IASB Meeting 19-21 February 2008

Tuesday 19 February 2008 (afternoon)

Insurance – Overview of responses to the May 2007 Discussion Paper

The Board held an initial discussion of the responses to the May 2007 Discussion Paper Preliminary Views on Insurance Contracts based on a high-level overview of those responses prepared by the staff. No decisions were made.

General overview

The staff noted that 158 comment letters have been received and there were a few more expected. There was a high degree of agreement that the building block approach provided a useful framework for analysing issues related to insurance contracts; however, nearly all respondents had concerns with aspects of those building blocks. The staff noted that there was widespread support for the following main aspects of the building blocks:

• using current estimates of cash flows, rather than locked-in estimates; the effects of changes in estimates would be recognised immediately in profit or loss;
• consistency with observable market prices for factors such as interest rates and equity prices;
• using expected value (that is, probability-weighted average) rather than a single outcome, although there were concerns expressed about how this principle would be applied in practice;
• reflecting the time value of money; and
• including a risk margin.

However, there were significant concerns expressed about the following:

• recognition of profit on initial recognition of an insurance contract;
• what the risk margin represents (is it a surrogate for the entity's cost of capital or is it a profit margin) and the interaction with what the Discussion Paper called the service margin;
• market consistency of cash flows;
• whether, given that most insurance liabilities could not be transferred, entity-specific expenses were not more relevant to users;
• some constituents (mainly in North America and Bermuda) were opposed to discounting non-life insurance items; other jurisdictions supported the treatment;
• many constituents were concerned about consistency with other IASB standards and on-going projects, especially revenue recognition and [non-financial] liabilities.

Accounting for the whole contract?

The staff highlighted some of the issues related to whether an entity should account separately for the rights and obligations created by an insurance contract; or account for the contract as a whole. The staff noted that the issues to be debated during future meetings were relevant to several other projects, including revenue recognition; the elements and recognition chapters in the Framework; fair value measurement guidance; financial instruments and non-financial liabilities.

There were preliminary discussions of a few issues, but nothing substantive.

Settlement value as a measurement attribute

Some constituents supported the proposed measurement attribute (current exit value) but many others encouraged the Board to explore further a settlement approach (given that many insurers do not expect to transfer their liabilities but, rather, to pay claims in the ordinary course of business). However, there was no consistency of views about what this settlement model might look like.

The staff explored whether settlement value might be a candidate for the measurement attribute for some or all insurance liabilities. It was noted that in many cases 'settlement value' would be similar to 'exit value' but with more entity-specific values for items such as expenses. The staff also asked whether there was a genuine need for a measurement attribute for insurance contracts: they concluded that there should be as it would help to clarify the accounting for insurance contracts. Again, the Board will discuss this topic with a view to making decisions at a subsequent meeting.

Timetable

The staff presented a project timetable for the development of an exposure draft. Board members did not think they had enough information to determine whether the timetable was reasonable. However, there was consensus that the issue of policyholder accounting for insurance contracts should not delay this project.

Roundtables should be held, but not before the IASB had done more work to develop their thinking and are in a position to be responsive to the issues raised in the comments on the Discussion Paper.

Conceptual Framework Phase D – Discussion Paper on Reporting Entity

Entity perspective vs. Proprietary/Parent Company perspective

The Board discussed whether to issue a document (for example an invitation to comment) to describe the entity perspective and the proprietary perspective in the context of general purpose financial reporting. The staff was concerned that the Board was firmly in favour of the entity perspective but had never explained why nor given its constituents an opportunity to comment on that position.

The staff argued for a stand-alone document. They had considered and dismissed the idea of including the discussion in the basis for conclusions on the forthcoming Exposure Draft of Phase A of the Framework project, because they thought the issue deserved a more prominent discussion than a section in the Basis of a project of which it was not really a part. They had also considered and rejected the possibility of including the topic in the forthcoming Discussion Paper on the Reporting Entity chapter of the Framework, because the topic had nothing to do with the boundaries of the reporting entity for general purpose financial reporting. The staff represented to the Board that a separate invitation to comment could be prepared in short order and included with the above-mentioned Exposure Draft and Discussion Paper.

The Board agreed to allow the staff to prepare the invitation to comment.

Conceptual Framework Phase A – Exposure Draft on Objectives and Qualitative Characteristics

'Accuracy' vs. 'free from error'

The Board discussed a drafting issue related to the forthcoming Exposure Draft (ED) of Phase A of the Framework. A Board member had objected to using the term 'accuracy' in place of 'free from error' as a component of faithful representation. The Board member was concerned that 'accuracy' could be interpreted as implying a level of precision that the Board did not (ever) intend. Other Board members noted that the problem might be exacerbated in translation. After discussion, the Board agreed to use the phrase 'free from material error' in place of 'accuracy' in the ED.

Comparable financial information

The Board noted that the pre-ballot draft ED states that '[p]ermitting alternative accounting methods for the same economic phenomena may be undesirable, because to do so diminishes comparability'. The Board agreed with a suggestion that the ED should expand on that notion and agreed that an accounting standard should not allow different entities to apply different accounting methods (or policies) for similar economic phenomena. The Board noted that when explicit accounting alternatives exist in an accounting standard, users were not harmed, because disclosure of which of the explicit alternatives has been chosen must be made. However, there was greater potential for harm to users when an accounting standard implicitly allows different accounting methods to account for a similar accounting phenomenon. In such circumstances, users may not be aware of the different ways to account for that accounting phenomenon.

The Board noted that this was an enhancing characteristic of general purpose financial reporting that was of particular relevance to standard-setting activities, and that accounting standards should be clear and unambiguous.

Wednesday 20 February 2008 (morning only)

Annual Improvements to IFRSs 2007 – Analysis of responses to the 11 October 2007 Exposure Draft

The annual improvements process is a new procedure to deal with miscellaneous, non-urgent minor issues in IFRSs in an efficient way. The first annual improvements document was published in October 2007 containing 41 amendments on 25 IFRSs. The purpose of this session was to inform the Board of comments received from constituents and determine how the annual improvements process will proceed.

The staff informed the Board that it received 75 comment letters (with the majority from Europe) with nearly a third arriving after the deadline. Constituents were reminded that timely filing of comment letters is necessary.

The staff noted that it has segmented the proposed amendments into three areas:

1. Items that received broad support and, subject to minor editorial change in some cases, are ready for the Board to reaffirm without deliberation (presented in Agenda Paper 4D); those items will go directly to balloting
2. Amendments that require more staff work but can be completed in time to meet the timetable for publication in May (presented in Appendix 1 to Agenda Paper 4B and Agenda Papers 4E - 4L)
3. Amendments that require more staff work but cannot be completed in time to meet the scheduled publication date (presented in Appendix 2 to Agenda Paper 4B)

The staff also asked the Board if they would consider approving separate publication of a restructured IFRS 1 on a stand-alone basis. The Board seemed to agree.

One Board member asked when the amendments will be incorporated in the Bound Volume published by the IASB. The Director of Technical Activities informed the Board that the plan is to incorporate the amendments in this year's edition of A Guide through International Financial Reporting Standards published by the IASCF (the 'Green Book').

The staff said that it has received a significant number of general comments on the annual improvements process itself, especially in the areas of:

• Scope
• Early adoption and transitional provisions
• Consequential amendments
• Due process and procedures

Scope

Staff noted that constituents had difficulties in understanding the criteria the Board applies when determining that an amendment is 'minor'. Some respondents were concerned about changing principles in IFRSs or addressing issues new to IFRSs without the appropriate level of attention from constituents. Some respondents objected strongly to treating some of the proposed amendments as minor improvements, such as:

• Statement of compliance in IAS 1 when not all IFRS are followed
• Changed definition of a derivative in IAS 39
• Advertising and promotional activities
• Classification of land under IAS 17

Some commentators believed due process had not been followed by the Board. One Board member noted that due process is actually being followed as the annual improvements process contains all steps except a discussion paper phase (not considered necessary) in accordance with the IASB Due Process Handbook.

This member also noted that minor does not mean 'minor impact' or 'no change in practice', but minor changes in terms of the number of words in IFRSs.

One Board member proposed to have a 'biennial improvements process'. This idea was not shared by other Board members.

Early adoption

A result of the comment letter analysis was that nearly all commentators disagreed with the transitional provisions as set out in the exposure draft. The Board acknowledged those comments and will consider this in the next annual improvements cycle. The Board also accepted that sometimes specific transitional provisions might be appropriate in this year's annual improvements document.

Consequential amendments

Another area of concern for constituents was that all accompanying material (for instance, the Basis for Conclusions) should reflect the amendments. Although some parts are not mandatory, it is thought of as being helpful for the full understanding of the implications of the changes.

Due process and procedures

Commentators raised concerns that the annual improvement document confuses small editorial corrections with changes having great impact on practice. Constituents proposed that the ED should have been structured to clearly identify amendments with broader impact.

The staff informed the Board that it plans to revisit the process for the 2008 annual improvements once the amendments resulting from the 2007 ED are finalised.

The Board then was asked if it agreed to the categorisation done by the staff. The Board seemed to agree.

The staff then turned to the amendments that it classified as 'requiring some staff work but can be completed in time' and informed the Board that this is the first of two batches for redeliberation. The topics discussed were:

• Amendment to IFRS 5: Plan to sell the controlling interest in a subsidiary
• Amendment to IAS 16: Sale of assets held for rental
• Amendment to IAS 19: Curtailments and negative past service cost
• Amendment to IAS 19: Short term and long term benefits
• Amendments to IAS 28 and IAS 31: Disclosure requirements for investments accounted for under IAS 39
• Amendment to IAS 28: Impairment of investments in associates
• Amendment to IAS 38: Advertising and promotional activities
• Amendment to IAS 40: Treatment of investment property under construction

Amendment to IFRS 5: Plan to sell the controlling interest in a subsidiary

The amendment proposes to clarify that all assets and liabilities of a subsidiary should be classified as held for sale if the parent has a sale plan involving loss of control of the subsidiary.

The staff proposed adding further words to clarify the proposed changes and align the effective date of the amendment with that of the revised version of IAS 27 Consolidated and Separate Financial Statements as published in January 2008. IAS 27 (2008) is effective for annual periods beginning on or after 1 July 2009.

The Board agreed.

Amendment to IAS 16: Sale of assets held for rental

The amendment should provide clarity in the case an asset is held with the dual purpose of renting and selling as part of an entity's business model.

Particular concerns were raised about the amendment being a rule instead of a principle, the consequential amendment to IAS 7 Statement of Cash Flows to prescribe 'operating' treatment for the original expenditure for the asset concerned, and the interaction with IFRS 5.

The staff recommended continuing with the amendment as proposed but adding clarification on the non-applicability of IFRS 5 in the Basis for Conclusions. One Board member proposed to put that guidance in the main body, which seemed to be supported by the rest of the Board.

The Board agreed.

Amendment to IAS 19: Curtailments and negative past service cost

The amendment's aim is to provide clarity on what is the difference between a curtailment and negative past service cost and to remove the reference to 'materiality from IAS 19.111. One of the Board's previous decisions was that any link to future salary increases relates to future services. The staff redrafted words aimed to reflect this. Also the staff proposed to make clear in the amendment that the change in the defined benefit obligation triggers whether or not there is a past service cost. The staff also proposed that the amendments relating to negative past service cost should be applied prospectively, that is, for benefit changes occurring on or after 1 January 2009.

Some Board members raised concerns with the wording proposed by the staff with regard to the link to future salary increases, suggesting that it was not helpful. The staff said they would go back and recirculate an improved wording. One Board member stated he would like to see the whole amendment dropped as IAS 19 cannot be fixed in this respect.

The Board decided to keep the replacement of the word 'materiality' with the term 'significant', even though 'significant' is not a defined term. All other staff proposals were accepted subject to some drafting changes.

Amendment to IAS 19: Short-term and long-term benefits

The original proposed amendment stated that entitlement is the distinguishing line between a short-term and long-term benefit.

The Board had a lengthy discussion on what is the appropriate distinguishing line and if the 'wholly' criterion (that is, if the liability is settled in total) was correct.

The staff recommendation used the words 'that are expected to be settled in full' for short-term employee benefits. Some Board members suggested using the words in IAS 1 (revised 2007) paragraph 69(c) that states '...due to be settled within twelve months after the reporting period'. Other Board members seemed to agree.

Amendments to IAS 28 and IAS 31: Disclosure requirements for investments accounted for under IAS 39

The proposed amendment would require entities that apply the fair value option to their investments in associates or jointly controlled entities to make some of the disclosures as set out in IAS 28 and IAS 31 in addition to the requirements of IFRS 7 Financial Instruments: Disclosures.

Constituents questioned why those investments should be treated differently from other IAS 39 investments, since the Board decided to allow fair value treatment for such investments on the basis they are no different from other financial assets for certain entities. The staff proposed to retain the original amendments. One Board member proposed to more extensively explain the rationale for the Board's decision in the Basis for Conclusions.

The Board agreed.

Amendment to IAS 28: Impairment of investments in associates

The amendment aims to provide clarity on reversals of an impairment loss in an associate that relates to goodwill of the associate. It states that the investment in the associate is treated as a single asset, that is, an entity is allowed to fully reverse any impairment loss if the recoverable amount of the associate has increased accordingly.

It was noted that constituents had raised some concerns about this amendment.

The Board had a short discussion on the topic, and one Board member made clear he would dissent from issuing the amendment in its current version. The other Board members agreed with the amendment as drafted.

Amendment to IAS 38: Advertising and promotional activities

The proposed amendments aim to clarify the term 'as incurred' used in IAS 38.69 that covers advertising and promotional activities. The proposed change would require entities to recognise the expense once they have access to the goods or services.

The Board received a significant number of objections to this proposal. A number of commentators highlighted that this would be a major change to existing practice and, hence, should not be part of the annual improvements project. Other constituents argued that, as advertising and promotional activities are not clearly defined, it is difficult to determine what is covered by IAS 38.69, especially in the case of mail order catalogues. Some constituents referred to the guidance under US GAAP set out in SOP 93-7, which allows capitalisation of direct-response advertising expenses (for example, mail order catalogues). Another issue that was raised in the comment letters was the treatment of undelivered advertising and promotional materials. The conclusion drawn by some commentators was that the amendment should be part of a separate project of the IASB or that the issue should be referred back to the IFRIC.

The staff proposes to continue with the amendment as proposed subject to some wording changes to reflect of the issues raised by commentators.

The Board had a lengthy debate on this issue and some Board members were in strong disagreement with the amendment. One Board member questioned if this amendment really improved financial reporting. Additionally, some Board members expressed their support for the Alternative View presented in the annual improvements document that some of the issues covered in the proposed amendment would better be dealt with in Standards on tangible assets such as IAS 2 Inventories.

The Chairman took a vote on this amendment. The Board agreed to proceed with the amendment (three Board members voted against).

Amendment to IAS 40: Treatment of investment property under construction

The final amendment discussed was the proposal to treat investment property under construction in accordance with IAS 40 (and not IAS 16). As a consequence, if an entity applies the fair value model, its investment property under construction would have to be fair valued from day one.

Of 42 respondents who commented on this amendment, 26 objected. The two main reasons were:

• The amendment is a significant change and should not be dealt with as part of the annual improvements process.
• If an entity applies the fair value model, but cannot determine the fair value for the investment property reliably, cost measurement would be required even when fair value becomes available.

The Board discussed some possible ways to address the issues raised. At the end of the discussion, there seemed to be agreement that the route IAS 41 takes in paragraphs 30-33, that is, use cost as a surrogate of fair value until it comes available, was appropriate.

Project plan

At the end of the session, the staff informed the Board about the project plan. Some of the amendments that require more staff work will be brought back to the Board at the March meeting. Sweep issues will be discussed at the April Board meeting. The final annual improvements document is expected to be published in May 2008.

The Board agreed with the project plan.

Thursday 21 February 2008 (afternoon only)

Distinction between Liabilities and Equity

The staff asked the Board whether there was agreement on acknowledging in the IASB's forthcoming discussion paper that the European Financial Reporting Advisory Group (EFRAG) had also issued a discussion paper on the distinction between equity and liabilities. Most Board Members disagreed with the staff's proposed wording and emphasised that the IASB should make it clear that it had not deliberated the final version of the EFRAG document, had therefore reached no final position on its merits and that the acknowledgement of the existence of the EFRAG paper should not be seen as the IASB endorsing the positions taken therein. It was decided to take the staff proposals offline to agree a suitable wording.

Post-employment Benefits

Measurement of contribution-based promises - sweep issues arising from the second pre-ballot draft of IASB Discussion Paper

As a consequence of discussions on the second pre-ballot draft of the IASB's intended Discussion Paper Preliminary Views on Amendments to IAS 19 Employee Benefits in January 2008, the staff had recommended clarifying what was meant by the Board's preliminary view that the measurement of contribution-based promises should not include the possibility that an entity might reduce the benefits provided; express no preliminary view on credit risk; and ask a question in the Invitation to Comment on whether and how credit risk should be taken into account, as well as to change term used to describe the measurement of contribution-based promises to 'fair value assuming the benefit promise does not change'.

Some Board members thought that the measurement of contribution-based promises should take into account the possibility that an entity might not be able to make the payments necessary to satisfy the liability, while the possibility that an entity might reduce benefits for past service in the future should be ignored: only when there was an actual agreement to reduce benefits should this be taken into account. There was also disagreement with the staff view that no preliminary view on credit risk should be expressed. Some Board members were of the view that a view should be expressed, but that the question what 'credit risk' comprises should be dealt with in the project on fair value measurement and that a reference to this should be included in the discussion paper. The Board discussed the meaning and elements of credit risk that would be included in the measurement, in particular whether the term referred to the credit risk of the entity or of the individual liability. After some discussion, there seemed to be a consensus that the risk of an entity not being able to make payments in the future should be included in the measurement and that contribution-based promises should be measured at 'fair value assuming the benefit promise does not change'.

Scope of Phase I - EFRAG Discussion Paper The Financial Reporting of Pensions

In January 2008, EFRAG had published a Discussion Paper The Financial Reporting of Pensions to 'take a fresh look at – and stimulate discussion on – the principles that might be reflected in future accounting standards on pension benefits that are related to pensions'. The staff proposed the IASB acknowledge the EFRAG effort in the introductory chapter of its own forthcoming Discussion Paper and to ask whether there were additional issues which constituents think should be addressed by the Board in Phase I (of its post-employment benefits project). The Board briefly discussed the staff proposal. One Board member said that, while the EFRAG paper was narrower in scope (focusing on pensions only), its discussion of the underlying principles was much broader than Phase I of the IASB's project. As a consequence, asking for additional issues to be dealt with in Phase I entails the danger of prolonging the entire project. The chairman made it clear that the emphasis of the IASB paper should be on short-term issues and that any reference to additional issues should be to those which could be resolved in the short term. The Board agreed.

Liabilities: Amendments to IAS 37

The Board continued its deliberation regarding the measurement requirements and the removal of the probability recognition criterion in the Exposure Draft of Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits (the ED).

Measurement objective

At the December 2007 meeting the Board discussed concerns that the proposed measurement requirements are unclear because they refer to both the amount to settle an obligation and the amount to transfer it to a third party. No final conclusion was reached and the Board decided to further investigate this issue in small-group meetings of staff and Board members. At this meeting the Board continued its deliberations by following up the main issues that arose from these meetings.

Clarification of the measurement objective

The staff suggested amending the measurement requirement as follows:

'An entity shall measure a liability at the amount that it would rationally pay on the measurement date to settle the present obligation with the counterparty or to transfer it to a third party.'

In addition, the staff suggested explaining the measurement principle by additional guidance like:

'The amount that an entity would rationally pay to settle or transfer an obligation is the least cost amount, that is: (a) the amount that a third party would demand to assume the obligation; or (b) the amount that the counterparty would demand to settle the obligation, if there is objective evidence that this amount is lower than (a).'

There seemed to be a consensus that settlement amount and transfer amount are current exit amounts and that no choice of measurement bases is permitted.

Some Board members were concerned that the measurement requirement would not work in cases in which no market to transfer the obligation exists (liabilities for environmental damages, lawsuits etc.). These Board members expressed the view that no market-based approach would be possible, but entity-specific assumptions should be used to measure those liabilities. One Board member suggested developing separate measurement guidance for these liabilities. Other Board members noted that these cases are similar to 'level 3 valuations' in accordance with FAS 157 Fair Value Measurements and, therefore, the use of entity specific assumptions would not be prohibited. Those Board members were of the view that the third party to assume the obligation would be a hypothetical market participant who has the same level of information as the entity.

The Board had a substantial discussion on this topic. Eventually, the Board decided by majority vote to adopt the staff's suggestion in principle but to add guidance on what is meant by 'third party' in the definition of transfer amount. There seemed to be a consensus that in this context the 'third party' should be described as 'knowledgeable' meaning that the third party has 'the same information about the liability as the entity'. The staff was asked to redraft the ED accordingly and to take into consideration combining the two pieces of guidance outlined above. In addition, the guidance should be enhanced by examples.

Risk adjustment for diversifiable risks

Carrying forward the existing requirements of IAS 37, paragraph 35 of the ED proposes that, when measuring a liability, 'an entity shall include the effects of risks and uncertainties'.

The Board decided not to give further guidance on risk assessment as part of this project; for example, how to treat risks that are diversifiable and in a perfect market would not be reflected in the market price of a liability.

Probability recognition criterion

The Board discussed responses received objecting to the removal of the probability recognition criterion. The staff suggested not reinstating this criterion mainly for the following reasons:

• The removal of the criterion would not lead to many more liabilities to be recognised.
• Many liabilities that are surrounded by great uncertainties such as large unprecedented legal actions would be covered by the ;reliable measurement; recognition criterion.

The Board agreed with the staff and decided not to reinstate the probability recognition criterion.

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