IASB Meeting 22-24 January 2008

Tuesday 22 January 2008 (afternoon only)

Revenue Recognition – Customer Consideration Model

(FASB staff joined by phone)

The staff introduced the customer consideration model noting that at the October joint meeting the staff had presented a summary of both the measurement and customer consideration models. The staff noted that neither the customer consideration nor measurement models are expected to be the final model. A final standard is expected to be drawn from a combination of both models.

Measurement (Agenda paper 2B)

Measurement at contract inception

The staff introduced the concept of measurement under the customer consideration model by initially addressing measurement at contract inception. The staff highlighted that:

• contract rights are measured at the amount of contract consideration stated in the contract (customer consideration); and
• customer consideration is allocated to the individual performance obligations pro rata based on the separate selling prices of each underlying good or service. As a result, the total performance obligations at contract inception are measured at an amount equal to the customer consideration.

Under the customer consideration model the rights within a contract are measured at the amount of consideration promised by the customer and not remeasured. Staff noted that they were still considering the impact of credit risk on the measurement of such rights.

The staff also introduced three potential bases that could be used to measure the contractual obligation:

• the separate selling prices of each promised good or service;
• the lay-off prices of each promised good or service; and
• an allocation of the customer's promised consideration.

The staff favoured a measurement basis using an allocation of the customer's promised consideration and asked for comments from Board members.

One Board member noted that in some situations entities will have to estimate prices for something they don't actually sell (for example, the price for the delivery of individual widgets that the entity only sells as a bundle of widgets) – so although the amount of the contract as a whole is relatively easy to determine, the individual components may require estimation. The Board member queried how entities could make judgements on items they didn't sell.

The staff agreed that allocation was necessary and that estimation was a feature of both the measurement and customer consideration models. One board member noted that the difference between the models was that the total amount of the revenue was capped under the customer consideration model, whereas under the measurement model it was open ended.

Board members discussed the features of each proposal, including the exception for readily observed lay-off prices in active markets. Some board members requested that the staff clarify what was meant by this exemption. The staff responded by indicating that the exemption was intended for commodity contracts.

Allocation of customer consideration

The staff then discussed how the customer consideration is allocated to the identified performance obligation in the contract. The customer consideration allocated to each obligation is based on the most reliable selling price information available. The hierarchy of reliable selling prices proposed by the staff (from most reliable to least reliable) is as follows:

• Level 1 - Current sales prices charged by the entity itself (in an active or inactive market)
• Level 2 - Current sales prices charged by competitors (in an active or inactive market)
• Level 3 - Estimate of sales price the entity would charge using its own pricing practices and internal assumptions.

One Board member pointed out that the agenda paper states that when estimating a Level 2 sales price, the entity could make use of a competitor's sale price, but re-calibrate that price to reflect the entity's own presumed sales price. Another board member noted that this meant that the selling prices were all entity specific, rather than market based. It was proposed by another board member that if this is the case only one level (rather than three) would be required, and another agreed in part, stating that there was no difference between levels 2 and 3. A further board member stated that the 'regular' fair value hierarchy could be used.

One board member queried the fact that the customer consideration model allows estimates of separate selling prices for allocating customer consideration. This was noted in the staff paper as a significant departure from existing US GAAP. One Board member queried why the model chose to depart from US GAAP to which another Board member responded that US GAAP was not an anchor for this project. It was recommended by a further Board member that the reference not be included within the final discussion paper.

The Board then discussed the exception for readily observed lay-off prices in active markets. When a promised good or service is traded in an active market with readily observable market prices the obligation should be measured using this price and no additional amount of consideration should be allocated to it. It was noted by one board member that if the goods or services were all delivered at the same time separation would not be required at all. It was also noted by another board member that just because an entity could sell an item in that marketplace does not mean the exception should be applied.

Measurement after contract inception

The staff then introduced measurement after contract inception. Under the customer consideration model the contract rights are measured after inception at the amount of promised consideration still to be received, adjusted for the time value of money. The contract obligations (that is, performance obligations) are measured at the amount of customer consideration originally allocated to them at contract inception. Performance obligations are not remeasured except when the contract is judged to be onerous.

A board member queried what the staff intended when they referred to 'the time value of money'. The staff indicated that they had not yet discussed this in detail. The board discussed measurement generally; including a continuation of the discussion of concerns that if it is not possible to layoff the obligation the model is potentially trying to measure using an attribute that does not exist.

No decisions were made.

Performance obligations (AP 2C)

The staff then discussed performance obligations. Although the agenda paper is titled 'Customer consideration model - performance obligations' the staff clarified that the discussion of performance obligations applies equally to the measurement model, however the definition of revenue only applies to the customer consideration model. The staff introduced the definition of a performance obligation as an enforceable promise by an entity within a contract with a customer to transfer an economic resource to that customer. The staff identified three key pieces to a performance obligation:

• An enforceable promise
• Contracts with customers
• Transfer of an economic resource

The staff noted that performance obligations are not limited to contracts for specific performance; the definition also extends to remedies for damages.

A number of board members commented that the wording within the definitions and explanations needed work. The board had concerns with the concept of enforceable promises as explained by the staff, in particular how this works for rights of return. Staff were requested to reconsider the wording used in the explanations.

The board then discussed the concept of transfer of economic resources and enforceable promises, with a number of board members noting that they had difficulty in applying the principles to service contracts.

Examples of performance obligations

In an attempt to clarify the preceding discussion the staff then moved on directly to the examples of performance obligations

The three examples dealt with:

• Delivery of paint as part of a painting services contract;
• Return rights; and
• Promotional promises.

Return rights

The majority of the discussion focussed around performance obligations in relation to return rights. Two alternative views of return rights were presented to the board – return rights as performance obligations and return rights as failed sales or cancelled contracts.

A number of board members expressed concern with the example provided by staff for accounting for return rights as performance obligations. The example proposed that by making resources available (e.g. cashiers to process a refund) the entity is providing an immediate benefit to the customer and therefore some of the customer consideration should be allocated to this performance obligation at contract inception and revenue should be recognised when that obligation is satisfied. Other board members supported this view and did not support the 'cancelled contract' view.

One board member queried whether the board should present only one view in the final discussion paper, or present both views on the basis that the board could not decide on a preferred view. It was agreed that only one view should be presented. Staff were requested to reconsider the three examples presented in the paper and prepare a paper presenting a number of alternative views for each example. This paper will be presented to a future board meeting in an attempt to clarify the positions of board members and determine if agreement can be achieved.

When are performance obligations satisfied?

The board then briefly discussed the timing of the satisfaction of performance obligations. This discussion focussed around an example in which a painter delivers paint prior to beginning work on a painting services contract and whether this would indicate that a performance obligation was satisfied. Some board members supported this view, whereas others did not believe that such a delivery should give rise to the recognition of revenue. The board reiterated the above request for staff to prepare a paper dealing with the identification and satisfaction of performance obligations for each of the three examples.

No decisions were made.

The board did not discuss agenda paper 2D

Annual Improvements to IFRSs – 2008

The staff presented a paper on disclosures required for non-current assets (or disposal groups) classified as held for sale or discontinued operations. This issue was previously discussed at the October 2007 Board meeting at which the Board agreed that:

• IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations;
• Disclosures in other IFRSs do not apply to such assets (or disposal groups) unless that other IFRS specifically requires a disclosure in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations; and
• Other disclosures about such assets (or disposal groups) may be necessary to comply with the general requirements of IAS 1 Presentation of Financial Statements.

At the October 2007 meeting the Board asked staff to analyse whether it would be burdensome to segregate the information relate to assets held for sale and whether the information produced would be meaningful. The staff have completed this research, and recommended that the Board clarify the disclosure requirements of IFRS 5 though the Annual Improvements Process to reflect the discussion at the October 2007 board meeting. The staff proposed changes to IFRS 5 to reflect the above decisions. The board agreed, subject to editorial changes.

IFRIC Update

IFRIC staff presented an update to the Board from the January IFRIC meeting. Deloitte observer notes from the January IFRIC meeting are Available on IASPlus.

Wednesday, 23 January 2008

Insurance [Education session]

The Discussion Paper Preliminary Views on Insurance Contracts proposed three building blocks for use in measuring insurance liabilities. One of those building blocks is a risk margin. The presenters performed an analysis on determining such a margin from a financial reporting and a regulatory (capital requirements) perspective and presented the Board a summary of their results (the presentation can be downloaded from the IASB's Website).

As this was an education session, no decisions were made.

The representatives of the audit firm preparing the analysis on behalf of the Group of North American Insurance Enterprises (GNAIE) explained the importance of risk margin/market value margins and presented one of the most widely supported approach, the cost of capital method. Board members showed particular interest in the variations of this approach and especially in the underlying assumptions, the parameters employed and the calibration of the respective models.

One Board member noted that all variations presented seem to include changes in the reporting entity's own credit risk. The presenters did not disagree with this statement.

The presenters stated that proper consideration of tax effects is necessary. One Board member said the approach taken in the presentation would not appropriately reflect this.

Financial Instruments – Comprehensive Project

In the Memorandum of Understanding between the FASB and the IASB, the Boards agreed that one or more due process documents will be issued on financial instruments accounting. The IASB plans to issue a Discussion Paper Reducing Complexity in Reporting Financial Instruments in Q1/2008. This paper was discussed with members of the Financial Instruments Working Group (FIWG) on 17 January 2008.

The purpose of this session was:

• To discuss the content of the staff draft of the IASB Invitation to Comment
• To discuss the questions for respondents therein
• To provide an oral summary of the FIWG discussions on the 17 January 2008.

The staff started with the summary of the FIWG discussions. Two proposals emerged from those discussions:

• The focus of the paper should be less on fair value and more on the intermediate solutions to reduce complexity in financial reporting for financial instruments.
• The discussion should be expanded to the problems resulting from the extended use of fair value, especially where markets are non existent or illiquid.

On the first issue, the staff said it will look into structure and language of the paper, as FIWG members had the impression that Board members had already decided that fair value is the ultimate measurement attribute. One Board member noted that the FASB seemed also to propose a change in the tone of the paper, but in the opposite direction (that is to propose more clearly fair value as measurement basis).

Also, the FIWG proposed to add questions on the following topics:

• Presentation (including disaggregation) – especially, what users of financial statements want
• Whether a single measurement attribute is desirable
• Discussion on hedge accounting alternatives.

On the first point, the Board had a lengthy discussion whether this issue should be included. Supporters of its inclusion mentioned that if this is not included, the feedback on the Discussion Paper would probably be negative. Those board members who were not in favour of having references or questions on presentation in the Discussion Paper noted that this might distract readers from the scope of the document. One Board member proposed that there could be cross references to the sections on presentation in the Joint Working Group papers issued some years ago.

On the issue of hedge accounting, staff reported that FIWG members obviously do not want to abandon hedge accounting. The chairman proposed that one way forward could be to abandon hedge accounting but allow entities to explain the effects and put them in an economic context in the notes. Another Board member was concerned that constituents might want more deferral hedge accounting alternatives besides hedge accounting.

Liabilities and Equity

At the December 2007 Board meeting the IASB decided to issue a Discussion Paper on Financial Instruments with Characteristics of Equity.

The objective of this session was to:

• Discuss the content of the staff draft of the IASB Invitation to Comment to be included in the Discussion Paper
• Discuss the questions for respondents included in the IASB Invitation to Comment
• Provide the Board with an oral summary of the FIWG discussions.

The staff informed the Board that the overall response from the FIWG was positive. The only area of concern was communication of the timeline of the project and the interaction if the IASB project with the progress of the FASB project. One Board member pointed out that, at this stage, this project is not on the active agenda of the IASB and that the Board will deliberate adding it to its agenda in due course. However, it would be welcomed that both Boards will move in tandem when they come to exposure draft stage. Another concern was that respondents should be asked about the interaction with other IASB projects.

The Board members seemed not to support this proposal. They saw it as the Board's duty to ensure proper interaction between Board projects.

While the Board agreed to the main body of the staff paper, except for some drafting proposals, the questions to respondents that were proposed in addition to the questions from the FASB document in Appendix B seemed to be more controversial. Two questions in the staff draft will be dropped:

• B1.b: How important is it that the IASB develops a common, high quality standard used in both US and IFRS jurisdictions in the short to medium term?
• B3: How would you address the interaction between this project and the IASB's other projects on the conceptual framework, financial instruments, and financial statement presentation? Are certain projects precedential?

It was also agreed that the question on the appropriateness of the principles set out for all types of entities and jurisdictions (B5) should be expanded to cover all approaches mentioned in the document. One Board member noted that respondents could also be asked if 'economic compulsion' should also be a principle and whether this should be addressed. The staff informed the Board that they will prepare a pre-ballot draft based on the outcome of this meeting.

Short-term Convergence: Earnings per Share

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

The Board discussed the way forward in this project and some sweep issues that arose during the drafting of the exposure draft (the ED).

Fair Value Method

The IASB and FASB tentatively decided that instruments that can be settled in cash or shares and are measured at fair value through profit or loss should not be adjusted for calculating basic and diluted EPS calculation (referred to as the 'fair value method'). The main reason for this decision was that the changes in fair value recognised in profit or loss reflect the economic effect of these instruments on current shareholders. It was noted that this rationale applies even though the inclusion of a financial liability measured at fair value through profit or loss in computing the incremental shares under the modified treasury stock method would result in EPS being anti-dilutive. In addition, the Board noted that excluding these instruments from the calculation satisfies the objective of simplifying the EPS calculation.

There was support from the Board for finalising the fair value method though one Board member noted that this approach was removing information about the number of shares that would be issued upon conversion of these instruments. Therefore, this Board member suggested requiring additional disclosure in order to enable users to calculate diluted EPS differently from the method required in the ED. The disclosure requirements discussed in this context were

• to disclose the number of incremental shares that would have been added to the denominator of diluted EPS (that is, as if the instrument was classified as equity and the treasury stock method was applied) and
• to disclose the fair value of the instruments excluded from diluted EPS under the fair value method to demonstrate how much value was assigned to the potential equity shares.

The Board decided not to include additional disclosure requirements but to include a question in the ED to seek input from constituents whether:

• They agree with the basis for excluding instruments that are measured at fair value through profit or loss from the EPS calculation, that is, no further adjustment to earnings or the potential number of shares is required.
• Additional information should be provided in a disclosure for these instruments and why.

Basic EPS: Two-class method

The Board also agreed that the two-class method should be applied to all participating securities regardless of whether they are classified as liabilities or equity and that the calculation of basic EPS should only include those shares that are either currently exercisable or convertible for little or no cost or can currently participate in earnings with ordinary shareholders.

Share-based payment awards under IFRS 2 Share-based Payment

The Board decided to clarify that a financial instrument or contract subject to IFRS 2 that is recognised (or would be recognised upon satisfaction of a performance or service condition) as a liability and measured in accordance the fair-value-based measurement approach in IFRS 2 would be considered to be recognised at fair value for purposes of applying the ED.

Way forward

The Board reaffirmed the other tentative decisions made in this project and asked the staff to draft the ED taking into account the decisions made at this meeting.

One Board member indicated an intention to dissent to the ED because of concerns about determining dilution for written puts and forward purchase arrangements as well concerns regarding the lack of disclosure. Another Board member may dissent because of a fundamental concern in issuing a standard on EPS.

Thursday, 24 January 2008 (morning only)

Related Party Disclosures (IAS 24)

Review of redeliberations to date

The IASB reviewed a summary of the results of their redeliberations to date. One Board member expressed concern that he was not in a position, neither was it clear from the agenda paper, to determine (i) whether re-exposure would be necessary; and (ii) whether the redelibaerations has resulted in divergence between the IASB and the FASB with respect to related party disclosures. Although the IAS 24 project was not a convergence project, the IASB should, as a matter of courtesy, alert their US colleagues if amendments to IAS 24, which currently is largely consistent with the equivalent US standards, would result in that no longer being the situation. Other Board members noted that this would also be an issue with other jurisdictions.

Follow-up issues: State-controlled entities

The Board spent a considerable amount of time re-deliberating the exemption from disclosure under the Standard for State-controlled entities.

The Board appeared to agree that the presence of transactions not on arm's-length terms would be an indicator of influence. 'Arm's-length terms' are those terms, including price, that would apply if the transaction occurred between unrelated parties. Negotiated volume discounts similar to those that would be offered to other parties purchasing similar amounts would be arm's-length sales.

The Board also appeared to agree that the exemption being proposed would not be available if State influence was identified at either the transaction or entity level (see IASPlus.com's reports for October 2007 and November 2007).

However, the status of these decisions was thrown in to doubt when the Board determined that, in some jurisdictions including China, the State often nominates one or more Board members. This fact alone seemed to indicate that the State would normally 'participate in the operating and financial decisions' of State-controlled entities and thus would always fail the exemption criteria developed.

The session ended in a degree of confusion and the staff will consult with interested parties and return to a subsequent meeting with revised proposals.

Puttable Financial Instruments and Obligations Arising on Liquidation

No papers were available for this session.

The Board held a brief discussion of a drafting issue on puttable financial instruments. The issue involved a proposed change from the staff draft used at the December 2007 public roundtable. After discussion, the Board agreed to return to the principle in the staff draft.

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