non-controlling interest in its former subsidiary after the sale.

Given that IFRS 5 and FAS 144 are to be converged and that the FASB has a project on a similar issue (Proposed FSP FAS 144-c), the Board decided to inform the FASB about the intended amendment. There seemed to be a consensus that the amendment should not be added to the omnibus exposure draft if the FASB disagrees with it.

IAS 41 – Replanting obligations

The Board continued its deliberations on an issue relating to the interaction of the requirement of IAS 37 and IAS 41. Paragraph 22 of IAS 41 requires that the calculation of fair value is not reduced by future replanting costs.

The Board discussed a number of possible solutions but did not reach a consensus. Because the Board was not able to reach consensus in two lengthy discussions, the Board concluded that this issue is not minor in nature and therefore does not qualify as an annual improvement. No further decision on how to address this issue was made.

IAS 36 – Disclosures for value in use and fair value less costs to sell

The staff identified an inconsistency in the disclosure requirements in IAS 36 Impairment of Assets.

The Board decided to address this inconsistency by clarifying in paragraph 134(e) of IAS 36 that 'if fair value less costs to sell is determined using discounted cash flow projections, the disclosures required by paragraph 134 (d) shall also be given'.

IAS 17 – Classification of leases of land and buildings

The staff was notified of a perceived inconsistency in the guidance on the classification of leases of land and buildings in IAS 17 Leases.

Paragraph 14 of IAS 17 states:

However, a characteristic of land is that it normally has an indefinite economic life and, if title is not expected to pass to the lessee by the end of the lease term, the lessee normally does not receive substantially all of the risks and rewards incidental to ownership, in which case the lease of land will be an operating lease.

The staff noted that there is concern that this additional guidance is unnecessary and potentially hinders the application of the general lease classification guidance in paragraphs 8 to 12 of IAS 17. The consequence of the current wording is that more leases of land and buildings are bifurcated between an operating lease for the land and a finance lease for the building than might otherwise arise from a simple application of the criteria in paragraphs 8 to 12 of IAS 17. Therefore, the staff proposed to delete this sentence.

The Board stated that the guidance in question was added as an improvement in 2003 and that the concern is obviously caused by reading 'normally' as 'always'.

One Board member suggested addressing this issue by rephrasing both paragraphs 14 and 15 of IAS 17 as these paragraphs nearly say the same.

The Board agreed and the Board member was asked to circulate the proposed rephrasing offline.

IAS 10 – Dividends declared after the balance sheet date

The staff identified that the reference to IAS 37 in paragraph 13 of IAS 10 Events after the Balance Sheet Date may imply that a liability can be recognised for dividends not declared until after the balance sheet date on the basis of a constructive obligation. Such circumstances may arise, for example, when there is an established pattern paying a dividend.

The Board agreed to propose the following amendment to paragraph 13 of IAS 10:

the dividends are not recognised as a liability at the balance sheet date because no present obligation exists at the balance sheet date they do not meet the criteria of a present obligation in IAS 37.

IAS 19 – Accounting for plan administration cost

The Board decided to align the definition of return on plan assets with the guidance in paragraph 107 of IAS 19 Employee Benefits by proposing the following amendment to paragraph 7 of IAS 19:

The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined benefit obligation) and less any tax payable by the plan itself.

IAS 23 – Definition of borrowing cost

To improve consistency between standards the Board decided to revise the components of borrowing costs given in paragraph 6(a) to (c) of IAS 23 Borrowing Costs by making reference to the guidance in IAS 39 Financial Instruments: Recognition and Measurement relating to effective interest rate.

IAS 34 – Earnings per share disclosures

The Board agreed to propose an amendment to paragraph 11 of IAS 34 Interim Financial Reporting clarifying that the requirement to present earnings per share in an interim report only applies to entities that fall within the scope of IAS 33 Earnings per Share.

IAS 1 – Reporting compliance with IFRSs

The Board redeliberated its December 2006 decision to amend IAS 1 Presentation of Financial Statements in respect of reporting compliance with IFRSs. Members of the Standards Advisory Council raised the following concerns over the proposed amendment:

• The statement of compliance with IFRSs should refer to 'IFRSs as published by the IASB' to draw a greater distinction with a statement of compliance with 'IFRSs as adopted for use in country X'. This would also align the compliance statement with the basis on which the SEC is proposing to exempt a Foreign Private Issuer from presenting a reconciliation with US GAAP.
• The ability to refer to IFRSs in the financial statements and disclose the differences between the financial statements as presented and the financial statements prepared in accordance with IFRSs as published by the IASB should be restricted only to circumstances when:
  • (i) the reporting framework which deviates from IFRSs published by the IASB is imposed by law or by an empowered authority in its jurisdiction; and
  • (ii) the reporting framework used is not significantly different from IFRSs as published by the IASB.

Some Board members noted that paragraph 14A should apply equally for all entities not only for those who are required by law/ regulation and expressed a lack of understanding for the proposed restriction. One Board member noted that it is not the business of the IASB do deal with entities that are not in compliance with IFRSs. This should be referred to regulators. The Board decided by majority vote to confirm the proposed amendment as currently drafted.

Exposure Draft

With regard to the omnibus exposure draft the following decisions were made:

• All proposed changes should be applied retrospectively
• No new reliefs should be provided for first time adopters
• Early adoption should be permitted but if the amendments are adopted early, all of the amendments should be adopted at the same time. The Board noted that a number of amendments affect more than one standard and that permission of selective early adoption would make the ED unnecessarily complicated.

The comment period will be 90 days.

19 July 2007

IAS 27 Consolidated and Separate Financial Statements – Formation of a new parent entity

Paragraph 37 of IAS 27 Consolidated and Separate Financial Statements requires investments in subsidiaries to be accounted for in the separate financial statements either at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measurement. This might be a potential accounting impediment to entities adopting a more prudentially sound corporate structure, as would be required in some jurisdictions to reduce risk exposure.

In such reorganisations, a new non-operating holding company is established for an existing group, which becomes the parent of the existing parent, issuing new shares to the shareholders of the previous parent. No change in the actual or relative ownership interests nor the assets and liabilities of the group takes place.

At present, the term 'cost' used by IAS 27.37 is being interpreted as requiring a newly formed parent entity to measure its investment in the previous parent at fair value, that is at the fair value of the existing group. This would usually differ from the previous cost figure in the separate financial statements of the previous parent and require a remeasurement. The staff had asked the IASB to consider making a limited amendment to IAS 27 to remove this impediment by exempting such new parents from the requirements of IAS 27.37, particularly as the consolidated balance sheet of the new group will be the same as before the reorganisation.

Some Board members argued that fair value measurement in the separate financial statements of the new parent was of little utility to users, which had been corroborated by staff research. Primarily, no transaction of economic substance had really taken place as there had been no change in ownership, there had only been a change of legal structure ('change of name'). It was suggested such transactions could be dealt with by the IFRIC or within the project on common control transactions and that the treatment should be consistent with that for other common control transactions.

Some Board members were worried that the amendment proposed by the staff was limited to a specific type of transaction. One Board member questioned whether there really was no transaction and assumed that there were other factors involved in such transactions, like changes in the risk structure of groups, not captured by the staff. Other Board Members questioned whether such transactions were really covered by IAS 27.37, but staff outlined that this was how IFRSs were being interpreted at present. It was argued that the IASB should be practical and that no fair value accounting should be required if there really was no transaction.

After some discussion, the chairman called for a vote on whether there should be an exemption for such transaction and whether the staff should draft requirements specifying the use of carryover values (no fair value uplifts) for such transactions. Ten Board members were in favour.

Post-employment Benefits – Discussion paper

Feedback from Employee Benefits Working Group Meeting

The first meeting of the Employee Benefits Working Group was on 5 June 2007. The staff informed the Board of the discussions by the Working Group, which had considered the following topics:

1. the Phase 2 project;
2. elimination of deferred recognition for defined benefit promises;
3. presentation alternatives, including three approaches previously discussed by the Board;
4. definitions of benefit promises; and
5. the classification of promises with fixed returns.

Topics 2 and 3 were discussed by the Board.

Unvested past service cost - elimination of deferred recognition for defined benefit promises

The staff asked the Board to confirm that in Phase 1, unvested past service cost would be recognised immediately in the period the amendment occurs. There were no objections by the Board.

Presentation of defined benefit costs

The Working Group had discussed the three approaches previously discussed by the Board, favouring approach 3. However, the Board was asked to modify approach three for inclusion in the planned discussion paper so that the following items would be recognised in profit or loss:

• a. service cost;
• b. interest cost;
• c. actuarial gains and losses on the defined benefit obligation except those arising from changes in the discount rate; and
• d. imputed interest income on plan assets determined using the discount rate determined by reference to market yields at the balance sheet date on high quality corporate bonds.

• e. Actuarial gains and losses arising from changes in the discount rate; and
• f. changes in the fair value of plan assets other than those in (d)

There was widespread reluctance by the Board to accept a modified approach three as favoured by some user representatives on the Working Group. The idea of recognising imputed interest based on high quality corporate bonds met with particularly stiff opposition, as many Board members seemed to want to eliminate the use of expected returns on plan assets altogether. One Board member, when asked if he preferred the original approach 3 over the proposed modification, said 'this is like asking me if I prefer to live or die.' There seemed to be general agreement with the chairman's analysis that the discussion paper should contain all three approaches in their original form and that the problems with using each approach should be outlined.

Cash balance and similar plans – Definitions of benefit promises

The staff asked the Board to finalise definitions of the three categories of post-employment benefits that had been discussed during this project and at previous Board meetings:

• defined benefit;
• defined contribution; and
• defined return benefit promises.

The staff had proposed the following revised definitions:

• defined contribution promise: a post-employment benefit promise that obliges the employer to pay specified contributions to a separate entity (a fund). Payment by the employer of those specified contributions extinguishes the obligation.
• defined return promise: a post-employment benefit promise, which may be funded or unfunded, that obliges the employer to pay a benefit comprised of:
  • a contribution requirement based on current salary; and
  • a promised return on the specified contributions that is linked to the change in an asset or index.
• defined benefit promise: a post-employment benefit promise that is neither defined contribution nor defined return.

Other Board members criticised the notion that for a plan to qualify as a defined contribution promise, it would have to be funded. Board members noted that in some jurisdictions many defined contribution schemes were unfunded. However, leaving the plan unfunded would introduce a guaranteed return element into the lump-sum (or fixed amount) payment promise, even though that return might be zero per cent, the staff argued. The Board asked the staff to clarify the wording on the importance of the timing of funding for the distinction between defined contribution and defined return promises. The staff agreed to do so. The staff also highlighted that any plan in which the contribution could be expressed in terms of current salary (such as genuine current salary and career average plans) would be classified as defined return promises.

Finally Board members asked if it was possible to collapse defined contribution and defined return promises into a single category. The staff argued that one would have to be very careful with the wording of such a broader category, so as to reassure entities currently making defined contribution promises that nothing would change for them. The chairman asked the staff to revise the definitions, collapsing defined return and defined contribution promises into a single category (which would not be called defined contribution so as to emphasise that there had been a change of definition) and defined benefit promises. In particular, the staff was asked to clarify the wording on funding to emphasise that promised returns related to actual and notional contributions.

Cash Balance and similar plans - Benefit promises with 'higher of' options

The Board discussed staff proposals on how to account for benefit promises that have maximum or minimum limits placed on them (also called 'higher of' options). Under current proposals, such promises would not be classified as either defined contribution or defined return and as such would be accounted for as a defined benefit plan using the projected unit credit method, thus ignoring the value of the 'higher of' option.

The staff had proposed to bifurcate such plans into a defined benefit element to be accounted for under IAS 19 and a 'higher of' option element to be accounted for at fair value. Changes in the liability in respect of the 'higher of' option would be disaggregated into a service cost element equal to the initial recognition of the 'higher of' liability and a fair value gain/loss element equal to the subsequent remeasurement of that liability. Both elements would be presented in profit or loss.

One Board member pointed out that in his home jurisdiction, such plans would be accounted for as two plans: A defined benefit plan accounted for as such and a separate 'higher of' plan measured at the incremental value of the 'higher of' promise. The staff agreed to investigate the accounting of such plans to see whether there was any merit to adopting a similar approach under IFRSs.

The Board discussed the valuation method for 'higher of' options. There was disagreement whether such options should be measured at fair value and what fair value meant in this context. It was suggested that entities should estimate the sum of the present value of future cash flows associated with the option, making assumptions about their potential volatility. No decisions were taken.

Vested benefits payable at the date when an employee leaves the entity

At the Board's June meeting, a Board member raised the question of whether, for defined return promises, an additional liability should be recognised if:

• vested benefits are payable at the date when an employee leaves the entity; and
• the amount payable is greater than the amount that would otherwise be recognised in the balance sheet for those benefits.

For defined return benefits, this is likely to occur when the rate of return promised to the employee is less than the discount rate used to determine the present value of the contribution requirement. The staff had recommended the IASB should not require an additional liability to reflect the amount that an employer would have to pay an employee leaving service before retirement, even though this might be considered inconsistent with the requirements of paragraph 49 of IAS 39, which states:

The fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.

However, the staff had argued that such an approach should not be applied in Phase 1 of this project as it would result in different accounting for benefits depending on whether such benefits are vested or unvested and as no additional liability is required for other post-employment benefits.

Some Board members asked the staff to clarify the language in the agenda paper. Moreover, it was suggested that staff should consider whether or not such 'walk away payments' would constitute a liability under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. One Board Member demanded that the staff should undertake further research as to how widespread the problem was in practice. The staff agreed. The chairman proposed going along with the staff's present approach and discuss the issue again at a later stage. Even though no formal vote was taken, there seemed to be agreement among the

Board members to move forward as proposed.

Components of a defined return promise and their measurement

The Board had defined a defined return promise as having two components, comprising:

• a contribution requirement based on current salary; and
• a promised return on the specified contributions that is linked to the change in an asset or index.

In terms of measurement, the staff had recommended that the contribution requirement should include both paid and unpaid contributions, with any payments being recognised as plan assets. The contribution element would be measured based on the specified contributions and using the IAS 19 discount rate, while the return element would be measured at fair value, assuming that benefits for past service would not change. The liability for benefits in payment should be measured using the projected unit credit method discounted at the IAS 19 discount rate.

Distinction between contribution and return element

Board members were not united in their assessment of the staff's analysis that to ensure the liability for the contribution requirement is always complete, whatever the funding level, was to consider the plan liabilities and plan assets separately. Some Board members disagreed over whether a difference between the contributions paid and the promised return constituted a contribution liability or a return liability, although the staff seemed to suggest that they regarded such differences as part a return liability.

Performance risk

The Board discussed the staff's proposals on how to account for performance risk, i.e. the risk that the entity defaults on its obligation reflected both the credit risk of the entity and the possibility that the entity will choose not to meet its obligation. It had been argued that that it might sometimes be difficult to distinguish credit risk from other elements of performance risk. Moreover, whether fair value reflects performance risk is an unresolved question in IFRSs. As a consequence, the staff had abandoned its earlier proposal to measure all components of defined return promises at fair value, arguing instead that the contribution element should be measured as outlined above.

The Board discussed the two elements of performance risk outlined by the staff. There was a debate about whether the notion that fair value included the probability of default (credit risk), while excluding the propensity of entities to force employees into accepting lower benefit levels. It was suggested that the staff should undertake more research in respect of whether it was always possible to distinguish credit risk from the risk that entities choose not to meet their obligations.

Benefits in payment

The Board discussed the staff proposal to stop treating the components of defined return promises separately once the plan had reached its payout phase and use the projected unit credit method instead. Even though the staff acknowledged that having three different measurement attributes for defined return plans was not ideal, this was nevertheless necessary to emphasise that there was no essential difference between defined return and defined benefit plans in terms of cash flows during the payout phase.

Where a defined benefit promise and a defined return promise had identical payout streams, the staff had recommended 'resetting' the defined return promise to the same final amount as the defined benefit plan. A defined return promise measured at CU 2,000 on the date of retirement that offered identical payouts compared with a defined return promise valued at CU 2,500 would thus be remeasured CU 2,500. Both plans would then be measured using the projected unit credit method and the IAS 19 discount rate throughout the payout phase. Board members disagreed over whether this was conceptionally superior to the opposite method. Due to the limited time available, the chairman decided to postpone a decision on the matter.

Income Taxes

The Board held a brief discussion of three issues noted for resolution before the joint FASB/IASB exposure draft on income taxes is issued.

Tax credits and investment tax credits

The Board agreed that, to be consistent with the scope exclusion in SFAS 109, 'investment tax credits' should be defined as tax credits that are directly related to the acquisition of depreciable assets.

Special deductions

SFAS 109 has explicit requirements for certain 'special deductions' that are a feature of the US tax system. IAS 12 does not address the issue at present. The Board agreed that IAS 12 should continue to be is silent on special deductions. The Board and staff are not aware of any problems in practice arising, although this does not mean that there is consistent treatment in practice or that problems will not arise in the future.

Weighted probability approach to determine the applicable rate

The Board agreed that that the rate used to measure deferred tax assets and liabilities should continue to be simply the rate expected to apply. This was not an expected value notion, but rather a best guess of the rate that would be applied, given the nature of the related income.

The use of the undistributed or distributed rate

The Board discussed the situation of certain entities (such as Real Estate Investment Trusts) that qualify for a special tax rate (often significantly lower than the normal corporate income tax rate) provided that the Trust distributes a given percentage of its income as a dividend on an annual basis.

The Board agreed that an entity should use the rate that it expects will applying when measuring current or deferred tax assets or liabilities. The Board acknowledged that this was a change in its previous decisions but thought the concept of requiring the rate that is expected to apply was a concept already contained in both Statement 109 and IAS 12. Some Board members were very unhappy about the consequences of this decision, but were not willing to dissent from the proposal package because of it.

Conceptual Framework – Phase C - Measurement

Measurement concepts and principles

The staff noted that the Board was at the beginning of Milestone II of this phase of the Conceptual Framework project and that it had agreed to have a discussion of measurement concepts and principles at this stage. It was the intention that the measurement concepts and principles should be the first set of criteria used to evaluate the measurement basis candidates brought forward from Milestone I.

The staff noted that the paper was the first stage of an iterative process and should not be seen as the basis for immediate decisions to be reflected in the forthcoming discussion paper. It was designed to provoke a discussion-as such the Board was asked whether the definitions and approach was thought to be useful and helpful.

Opinions were sharply divided. Some thought that the staff were absolutely right to catalogue and address the issues as they had done. There is nothing substantive on measurement in the current FASB and IASB Frameworks and it was necessary to address the topic from the very foundations. Others, however, saw the exercise as needlessly academic and a recipe for unnecessarily delaying developing the discussion paper. In defence, the staff noted that much of the material in the papers presented would form part of the Basis for Conclusions rather than the concepts themselves.

The debate was lively but no decisions were reached. The staff will review their suggestions in light of the opinions and concerns expressed by Board members. The staff did not pursue a paper included in the meeting Observer Notes on the evaluation of measurement basis candidates using the proposed measurement concepts and principles.

Conceptual Framework – Phase D - Reporting Entity

Comment period

The Board agreed that the forthcoming Discussion Paper on Phase D of the Conceptual Frameworks project (Reporting Entity), which is now in pre-ballot and is expected later in the third quarter 2007, should have a comment period of 120 days.

20 July 2007

Liabilities – Amendments to IAS 37

The purpose of this session was summarise the current status of the project, to identify unresolved issues and to agree on the extent of further work required on these topics in the IAS 37 project.

Distinguishing a liability from a business risk

The Board reaffirmed its previous decision that the occurrence of a past event (i.e. not a potential outflow of economic benefits) distinguishes a liability from a business risk. A present obligation arises after something has happened. In contrast, a business risk is something that might happen in the future as a result of conditions that exist on the balance sheet date.

The Board then discussed a related issue with regard to the definition of a liability. The staff noted that the phrase 'little, if any, discretion' used in paragraph 13 of the ED to describe when and why an entity has a present obligation might be ambiguous and asked the Board whether this term should be replaced by more emphatic phrases such as 'irrevocably committed', 'no discretion' or 'something an entity cannot avoid'.

One Board member noted that the main problem with the phrase 'little, if any, discretion' is that it is sometimes applied to answer the question whether the outflow of resources can be avoided.

Overall the Board was not convinced that a more emphatic phrase would make things better and decided to keep the phrase 'little, if any, discretion'.

Stand ready obligations

The Board reaffirmed that a stand ready obligation must satisfy the definition of a liability and that the term 'stand ready obligation' is just a label for situations where an entity has an unconditional obligation associated with a contractual obligation (for example, product warranty and written options).

The staff presented revised wording for paragraphs 22 to 26 of the ED reflecting the Boards tentative conclusion. Subject to editorial changes the Board agreed to the proposal.

Existence of a present obligation The Board identified three general situations when uncertainty about the existence of a present obligation might arise:

• (a) Did a past event occur?
• (b) How does authoritative guidance (including statute, law, contract and regulation) apply to known facts?
• (c) In the absence of legal enforceability, do cumulative events and circumstances provide sufficient evidence to confirm that a present obligation exists?

Situations (a) and (b)

The Board noted that an entity must use judgment to determine whether a present obligation exists and that the evidence an entity considers and the relative weight assigned to each piece of evidence will depend on the individual facts and circumstances of each case. Subject to some editorial changes it was decided to give additional guidance on situations (a) and (b) by providing indicators such as:

• The entity's own experience with identical or similar items
• The experience of others with identical or similar items
• The opinion of experts
• Additional evidence provided by events after the balance sheet date about conditions that existed on the balance sheet date
• Any evidence of a potential breakdown or weakness in an entity's internal controls (for example a letter of complaint, the start of legal proceedings or an internal audit report).

One Board member observed that the purpose of the indicators is to indicate whether a certain event that has happened leads to a liability rather than solely whether an event has happened, and that this should be clarified in the standard. At this point the Board redeliberated the 'hamburger example'. The Board discussed this example in March and May 2007 but did not reach a conclusion whether:

• 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.
• A present obligation arises only when the hamburger is contaminated and all available evidence is used to determine whether or not a present obligation exists.

One Board member recalled a previous discussion, in which the Board was content to conclude that performing operations in a hospital did not create liabilities, only when an operation went wrong. There was a strong analogy between the examples. However, Board members noted that the staff had made real progress towards solving a very real problem in accounting and encouraged them to spend a bit more time to see whether a definitive solution could be developed. The Board agreed to ask the staff to investigate the issue further.

Situation (c)

As agreed at the May 2007 meeting the staff explored the following three options to address uncertainty in the ED:

Option 1: Limit the recognition of constructive obligations to those a court could enforce;

Option 2: Recognise both constructive obligations that a court could enforce and constructive obligations that are enforceable 'by equivalent means' and explore the meaning of 'by equivalent means';

Option 3: Option 2, but use the explanatory text already in paragraph 15 of the ED as a proxy for explaining 'by equivalent means'. The staff proposed the following revised wording:

'In the absence of legal enforceability, particular care is required in determining whether an external party has a right to call upon an entity to act in a particular way. In the case of a constructive obligation, this will only be the case 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.'

The Board agreed to proceed with option 3. The Board draw particular attention to the phrase 'an external party has a right' that is, any kind of economic compulsion would not meet the criteria of an obligation.

The 'more likely than not' recognition criterion

The Board was asked whether an explicit 'more likely than not' criterion should be included in any final standard.

The Board was nearly equally split. Board members against including the criterion argued that assessing whether a present obligation exists is a judgemental, not a mathematical issue. In addition, including the criterion would create a 'safe harbour' that would help preparers to avoid tough decisions. Those Board members who favoured including the criterion would include it, provided that it was not seen as determinative.

The Board will continue its deliberations at a subsequent meeting.

Joint Ventures – Loss of Joint Control

The Board discussed a sweep issue raised by one Board member on review of the pre-ballot draft of the proposed amendments to IAS 31 Interests in Joint Ventures (ED).

The ED stipulates that on loss of joint control the investor should remeasure to fair value any remaining investment in the former joint venture and recognise a gain or loss. As the ED will propose to require the use of the equity method for interests in joint ventures the question arose whether the investor should be required to remeasure to fair value regardless of whether it recognises its investment using the equity method both before and after remeasurement.

The following views were discussed:

View 1: Loss of joint control is a significant economic event

The wording of the Board's decision when amending IAS 27 Consolidated and Separate Financial Statements supports the view that it is appropriate to remeasure an investment in a joint venture whenever the investor loses joint control, regardless of whether the basis of accounting changes at that time. The loss of joint control is a significant economic event that changes the nature of an investment. Joint control is established by contractual arrangement. For a venturer to lose joint control, the venturers must change the terms of the contractual arrangement. That change of contractual terms would represent a significant economic event, and therefore, it is appropriate to remeasure any remaining investment in the venture, even if that investment continues to be accounted for using the equity method.

View 2: Remeasurement should result from a change in basis of accounting

The ED gives guidance on how to determine whether a joint arrangement is a joint asset, joint operation or joint venture, or a combination of these. If, according to IAS 31, a venturer has an interest in a joint venture the venturer applies the equity method as described in IAS 28 Investments in Associates. It would appear inappropriate to require remeasurement of that investment (and the recognition of a gain or loss) when the change in the nature of an investment does not result in any change in the basis for accounting.

Those Board members in favour of view 1 noted that they would accept view 2 for practical reasons in order to get out the ED quickly. One Board member expressed the view that the equity method would not be appropriate for accounting for both associates and joint ventures but that 'we have to live with it in the short term'.

The Board decided not to require re-measurement of an interest when joint control is lost but an equity interest is retained. This decision was essentially pragmatic. The Board did not want to suggest that a change in basis of accounting was a trigger for remeasurement.

Format of the ED

The Board decided that the forthcoming exposure draft should be exposed as a Draft IFRS and not as amendments to IAS 31.

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