IASB Meeting 11-14 December 2007

Tuesday 11 December

Liabilities and Equity [education session]

This project is part of the Memorandum of Understanding between the FASB and the IASB. On 30 November 2007, the FASB published for comment a preliminary views document. The document can be downloaded from the FASB's Website.

This session was split in two parts:

• The Board's strategy for the project
• An education session conducted by FASB staff members on the preliminary views document issued by the FASB

Strategy

The staff informed the Board that it plans to present a comprehensive analysis of the differences between the FASB's preliminary views and the current approach under IFRSs as set out in IAS 32 at the Board meeting in January or February (including a draft IASB Discussion Paper (DP) inviting comment on FASB's preliminary views). Staff noted that if the Board does issue amendments to IAS 32 regarding instruments puttable at fair value, that would be included in the analysis. The focus will be on the 'basic ownership' and 'ownership-settlement' approaches. The next step would be the publication of the IASB DP in March 2008. The DP would incorporate FASB's preliminary views document, possibly with additional material or questions, and invite public comments.

The Board agreed to the proposed schedule.

Education session

This was an education session and accordingly no decisions were made. The full presentation can be downloaded from the IASB's Website (Agenda Paper 4B).

The main topics of the presentation were:

• The FASB's preference is a basic ownership approach. A basic ownership instrument is the most subordinate class of claims that provides for a share of the assets after all other claims are satisfied – settlement would not be relevant for classification. In this approach (like in the other approaches) equity is defined first – liabilities are the residual.

  The FASB staff highlighted the reduction of accounting arbitrage opportunities and its simplicity as the main advantages of this approach. Additionally, substance and linkage tests would be reduced. The major disadvantages are the greater impact on the income statement and the changes in accounting for convertible debt (especially compared to the current IAS 32 model) and stock options.

• The ownership-settlement approach seems less favourable, but still a feasible approach.

• The reassessed expected outcomes approach was found to be complex and hard to communicate to constituents. The FASB staff made clear that they would prefer not to analyse this approach any further as none of the FASB members voted in favour of it.

The Board discussed some types of instruments, especially those with put features, in the light of the previous discussions it had on the proposed puttable instruments amendments to IAS 32. Also, it discussed some types of preference shares. The FASB staff noted that the preliminary views document is not supposed to be close to a standard but more a discussion of the broader principles from which a standard could be developed.

One participant mentioned the possible impact of the equity definition on distributable profits if distributable profits are based on equity as measured in accordance with IFRSs.

Some Board members raised concerns that the proposed approach to distinguish liabilities and equity will not be in line with the current IASB Framework and asked if the FASB and IASB staff are communicating with the Framework's project team. It was noted that staff must ensure that both projects are aligned so that the liabilities/equity project does not present outcomes that contradict the results from the Framework project.

Fair Value Measurements

The purpose of this session was to continue the deliberations on the issues in the Fair Value Measurements Discussion Paper and to present an analysis of the 'market participants view' under SFAS 157 compared to the 'knowledgeable, willing parties in an arm's length transaction' in IFRSs.

After staff review of the two approaches, the Board was asked if it agrees with the staff analysis on the market participants view. Some Board members raised concerns about the possible differences of the notion 'market participants view' in comparison to a 'knowledgeable, willing party'. The staff noted that they see no differences in content. One Board member asked why a change in terminology would then be necessary as constituents are familiar with the notion of a 'knowledgeable, willing party'. Other Board members said that the document must make clear that the terms are interchangeable.

After this the Board discussed what a market is and whether, for certain transactions, one can assume a market exists if, for example, actually only two parties are acting. As no definition of 'market' was provided, the Board asked the staff to develop an analysis. As all further discussions depend on the outcome of that analysis the Board agreed to postpone discussion of the other items in the agenda paper to a later Board meeting. No further decisions were made.

Technical Plan

The staff presented an updated draft version of the IASB Work Plan and asked the Board if it has questions on items on the agenda.

One Board member asked about the progress on the short-term convergence project on impairment as there are major differences between US GAAP and IFRSs. The staff said that the project is lead by the FASB, and no resources are currently allocated to this project as the FASB gives higher priority to the long-term convergence projects.

On the short-term convergence project on income taxes the Board was informed that a pre-ballot ED would be circulated amongst Board members early in the new year.

Regarding the revenue recognition project the staff mentioned that it will insert cross references to the paper on this topic issued by the PPAinE (Proactive Accounting Activities in Europe).

The Board was informed that the progress on the project on lease accounting has slowed due to a lack of staff resources.

Wednesday 12 December 2007

Agenda Proposals

The staff presented the Board with four agenda proposals:

• Intangibles
• Emissions trading and government grants
• Common control transactions
• Management commentary

The IASB technical and research directors discussed the issue of resource constraints on the above projects, noting that a detailed analysis was provided to the Board in an internal management document that was not publicly available. The IASB research director noted that they were aware of pressure on constituents, staff, and the Board arising from the current projects already on the IASB agenda and did not want unnecessarily to add further pressure on limited resources.

Intangibles

Staff from the Australian Accounting Standards Board (AASB) presented an agenda proposal for a project on intangible assets to be added to the IASB's and FASB's technical agendas. AASB staff noted that earlier drafts of the proposal were discussed with the IASB at its October 2006 and January 2007 meetings and at the joint IASB/FASB meeting in April 2007. The AASB staff presented a range of possible scopes for the agenda proposal:

• Specifying disclosures for internally generated intangible assets.
• Resolving major definition, recognition and measurement shortcomings with IAS 38.
• Specifying recognition and disclosure of intangible assets developed from a discrete plan, initially and/or subsequently measured at cost or fair value.
• Specifying recognition and disclosure of internally generated intangible assets, irrespective of the manner in which they arise.

The IASB research director put forward the recommendation that the Board should not put the project on the agenda at this stage as this would be a major project.

A number of Board members expressed support for the director's recommendation, and noted that although the project was not urgent, it was an important project that should remain on the research agenda. The Board thanked the AASB staff for the significant amount of time and effort already invested in the project. The Board asked the staff to discuss the future of the project 'offline' with AASB staff and other national standard setters. It was suggested to the AASB staff that the scope of the intangibles project could be expanded to start with 'a clean sheet of paper' and revisit the fundamentals of accounting for intangible assets.

Emissions Trading and Government Grants

IASB staff presented an agenda proposal to re-activate the project to provide guidance on how to account for emission trading schemes. Staff noted that emission trading schemes were becoming increasingly common and that subsequent to the withdrawal of IFRIC 3, there was no clear accounting guidance on how to account for such schemes.

The staff paper presented to the Board for the agenda decision included the following table outlining the main approaches that are being accepted in practice to account for emissions trading schemes:

Staff also noted that the FASB has added a similar project to its agenda. One Board member questioned whether the project would deal only with emission trading schemes, and any government grants related to such schemes, or whether the IAS 20 project should also be reactivated.

The IASB research director put forward the recommendation to restart work on the emission trading schemes project. The IASB research director did not believe that the scope of the work should extend to a review of IAS 20. It was suggested by one Board member that the project could be split into two phases:

• Phase 1 could deal with emissions trading schemes
• Phase 2 could deal with a revised IAS 20.

Staff did not support this proposal.

Another Board member queried why there was diversity in practice when the IAS 8 hierarchy was in place and IFRIC 3 exists (although not effective). It was noted that it is important that the project defines what an emission right is.

The staff proposed that the scope of the project should only address emission trading rights, including any government grants associated with such emission trading rights, but not address government grants more generally. The Board voted (10 in favour) to proceed with this project.

Common control transactions

The IASB staff presented an agenda proposal to address common control transactions. The staff noted that a number of requests had been received to add a project on common control transactions to its agenda. Staff proposed that the scope of any such project on common control transactions be limited to accounting for combinations between entities or businesses under common control in the acquirer's consolidated and separate financial statements. They also considered that the project should investigate whether the description of a combination between entities or businesses under common control could be clarified. The staff recommended not to extend the project scope beyond combinations between entities or businesses under common control.

The IASB research director put forward the recommendation that this project be added to the agenda. The IASB research director noted that this was a significant issue in Australasia and has also been raised by constituents in Europe as an issue. It was noted that some jurisdictions already have their own common control standard. The IASB research director recommended that the project should be narrow in scope so as not to capture all common control transactions (for example, transfer pricing issues would be excluded).

The Board discussed the scope of the potential common control transaction project at length. One Board member noted that spin offs and demergers was the bigger issue within common control transactions and that this issue should be addressed as part of the common control project. Other Board members and staff agreed. Another Board member noted that the examples provided in the staff proposal were all 100% owned subsidiaries, and that the real issue arises when there is a minority interest.

The staff proposed the following scope for the common control transactions project:

• Define what a common control transaction is.
• Include demergers and spin offs.
• Consider accounting in both the separate and consolidated financial statements.

The process to be followed will be determined at a future Board meeting – that is, whether the project would include a discussion paper, or whether the project would go straight to the Exposure Draft stage.

The Board agreed with the revised scope and agreed to add the item to the technical agenda (8 in favour).

Management Commentary

The IASB staff presented an agenda proposal to use the conclusions reached in the Management Commentary Discussion Paper as the basis for moving the project from the research agenda to the active agenda. The project would address the presentation of information presented outside the financial statements in the form of management's explanation of the enterprise's financial condition, changes in financial condition, results of operations, and causes of changes in material line items.

The staff presenting the paper expressed a personal view that any such guidance arising from the project should be in the form of a 'non-mandatory IFRS' rather than a 'best practice' guidance. It was proposed that jurisdictions could optionally adopt such an IFRS.

The IASB research director put forward the recommendation that the Board does not undertake management commentary as a standards-level project. Instead, the IASB research director was supportive of a project that would produce best practice guidance.

The Board agreed with the IASB research director's recommendation (8 in favour).

IFRIC: Amendments to IFRS 5 – Owner Distributions

The IFRIC staff presented a paper on whether the requirements in IFRS 5 are applicable to non-current assets (or disposal groups) classified as held for sale and to discontinued operations should be extended to non-current assets (disposal groups) that are held for distribution to owners. This issue arose as a consequence of IFRIC discussions on its project on accounting for non-cash distributions. Board members were commenting on an appendix to the board papers that was not available to the public.

One Board member raised the issue of whether the amendment should refer to the 'commitment' to distribute assets to its owners, or to an 'obligation' to distribute assets to its owners. It was noted that the use of the term 'commitment' would be consistent with the current wording of IFRS 5, whereas the term 'obligation' would be consistent with the wording of the draft Interpretation on non-cash asset distributions developed by the IFRIC.

The IFRIC staff said that they had not considered the issue as part of their deliberations on the draft IFRIC and suggested that the amendments to IFRS 5 be removed from the draft IFRIC Interpretation and considered by the Board as part of the 2008 Annual Improvements Process so as not to delay the publication of the Draft IFRIC Interpretation. The staff further suggested including a question in the draft IFRIC on this issue.

The Board agreed.

Revenue Recognition

The Board continued its discussion of the 'Measurement Model', begun in November 2007 (see IASPlus Meeting Notes for November 2007). The measurement model is one of two that are being considered for inclusion in the forthcoming FASB/ IASB discussion paper on revenue recognition. This session was intended to ensure that issues to be raised with respondents were identified and included in the discussion paper.

The staff reminded the meeting that, under the measurement model, revenue is not defined. Rather, revenue reflects the change in the exit price of the contract asset or contract liability from providing goods and services at the date the goods and services are provided. The Board discussed four possible approaches. Briefly, those approaches were:

1. All contract revenue would be reported in the revenue line; any losses on the contract would be reported in a separate line item. Total revenue recognised could be greater than contract consideration.
2. Report the effects of price changes as revenue – revenue and changes in the exit price of the customer contract would be reported in the same line. Total revenue recognised would be equal to contract consideration; however in any one period revenue could be negative.
3. Report the effects of price changes outside revenue – in this presentation, all changes in the exit price would be presented separately from revenue as contract gains and losses. Total revenue recognised would be equal to the contract consideration.
4. Report the effects of price changes as an adjustment of revenue – within 'revenue', there would be an analysis of gains and losses on contract, coming to a total of 'contract revenue' that would be equal to the contract consideration.

Board members suggested that remeasurement would be required either when the exit price changed or when the entity did something under the contract.

A Board member thought that the analysis was useful for complex, infrequent transactions (such as building a nuclear power station). However, the market for such transactions does not exist and it would be very difficult to determine exit prices (as currently understood). In addition, he challenged the staff and other Board members whether and how this information was useful in forecasting the entity's future cash flows. Another Board member shared this concern and asked whether analysts would find this approach useful.

A Board member expressed the view that analysts are more interested in margin rather than revenue; revenue is important but it is not overriding. Other Board members noted that if margin analysis was to be useful and consistent, all the components of gross margin would have to reflect current fair value (at least one Board member objected, noting that the project was restricted to revenue). They noted that, while the information provided by the measurement model might be useful for benchmarking purposes, it would not assist in predicting future cash flows or margin analysis. It was also noted that the Standards Advisory Council had asked the Board to justify changes, especially radical ones like this, on the basis of decision usefulness and utility in predicting future cash flows.

A Board member noted that own costs are important to estimating future cash flows and that neither the measurement model nor the customer consideration model (to be discussed later) solved the problem. However, the measurement model potentially made all prepaid contracts into IAS 39 derivatives (such as by eliminating the notion of 'normal purchase and sale' contracts). In addition, the right to cancel or the right to return with full refund also challenged the measurement model. Another Board member noted that the 'hard issues', such as these last two, were common to both the measurement model and the customer consideration model and were solved by neither.

One Board member asked the staff whether they had consulted with any of the entities that use a similar approach already. He noted in particular some non-life insurance companies in Australia and gold mining and similar commodity companies. Many gold producers sell their production forward; what interests analysts most is how well those companies manage the forward/spot price spread (there is a unified and active market for such transactions). For this to work, such companies re-price their delivery contracts on an ongoing basis (minute-by-minute essentially). For the measurement model to be truly useful, the Board member thought that the re-pricing of the contract must be done on a daily basis.

Measurement model – should the model account for a broader set of assets and liabilities?

The Board then turned to question whether a focus on the contract asset or liability would be too narrow to represent faithfully an entity's economic circumstances. In considering this question, the staff noted the following consequences about the measurement model:

• Measuring only the contract asset and liability at current exit price could result in accounting mismatches arising in profit or loss that may not faithfully depict economic mismatches.
• Profit or loss would depict changes in a narrow set of assets and liabilities that may give an incomplete depiction of the changes in the entity's assets and liabilities throughout the contract.

The Board used the example of a house builder who builds a house 'off plan'. The example highlighted that in addition to the building activity, revenue under the measurement model is driven by the value of the house itself. This suggests that, to reflect the whole of the transaction properly, revenue might be analysed between 'contracting' revenue and 'production' revenue; or that gross margin would reflect the net of revenue, production margin and expenses.

The staff noted that the FASB/IASB group working on the measurement model wants to go beyond the narrow confines of contracts but are undecided about whether to revise the definition of revenue or treat the additional items as other components of income. Board members noted the similarity between where the staff would like to go and the presentation that results from recognising biological transformation in IAS 41. Board members also noted that the discussions highlighted that recognition and measurement were the primary challenges rather than measurement.

Thursday 13 December 2007

Liabilities: Amendments to IAS 37

The IASB staff presented a paper to the board discussing comments received in relation to the measurement proposals in the IAS 37 Exposure Draft. The staff indicated that the scope of the IAS 37 project did not include a fundamental review of the existing measurement requirements; however the Board acknowledged the ambiguities in the existing requirements and proposed limited amendments to clarify that:

• (a) the objective is to measure the liabilities at its current settlement or transfer amount, that is, the amount that the entity would rationally pay to settle the obligation or transfer it to a third party on the measurement date; and
• (b) an 'expected cash flow' approach is an appropriate way of estimating this amount, even for single obligations.

In previous meetings, the Board has rejected commentators' suggestions that these proposals would change rather than clarify the existing requirements of IAS 37.

Clarification or change

The Board first considered how to address concerns that it is changing, rather than clarifying, the measurement requirements of IAS 37.

The staff noted that some respondents to the Exposure Draft thought that, at present, IAS 37 requires liabilities to be measured on the basis of the ultimate future costs and permits individual obligations to be measured at their most likely outcome. The staff believed that the existing requirements of IAS 37 are being misinterpreted and, therefore, it is important for them to be clarified.

The staff proposed that concerns that the existing requirements are being changed, not clarified, would be adequately addressed by greater explanation in the Basis for Conclusions. It was noted by one Board member that many constituents would not accept the revisions regardless of any changes made to the Basis of Conclusions.

Settlement or transfer amount

The Board then moved on to consider whether one or the other of the two measurement objectives (namely settlement amount or transfer amount) should be removed from the proposed measurement requirements.

Staff noted that some respondents to the Exposure Draft had expressed the view that it was not clear:

• whether there was a difference between the amount that would be required to settle an obligation and the amount that would be required to transfer it to a third party; and
• if there were a difference, what that difference would be and whether entities had a free choice between the two measurement objectives.

The Board had an extensive discussion around whether the amounts were different, with some Board members of the view that the amounts would be the same, and others of the view that they could be different. One Board member illustrated this via an example in which:

• an entity has an obligation of 100;
• there is a 50% likelihood that the obligation will be settled for 100 and a 50% likelihood that the obligation will be settled for nil.

The expected future cash flows are 50. If settlement is used as the measurement basis the liability would be less than 50 as an entity would rationally accept less than 50 to settle the obligation (for example, they would accept less than 50 in exchange for the certainty of receiving the cash). However, using a transfer notion for measurement of the liability a counterparty taking on the liability would require more than 50 to assume the liability, for example, because of risk margin, profit margin, and other factors.

Not all Board members agreed that this example was valid.

The Board could not agree on whether there was a difference between the settlement and transfer measurement objectives and requested that a small group of staff and Board members take the issue offline to have one more attempt to articulate the concepts discussed. The issue will brought back to a future Board meeting.

Rationale for current settlement/transfer amount

The Board briefly discussed the proposed text to the Basis for Conclusions (not publicly available) and agreed that the proposed changes would be useful.

Amendment to the Preface to IFRSs

The Board discussed some proposed technical amendments to the Preface to IFRSs necessitated by the recent enlargement of IFRIC from 12 to 14 members. As a consequence, publication of draft Interpretations and approval of final Interpretations now require that not more than four IFRIC members have voted against them (previously 3 members).

The Board approved the amendments to the Preface.

Annual Improvements to IFRSs - 2008

IFRS 8: Disclosures of Information about Segment Assets

The IASB staff presented a proposal for the 2008 annual improvements process. The staff asked the Board whether IFRS 8 should be amended to eliminate an unintended potential divergence from existing US practice regarding the disclosures of information about segment assets. Specifically:

• (a) should a measure of segment assets be disclosed even when such information is not provided to the chief operating decision maker (CODM) notwithstanding that this requirement creates a difference from existing US practice?
• (b) Should the standard be amended to state clearly the disclosure requirement for segment assets that the Board intends?

The issue arises as BC35 appears to require such disclosures in all cases even when those amounts are not provided to the CODM. This interpretation contradicts guidance published for the application of SFAS 131 Disclosures about Segments of an Enterprise and Related Information. Further, information about segment assets is not listed as one of the intended differences between IFRS and US GAAP.

The Board agreed that a measure of segment assets should only be disclosed when such information is provided to the CODM and no difference should be created from US practice. The Board further agreed to amend the Basis for Conclusions and to make no changes to the standard of IFRS 8. This amendment is to be included in the 2008 annual improvements process.

Scope of Paragraph 11A of IAS 39 - Application of Fair Value Option

The staff presented a paper to the Board analysing two alternative interpretations of paragraph 11A of IAS 39. The issue was initially referred to the IFRIC when they were asked to consider whether the fair value option (FVO) available in paragraph 11A of IAS 39 can be applied to all contractual arrangements with one or more 'substantive' embedded derivatives, including contractual arrangements that contain host contracts outside the scope of IAS 39. The IFRIC referred the issue to the Board as it relates to some of the basic requirements of IAS 39 and amendments to the standard may be required.

IAS 39 paragraph 11A states that 'Notwithstanding paragraph 11, if a contract contains one or more embedded derivatives, an entity may designate the entire hybrid (combined) contract as a financial asset and financial liability at fair value through profit or loss'.

The issue arises as to whether paragraph 11A applies to all hybrid contracts, even if , in the absence of such designation, the host would not be in the scope of IAS 39 or whether paragraph 11A only applies to hybrid contracts with financial hosts in the scope of IAS 39.

The Board agreed that the wording of IAS 39 should be amended to clarify that paragraph 11A only applies to financial host contracts in the scope of IAS 39. This amendment is to be included in the 2008 annual improvements process.

Application of Paragraph AG33(d)(iii) - Bifurcation of Embedded Foreign Currency Derivative

In May 2007 the IFRIC issued a tentative agenda decision, noting that applying AG33(d)(iii) of IAS 39 requires an entity to:

• identify where the transaction takes place; and
• identify currencies that are commonly used in the economic environment in which the transaction takes place.

However at its September 2007 meeting the IFRIC decided to refer the issue to the Board because any guidance developed would be more in the nature of application guidance rather than an interpretation.

The IASB staff presented a paper to the Board outlining the issue and inconsistencies in practice with respect to the application of paragraph AG33(d)(iii)and suggested amended wording for the Board's consideration. The staff noted that the standard does not explain the meaning of economic environment and noted that entities are interpreting 'economic environment' in different ways.

The IASB staff believe that the intent of the exemption is to allow preparers not to separate embedded foreign currency derivatives if the embedded derivatives are integral to the arrangement and therefore bear a close relationship to the terms of the contract. That is, the exemption applies to embedded foreign currency derivatives that have been entered into for reasons that are clearly not based on achieving a desired accounting result or for speculative purposes.

The staff presented examples of situations in which foreign currency would be considered to be integral and noted that in each example the currencies have many of the characteristics of a functional currency (that is, the currency of the primary economic environment in which the entity operates).

The IASB staff recommended to the Board that the paragraph be amended to refer to the characteristics of a functional currency as detailed in paragraph 9 of IAS 21 (refer to Agenda paper 3C Appendix 1 for the proposed wording of the amendment). The Board agreed. This amendment is to be included in the annual improvements process.

Cash Flow Hedge Accounting Isues

The IASB staff presented an issue for clarification as to the period in which gains or losses on hedging instruments should be reclassified from equity to profit or loss as a reclassification adjustment for cash flow hedges. In particular, the staff noted that there was some confusion regarding the period during which reclassification adjustments should be made if the hedged forecasted transaction resulting in recognition of a financial instrument. The staff proposed amendments to paragraph 97 and 100 of IAS 39 to remove any confusion as to the appropriate timing of reclassification.

The Board agreed that the paragraphs required amendment; however a number of Board members had issues with the proposed wording, and the Board decided that drafting the proposed amended wording would be concluded offline. The resulting amendment is to be included in the annual improvements process.

Financial Instruments - Derecognition Research Project

The objective of this session was to obtain the views of the Board as to when financial assets and financial liabilities should be presented linked in the financial statements (referred to as 'linked presentation'). Any views of the Boards will be included in the staff report on derecognition, which is the next milestone in the research project on derecognition. This is an outcome of the papers presented at the Joint IASB-FASB Board Meeting in October 2007.

Staff presented two possible views on linked presentation – the joint presentation of financial assets and financial liabilities in primary financial statements (but still presenting them separately, that is, no netting).

The Board was presented a paper on two possible views when linked presentation is triggered:

View 1 - an entity shall apply linked presentation in the financial statements when either:

(a) An entity's obligation to a financial liability is satisfied solely by economic benefits generated by a financial asset. In this case the total liability is linked to the asset.

(b) An entity is obliged to pay a financial liability all economic benefits generated by a financial asset. In this case the total asset is linked to the liability.

(c) If a financial liability is satisfied solely by economic benefits generated by a financial asset (thus satisfying condition a.), and the entity is also obliged to pay all economic benefits on a financial asset to settle a financial liability (and also satisfies condition b.), then the financial liability is linked to the financial asset in accordance with condition a.

View 2 - an entity shall apply linked presentation in the financial statements when either:

(a) An entity is obliged at the reporting date to settle a financial liability using economic benefits generated by a financial asset. In this case it is the specific obligation to settle the liability using economic benefits generated by the financial asset that is linked to the financial asset, and other obligations of the entity to the debt holder will not qualify for linked presentation.

(b) An entity has a right at the reporting date to receive economic benefits on a financial asset equal to some or all of the economic resources to be sacrificed if a financial liability is settled. In this case it is the specific right to receive economic benefits equal to some or all of the economic resources to be sacrificed if the financial liability is settled that is linked to the financial liability, and other rights of the entity to receive economic benefits will not qualify for linked presentation.

These views do not only define when linked presentation is required but also if the liability is linked to the asset or vice versa.

The staff presented to the Board a set of scenarios to explain the similarities and especially the differences between both approaches, which can be summarized as follow (the complete case study can be downloaded as Agenda Paper 9B from the IASB's website):

Only the first three scenarios were discussed. The Board had a lengthy discussion on the views and their application to the scenarios.

Some Board members expressed concerns that these scenarios might not be realistic. One Board member questioned whether this issue could better be dealt with in the project on financial statement presentation to avoid proposing principles that are not in line with what has already been agreed on. The staff noted that all discussions are currently at staff paper level.

As the staff talked the Board through the scenarios, some Board members had problems in arriving at the solutions the staff presented when applying the principles set out in views 1 and 2. Those Board members also could not extract the rationale behind the principles. They suggested that if some Board members cannot understand the principle then it is not a good idea to further elaborate on linkage.

On inquiry, the staff stated that the paper is based on the assumption that all financial items concerned are measured at fair value and that even if the cash flows of the linked items are identical in amount and timing there might be a gap due to the different risk premiums.

Also Board members could not see the rationale behind the analysis in scenario 3 that in view 1 the asset is linked to the liability while according to view 2 the liability is linked to the asset.

At one point in the discussion, one Board member raised the question if the staff could come back and make clearer how linked presentation enhances financial reporting, that would be an improvement in the staff paper. Others doubted that it would be desirable to add linkage in any outcome of the research project on derecognition. Another Board member suggested while linked presentation might not be desirable in the primary financial statements, users may find such information useful if it is disclosed in the notes. Board members also noted that linked presentation might mitigate some of the burden resulting from setting a high hurdle for derecognition.

No decisions were made.

Conceptual Framework: Phase A – Objectives and Qualitative Characteristics

At the October 2007 meeting the Board decided (i) to withdraw the relevant paragraphs on the objective and qualitative characteristics in the existing Framework and replace them with new Chapters 1 and 2 when they are finalised and (ii) to make consequential amendments to the rest of the existing Framework only when they are essential.

At this meeting the Board discussed three options in relation to the replacement of the term 'reliability' with 'faithful representation' and, in particular, its implications for the recognition criteria in paragraph 86 of the existing Framework, which deal with the reliability of measurements.

Option A:

Delete references to paragraphs that are withdrawn.

Under this option the phrase 'as discussed in paragraphs 31 to 38 of this Framework' would be removed from paragraph 86. Accordingly, the new Framework would contain the two terms 'reliability' and 'faithful representation' but no definition of 'reliability'.

Option B:

Include a rubric to tell constituents that some paragraphs in the existing Framework have been withdrawn and replaced with new chapters 1 and 2. Include, by way of footnote, the existing definition of 'reliability' the first time 'reliability' appears in the new Framework.

Under option B the new Framework would also contain the two terms 'reliability' and 'faithful representation'. However, in contrast to option A, the definition of 'reliability' in paragraph 31 of the existing Framework would be added as a footnote to paragraph 86.

Option C:

Update the recognition criteria in paragraph 86 to reflect the change in terminology. In this case the new Framework would contain only the term 'faithful representation'.

Under all options constituents would have to look at the basis for conclusions to be informed that 'reliability' and 'faithful representation' are essentially the same.

Some Board members noted that the term 'reliability' was removed for a good reason, namely that the term has been misunderstood in the past. Therefore, it should not be retained in the revised Framework. Other Board members pointed out that it would be helpful to retain the term 'reliability' until finalisation of the measurement part of the project (Phase C).

Finally, the Board agreed by majority vote to proceed with option B.

Conceptual Framework: Phase B – Elements and Recognition

Way forward: The alternative approach

The Board discussed the way forward regarding the definition of a liability. The staff noted that Phase B of the Conceptual Framework overlaps with the Liabilities and Equity project and raised the concern that this may result in issuing two contradictory discussion papers. Therefore, the staff presented the following alternative approach:

• In a first step, define the 'credit side' of the statement of financial position containing liabilities and equity in co-operation with the Liabilities and Equity project team.
• In a second step, elaborate the distinction between liabilities and equity.

Some Board members expressed sympathy for the alternative approach. Other Board members noted that a robust definition of a liability needs to be developed anyway, that is, independent of the outcome of the Liabilities and Equity project. In addition, those Board members were concerned that the alternative approach could significantly hold up the Conceptual Framework project.

By majority vote the Board decided not to adopt the alternative approach but to proceed with the development of the working definition of a liability.

Definition of a liability

The Board then discussed a revised working definition of a liability. The objective of the discussion was to decide which definition should be used as the working definition of a liability as the Board proceeds with other aspects of Phase B of the Conceptual Framework project.

Based on the existing IASB and FASB definitions of a liability, the staff presented the following improved and converged definition of a liability:

A liability is a present economic obligation of the entity.

The following justifications were offered:

• The key convergence change proposed is the use of 'economic obligation' rather than 'sacrifices of economic benefits' to indicate that the focus is on a stock, rather than on a flow, and the use of present rather than future to indicate that the resource must presently exist.
• Both the IASB and FASB definitions have been misinterpreted as implying that there must be a high likelihood of future outflow of economic benefits for the definition to be met. That is not the intent and, therefore, the terms expressing any form of likelihood have been removed.
• To avoid undue emphasis on identifying the past transaction or other event that gave rise to an asset, the Boards decided to improve the definition of an asset by focusing on the present, rather than on past transactions or other events.

In a parallel manner, by focusing on a present economic obligation in the proposed definition of a liability, it becomes redundant to refer to the need for a past event.

The Board agreed with the proposed definition.

Based on the improved and converged definition, as an interim step the staff developed the following proposed working definition of a liability:

A liability of an entity is a present economic burden or requirement to which the entity has an enforceable obligation.

There seemed to be a consensus that this definition overemphasises symmetry to the working definition of an asset. The Board disagreed with the term 'present economic burden or requirement' and, in particular, raised the concern that the term 'burden' may be too wide. In addition, some Board members requested further research on 'enforceability' and the implications of economic compulsion.

The Board could not agree on a working definition and asked the staff to revise the wording for discussion at a future meeting.

Friday 14 December 2007

Puttable Financial Instruments and Obligations Arising on Liquidation

The purpose of this session was to discuss with the Board issues that arose during the roundtables on the staff draft on puttable instruments and to summarise significant drafting changes. The discussions were based on a pre-ballot draft that was not available to the public.

In the first part of the session the following issues were discussed:

• Financial instruments that include other contractual obligations

  Constituents questioned why paragraphs 16A and 16C of the staff draft were different, especially with respect to the condition in 16A(d) that the instrument 'must not include any other contractual obligation to deliver cash' whilst paragraph 16C does not include that condition. The staff noted that believes that it is appropriate to have different conditions, but changed the title of the section containing 16C to 'components of instruments' to clarify that such instruments can have other contractual obligations that would need to be separated. The Board agreed.

  Another issue was if mandatory dividends and partnership remuneration meet the definition of a contractual obligation. The Board agreed in September 2007 not to deal with this issue and decided not to revise its decision.

• An instrument holder in the role of owner and non-owner

  Constituents described situations where part of the remuneration is for services and hence they do not compensate the holder for the role as owner, but this would not automatically lead to liability treatment of the whole instrument and analysed separately. The Board agreed this is correct, but as suggested by one Board member this must be ring-fenced to avoid abuse, i.e. prohibit excessive 'service remuneration'. The draft will be amended to make clear that this remuneration must be an appropriate return for the services provided.

• The meaning of 'fixed', 'guaranteed' or 'restricted' to describe an instrument's return

  The staff draft caused some confusion with regard to the meaning of 'fixed', 'guaranteed' or 'restricted' return. As a result the last sentence of paragraph 16A(e) has been removed in the pre-ballot draft. The Board agreed to the deletion.

• Interaction of the proposed amendment and the requirements in IFRS 2 Share-based Payment

  Constituents also asked about the interaction of IFRS 2 and the proposed amendment. There might be situations where the provisions in IAS 32 lead to an equity balance sheet presentation while they would be a liability in accordance with IFRS 2. Some Board members expressed concerns about the apparent conflict with the Framework of the proposed amendments. After being reminded by the Chairmen of the Board that this was not meant to be a major project the Board members agreed to the revised wording in the ballot draft.

• The proposed disclosure requirements

  The staff was split on the disclosure of the fair value of those instruments. One Board member said from the perspective of users this information is useful. The Board agreed to keep this disclosure requirement. Additionally, it was agreed to include a consequential amendment to IFRS 7 Financial Instruments: Disclosure to make clear that the instruments captured by the IAS 32 amendment are scoped out of IFRS 7.

• Application of the proposed amendment's requirements to specific mutual fund structures

  The staff asked the Board if they have any questions on the application of the amendments to mutual funds. The Board decided not to address this issue specifically.

• Whether it is appropriate to analogise to the exception in the proposed amendment

  The staff asked the Board if the standard text should contain guidance that the exceptions resulting from the amendment shall not be analogised. Some Board members questioned if such an amendment should better be made to IAS 8 as it seems to be a principle that exceptions should not be analogised. It was noted that this is more than a minor amendment. Nevertheless that clarification should be included within this amendment due to the dynamics in the structuring industry. The Board agreed.

• Amend the draft to deal with situations in which significant amount of the profit is distributed via rebate (not mentioned in the Agenda Paper)

  This was an additional item brought up by the staff with regard to rebates being granted to owners. It was suggested amending the application guidance to make clear the Boards intentions. The Board agreed. After this, the staff presented to the Board significant drafting changes made to the published staff draft. The Board accepted all changes made.

Staff then asked if the Basis for Conclusions should contain a cost-benefit analysis. Staff noted it is standard procedure to include such an analysis. The Board agreed.

The Chairman then took an indicative vote. Two Board members indicated they would dissent.

The staff informed the Board they will circulate a ballot draft and if that is accepted a Near-final Draft will be published in the subscribers' area of the IASB's website by 24th of December latest.

Post-employment Benefits

The Board discussed several issues raised by Board members on the first pre-ballot draft of Preliminary Views on Amendments to IAS 19 Employee Benefits (internal discussion document that was not publicly available).

Classification of promises that include a fixed return

The staff noted that in the current version of the discussion document current salary promises and career average promises including those with fixed returns are classified as contribution-based while other salary related promises (for example, final salary promises) are classified as defined benefit. The staff informed the Board that some Board members and other constituents had raised the concern that promises of a fixed return on contributions are defined benefit promises in nature. Accordingly, including them in the contribution-based category would change the measurement for these defined benefit promises and would extend the scope of Phase I unnecessarily.

Other Board members argued that promises with a fixed return and promises linked to an index (such as inflation) are similar in nature and treating them differently would result in a new discrepancy.

There seemed to be a consensus that this could be one of the most contentious issues in the discussion paper. The Board reaffirmed its tentative decision that the scope of contribution-based promises should include promises with a guaranteed fixed return. However, the staff was directed to make this issue 'crystal clear' in the discussion paper and to seek input from constituents by asking specific questions.

Classification of promises of a regular fixed amount after retirement

Following the decision for promises with a guaranteed fixed return the Board decided that promises of a regular fixed amount after retirement should also be classified as contribution-based promises.

Classification of promises that IAS 19 classifies as defined contribution

The staff informed the Board that one Board member raised the concern that such a classification would effectively change the accounting for traditional defined contribution promises and that such a change would be outside the scope of this project.

The majority of Board members was of the view that the accounting for typical (plain vanilla) former defined contribution promises would not be changed. Therefore, the Board re-affirmed its decision that defined contribution promises are a subset of contribution-based promises.

Disaggregation and presentation of changes in contribution-based promises

The current version of the discussion paper includes preliminary views that:

• Changes in the value of the liability for a contribution-based promise should be disaggregated into a service cost component and other value changes.
• All changes in the value of the liability for a contribution-based promise and all changes in any plan assets should be presented in profit or loss.

The Board acknowledged that decisions about disaggregation and presentation of contribution-based promises were not discussed in detail during the previous sessions.

The Board therefore decided to redraft the pre-ballot draft (i) to be less definite about the Board's preliminary view on disaggregation and presentation for contribution-based promises and (ii) to explain the differences in presentation between contribution-based and defined benefit promises that result from those preliminary views. In addition, the Board agreed to seek input from constituents regarding potential practical difficulties to disaggregate changes and what level of disaggregation would be useful.

Presentation of defined benefit costs

The chapter on presentation of the components of defined benefit costs includes the following approaches:

Approach 1

All changes in the defined benefit obligation and in the value of plan assets are presented in profit or loss in the period in which they are incurred.

Approach 2

The costs of service are presented in profit or loss. All other costs are reported as consequences of deferring payment of employee remuneration.

Approach 3

The changes that arise from remeasurements relating to financial assumptions are presented outside profit or loss. Remeasurements relating to financial assumptions arise from changes in the discount rate and in the value of the plan assets. Changes in the amount of post-employment benefit cost other than those arising from remeasurement of financial assumptions, for instance, the costs of service, interest cost and interest income, would be recognised in profit or loss.

Approach 3 requires the identification of interest income on plan assets and, accordingly, requires disaggregation of changes in the fair value of the plan assets.

The Board reaffirmed its decisions that all three approaches should be presented in the discussion paper and to explicitly state that the expected return on plan assets should not be used to identify the interest income amount.

The staff was asked to redraft the pre-ballot draft reflecting the decisions made at this meeting. No Board member indicated an intention to object to the discussion paper.

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