IASB Meeting 20-23 MAY 2008

Tuesday 20 May 2008

Emissions Trading Schemes

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

Background and objective

The purpose of this session was to clarify the scope of the joint project with the FASB on emissions trading schemes. The Board activated the work on this project in December 2007 and this was the first time it was discussed at the Board since then.

The staff highlighted the following:

• Presently, there is no authoritative accounting literature in either IFRSs or US GAAP that addresses these issues. In June 2005, the IASB withdrew IFRIC 3 Emissions Rights, which addressed the accounting for the rights and obligations arising from participation in the European Union's Emissions Trading Scheme (EU ETS).
• Clarification of the scope of the project is a key issue because it will have the following implications:
  • The accounting questions that will need to be answered (and therefore the staff's direction of research) depend on the scope of the project.
  • Neither Board has clearly defined the scope (in light of the variety of schemes that exist) when it added the project to its agenda.
  • An opportunity exists to align each Board's respective scope.
• There is a wide range of emissions trading schemes. In common, they are all aimed at reducing the damage to the environment. The theory behind emissions trading relies on the creation of value through the allocation of a right to emit. This target is normally below actual physical levels of emissions currently being made by entities. Hence, an artificial scarcity is created, which in turn creates a value for the holders of such rights. Emissions trading schemes are believed to reduce emissions in a manner that is cost effective and efficient.

Scope alternatives and Board decisions

Based on the staff's research, three possible scopes for the project have been identified:

Alternative A: Government mandated cap and trade schemes only (narrow scope).

Alternative B: All emissions trading schemes and tradable rights (broad scope).

Alternative C: A scope between the narrow scope and broad scope

The Board supported Alternative B mainly for the following reasons:

• Constituents, particularly financial statement preparers, are asking for guidance is this area.
• There is currently no authoritative literature in IFRSs or US GAAP that addresses the subject; consequently, preparers are uncertain about the proper accounting and diversity has developed in practice.
• The lack of authoritative guidance might produce diversity between different schemes and/or tradable rights.
• A consequence of a limited-scope project might be that preparers and auditors bombard the Board with questions about how to account for schemes or tradable rights that were excluded from the scope of the project.
• The number and types of emissions trading schemes continue to increase over time as more and more citizens, entities, and governments all around the world grow increasingly concerned about the environment.

The Board then discussed the definition of emissions trading scheme. The staff proposed the following definition:

'An emissions trading scheme is an arrangement designed to improve the environment, in which participating entities may be required to remit to an administrator a quantity of tradable rights that is linked to their direct or indirect effects on the environment.'

Finally, the Board agreed with the staff's recommendation not to constrain itself to existing authoritative literature when developing possible accounting models, but only to ensure that the accounting model developed will comply with the Framework.

Amendment to IAS 39: Exposures Qualifying for Hedge Accounting

At the April 2008 meeting the Board discussed how to proceed with this project. The Board decided to make limited amendments to IAS 39 addressing two issues:

• the hedging of inflation risk in particular situations, and
• the designation of a purchased option in its entirety as a hedging instrument for risk in an item that contains no optionality, in such a way that no effectiveness results.

Designation of inflation risk in particular situations

The issue originally raised to the IASB was whether it was possible under IAS 39 to designate as a hedged item the inflation risk associated with a fixed rate financial liability.

The Board discussed this issue as part of the deliberations that resulted in the publication of the ED of amendments to IAS 39. The ED clarifies that fixed rate debt cannot be fair-value hedged for inflation risk, yet floating rate debt can, but only if the contractual floating rate cash flows of that recognised debt instrument are linked to changes in inflation. Inflation risk was not specified as an eligible risk in paragraph 80Y of the ED. However, if inflation (a) was a contractually specified cash flow and (b) the remaining cash flows of the instrument would not be a residual amount, paragraph 80Y(e) of the ED permitted designation of the inflation component.

At this meeting the Board members confirmed their decision as they believed this reflected its original intentions that only risks and cash flows that were separately identifiable and measurable should be eligible for designation. The Board also believed that this decision reflected existing practice and this was largely confirmed by respondents to the ED. Paragraph 80Y will be moved to the application guidance of IAS 39.

Designation of purchased option as hedging instrument

The ED also provides clarity on a previous IFRIC discussion on cash flow hedge effectiveness using options. If an entity hedges a non-optional exposure (for example, floating rate interest payments on issued floating rate debt) with an option (for example, by buying an interest rate cap), the entity cannot claim that the debt has optionality that is equivalent to that in the option and thereby defer all the fair value movements of the option in equity under a cash flow hedge.

The decision of the Board in developing the ED (paragraph AG99E) was consistent with the view of the IFRIC. Paragraph AG99E states that: 'In designating as a hedged item a portion of a financial instrument, an entity cannot specify as the hedged item a cash flow that does not exist in the financial instrument as a whole. For example, in designating a one-sided risk (such as the decrease in the fair value of a financial asset) as a hedged portion, an entity cannot include any cash flows that are imputed or inferred in the designated hedged portion (for example, inferring the cash flows arising from the time value of a hypothetical written option in a non-derivative financial asset).'

The Board decided to retain the approach in the ED as they believed that this decision reflected their original intentions. However, the Board acknowledged that diversity in practice exists and that paragraph AG99E may result in a change in practice for some entities.

Effective date on transition requirements for the proposed amendments

The ED proposed retrospective application. The Board believed that restating comparative information on first-time application of this proposed amendment should not entail significant cost or effort because the requirement in IAS 39 to document hedging relationships should mean that the information required to make any restatement is readily available. If an entity has previously deferred both the time value and intrinsic value of a purchased option and the amendment would disqualify such a designation, the entity would be required to restate to the position had hedge accounting not been applied at all. In such a case, an entity cannot retrospectively present the effects of an alternative hedge designation that was not actually applied in practice. This decision reflects the principle that hedge accounting can only be undertaken if the designation and documentation are done at inception of the hedge.

Regarding the proposed effective date, the staff proposed that the amendments should be applied for annual periods beginning on or after 1 January 2009, with earlier application permitted. A few Board members raised some concerns about whether the proposed effective date leaves enough time for the preparers to adopt the proposed amendments. The proposed effective date was approved by the affirmative vote of 11 Board members.

Earnings per Share

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

The Board discussed sweep issues identified by the Board and external reviewers in the review process of the pre-ballot draft of proposed amendments to IAS 33 Earnings per Share. The pre-ballot draft was not included in the observer notes for this meeting.

Scope of IAS 33

Puttable financial instruments

In February 2008 the Board amended IAS 32 Financial Instruments: Presentation to include an exception that instruments that meet the definition of a financial liability should be classified as equity instruments if they have all the features and meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D of that standard.

Some external reviewers noted that paragraph 96C of IAS 32 Financial Instruments: Presentation treats puttable instruments classified as equity under the amendment as equity only in IAS 1, IAS 32, IAS 39 and IFRS 7. Consequently, the exception does not apply to IAS 33 and those instruments would not be treated as ordinary shares in the EPS calculation.

The Board agreed to amend paragraph 96C of IAS 32 to include IAS 33 in the exception. The Board noted that this amendment will align the EPS calculation with the accounting treatment for those instruments.

In addition the Board deliberated how IAS 33 would apply to an instrument that meets the definition of a financial liability but is required to be classified to equity in accordance with the exception in IAS 32 at some point after initial recognition.

The Board agreed to the staff analysis that by extending the scope of IAS 32 to IAS 33, the standard would provide principles for instruments that (1) meet the definition of a participating instrument or are (2) measured at fair value through profit or loss. Consequently, the Board decided that no amendment to the pre-ballot draft is necessary in this respect.

EPS calculation for options, warrants and their equivalents

Forward contracts to sell an entity's own shares

Some external reviewers asked for clarification of the EPS treatment of forward contracts to sell an entity's own shares. The Board decided to include guidance in the amendment on the dilutive impact of forward sales of shares classified as equity stating that the treasury stock method should be applied to these contracts.

Proceeds - Carrying amount of liability

Some external reviewers questioned whether guidance is needed on what is deemed proceeds in the instance when the instrument is a financial liability that is an option, warrant, or equivalent. If options, warrants, and their equivalents are classified as liabilities, they would always be measured at fair value through profit or loss, and no denominator adjustment of the diluted EPS calculation is necessary. Therefore, reviewers questioned whether the proposal to define the proceeds from the assumed exercise of options, warrant, and their equivalents is necessary.

The Board agreed with those review comments and decided to delete the paragraph on items to be included in proceeds from the exercise of options, warrants, and their equivalents in paragraph 46 of the pre-ballot draft, as those paragraphs were unnecessary.

Proceeds - Deferred taxes

Some reviewers stated that the wording in the pre-ballot draft (paragraph 47A of current IAS 33) could be interpreted in a way that IAS 33 prohibits the inclusion in the assumed proceeds of tax benefits that would be credited to equity upon exercise of share options to which IFRS 2 Share-based Payment applies.

The Board was of the view that the wording in IAS 33 was never intended to prohibit an entity from including those tax benefits in the proceeds from the assumed exercise of employee options. Consequently, the Board decided to amend the pre-ballot draft to state that the proceeds from the assumed exercise of employee options include tax benefits that are credited to equity upon exercise of the option.

EPS calculation for gross physically settled forward contracts to buy an entity's own shares

Forward purchase contracts with and without remittance of dividends

Paragraph 23 of IAS 32 states that a 'contract that contains an obligation for an entity to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount'.

Some external reviewers questioned whether the pre-ballot draft would achieve convergence with US GAAP regarding forward purchase contracts without remittance of dividends because:

• the wording in paragraph A33 is not clear on whether the Board believes that the gross physically settled forward purchase contract or the ordinary shares subject to the contract meet the definition of a participating instrument;
• not all gross physically settled forward contracts to buy an entity's own shares are participating instruments.

In this context the staff noted that the pre-ballot draft also requires forward purchase contracts with remittance of dividends to be accounted for in the same way as those without remittance of dividends. The staff pointed out that when dividends are remitted back, the liability that has been reclassified from equity no longer meets the definition of a participating instrument. Consequently, the staff suggested that for such contracts the denominator should be reduced but that the Application Guidance of the pre-ballot draft should not be applied.

Debate continued about what the accounting should be when a forward contract/written put to buy equity is in the money, that is, when the strike price recognised as a financial liability is in excess of the fair value of the share to be acquired. The staff agreed to look into this issue and will revert back to the Board offline.

Mandatorily redeemable shares

The staff noted that the accounting treatment of mandatorily redeemable ordinary shares in accordance with paragraph 18a of IAS 32 is similar to the accounting treatment of gross physically settled forward contracts to buy an entity's own shares and that therefore the same EPS treatment should apply.

The Board agreed and asked the staff to amend the pre-ballot draft accordingly.

Contracts that may be settled in ordinary shares or cash

Some external reviewers questioned whether the requirements for the diluted EPS calculation of contracts that may be settled in ordinary shares or cash are necessary since they could not think of an instrument to which those requirements would apply. These reviewers were of the view that either an entity would measure a financial instrument with settlement options either at fair value through profit or loss, and therefore no denominator adjustment would be required, or the instrument would meet the definition of a participating instrument, and the application guidance in paragraphs A25 to A30 of the pre-ballot draft would apply.

The Board agreed and asked the staff to delete the respective guidance from the pre-ballot draft.

Effective date and transition guidance

The Board decided that early adoption of the proposed amendments to IAS 33 should not be permitted since early adoption may impair performance comparisons between entities in the same reporting period that prepare financial statements in accordance with IFRSs. Also, not permitting early adoption would be consistent with the equivalent FASB amendment. The Board also decided that no additional transitional provisions are necessary.

Introduction of a comprehensive earnings per share measure

The Board discussed whether, following the 2007 amendments to IAS 1 Presentation of Financial Statements, the ED should encourage the disclosure off 'Comprehensive Earnings per Share' in addition to EPS. One Board member noted that such a statement is unnecessary since an entity is not precluded from providing this additional information on a voluntary basis. The Board decided not to include the statement in the ED.

IFRIC Update

IFRIC staff presented an update to the Board from the May IFRIC meeting. Deloitte observer notes from the May IFRIC meeting are available Here on IASPlus.

The Board was informed that the IFRIC completed its deliberations on D21 Real Estate Sales and D22 Hedges of a Net Investment in a Foreign Operation in May 2008. The IFRIC staff noted that it will send the Interpretations to the Board for approval in June 2008.

Regarding D21 the IFRIC staff presented the flowchart and the illustrative examples approved by the IFRIC at its May meeting in order to facilitate the Board's ratification of the final Interpretation. Board members appeared to be supportive subject to some editorial comments.

Wednesday 21 May 2008

Annual Improvements Project – 2008

The Board discussed potential improvements to the annual improvements process itself and two amendments to IAS 38 Intangible Assets for inclusion in the 2008 annual improvements.

Scope and process for future 'Improvements to IFRSs'

The staff presented a paper suggesting changes to scope and due process for future improvements to IFRSs. The proposals were based on general comments received on the exposure draft for Improvements to IFRSs published in October 2007.

Scope of the project

The staff was of the view that it would not be possible to define a universally agreed scope for the improvement project. In particular, the staff noted that the term 'minor amendment' was subjectively interpreted, for example, in terms of word count or accounting effect. Therefore, the staff proposed that the scope of the project should be determined on the basis of what amendments are appropriate to be included in a single annual exposure draft rather than on the definition of the word 'minor'.

When deciding whether the nature of the amendment allows inclusion in a single annual exposure draft or requires individual exposure the staff suggested using the factors included in the Due Process Handbook for the IASB, including pervasiveness of issue, diversity of practice, increasing convergence, feasibility of a sound solution, and cost/benefit considerations. The staff emphasised that such a decision requires judgement.

The Board agreed to the staff proposal.

The Board also agreed to a staff analysis that the use of a single annual exposure draft is appropriate, that is, that no additional due process documents are required.

Due process

Regarding the process for future improvements to IFRSs the Board made the following decisions:

• The IASB's website summary should be amended by including a revised explanation of the project scope and, in particular, eliminating the word "minor".
• Balloting should take place individually for each issue throughout the year. Immediately after approval by the Board, the text of the post-ballot draft (including basis for conclusion, consequential amendments to other IFRSs and dissenting opinions) is posted to the IASB's website.
• At the end of the project cycle all previously balloted issues are collated in the exposure draft. The exposure draft should have a 90 day comment period. In this context the staff noted that constituents will not be precluded from providing feedback on individual proposed amendments at any time after the post-ballot draft is available on the website.
• To segregate in the ED amendments that result in accounting changes (Part I) and those that are terminology or editorial changes (Part II), similar to the segregation in the near-final draft of the 2007 annual improvements.
• To continue considering early adoption and transitional provisions on a standard by standard basis.

For the 2008 annual improvements the Board agreed to the following estimated timetable:

• June 2008: Last Board meeting to discuss/approve new proposals; sweep issues, if any, to be discussed in July
• August 2008: Publication of exposure draft with comment letter due date in November 2008 (90 days comment period)
• January to March 2009: Board redeliberations of comments received
• 1 April 2009: Publication of final amendments
• 1 January 2010: Effective Date (unless otherwise indicated)

IAS 38 - Measuring the fair value of an asset acquired in a business combination

The Board discussed a proposed amendment to paragraphs 40 and 41 of IAS 38, which provide guidance regarding valuation techniques to measure the fair value of an intangible asset acquired in a business combination when there is no active market for the asset.

The general concern raised by constituents was that the guidance in paragraph 41 of IAS 38 does not describe commonly-used valuation techniques in the manner in which they are used in practice. In particular:

• It is uncommon in practice to use valuation multiples to measure the fair value of intangible assets
• The relief from royalty approach is mischaracterised since this approach reflects the hypothetical amount the entity saves by not having to license it from another party whereas paragraph 41(a) focuses on the amount received from licensing the asset to another party.
• IAS 38 could be interpreted as prohibiting the use of a cost approach, in particular, the approach of 'current replacement cost' which is considered to be a commonly used valuation technique.
• The word 'or' between paragraphs 41(a) and 41(b) may be misinterpreted in a way that (a) and (b) are mutually exclusive.

For timing reasons the Board decided to address this issue in the 2008 annual improvement project and not in the fair value measurement project.

The Board agreed to the proposed amendment (omitted from observer notes) subject to drafting suggestions.

IAS 38 - Additional consequential amendments arising from IFRS 3 (revised 2008)

The staff suggested making additional consequential amendments to paragraphs 36 and 37 of IAS 38 to clarify that:

• an intangible asset must be recognised separately from goodwill even if it is separable only together with a related contract, identifiable asset, or liability.
• if an intangible asset is separable only together with another intangible asset, those assets can be recognised together as a single asset.
• if the individual assets in a group of complementary intangible assets have similar useful lives, those assets can be recognised together as a single asset.

The Board agreed to the proposed amendment (omitted from observer notes) subject to drafting suggestions.

The Board decided to propose an effective date of 1 July 2009 to align it with the effective date of the revised IFRS 3. The Board agreed to a staff analysis that the short implementation period of three months would be acceptable since (1) the amendments simply clarify the Board's decisions in the business combinations project and (2) the proposed final wording would be available on the IASB's website before the exposure draft is published.

Revenue Recognition

The staff presented the draft version of chapter 5 of the forthcoming discussion paper on revenue recognition discussing the measurement approaches relating to the proposed contract-based model (draft chapter reproduced in Agenda Paper 7B).

Chapter 5: Measurement of the contract

The staff explained that the chapter separately considers the following fundamental issues:

• Measurement objective: Exit price or customer consideration (sales price)
• Remeasurement of the performance obligation: Remeasuring or locking in the measurement after contract inception

The chapter therefore implies that there are four possible measurement approaches from the combination of using either an exit price or sales price at contract inception and then either remeasuring the performance obligation or locking in those measurements after contract inception.

The staff noted that the 'exit price measurement approach' combines exit price with remeasurement of the performance obligation while the 'customer consideration measurement approach' is a combination of customer consideration with no remeasurement of the performance obligation.

In an appendix to chapter 5 the staff presented a hybrid model taking into account concerns raised by Board members regarding the 'pure' customer consideration model (reproduced in appendix A to agenda paper 7B). The hybrid model was based on the customer consideration measurement approach, that is, a customer consideration (sales price) measurement objective was used.

The main difference to the pure customer consideration measurement approach was that the cost component was updated to measure the performance obligation over the life of the contract.

The Board had a lengthy debate on the principles outlined in the draft chapter. Board members expressed diverse views. The discussion focussed mainly on the following issues:

• Whether the Board should express a preliminary view for one approach.
• Whether the hybrid model in the appendix should be included in the DP.
• Whether the 'day 1 profits' or the remeasurement of the performance obligation is the key difference between the approaches. In this context one Board member pointed out that the customer consideration measurement approach does not allow the recognition of a contract asset and therefore may be in contradiction to the Conceptual Framework in cases where an asset that meets the definition in the Conceptual Framework arises at inception.
• One Board member was concerned that the cross-cutting issues with other standards (in particular IAS 37) were not clearly articulated. In this context another Board member noted that the implications of an exit price measurement approach on other standards (for example, IAS 2 and IAS 39) and ongoing Board projects were not explained.

There seemed to be a consensus that the structure of the chapter is appropriate, but little progress was made regarding the other issues. Finally, the Chairman cut off the debate and asked for a vote on a preliminary view.

A majority of 9 Board members was in favour of the customer consideration measurement approach meaning that a customer consideration (sales price) measurement objective should be used. By combining the measurement objective with the remeasurement issue the Board developed the following three approaches:

• Customer consideration without remeasurement of the performance obligation except for onerous contracts (the pure customer consideration approach)
• Customer consideration with 'some' remeasurement of the performance obligation (the 'middle way')
• Customer consideration with 'full' remeasurement of the performance obligation

Of the 9 Board members in favour of the customer consideration measurement approach 5 preferred the 'middle way'. However, it was not specified which events trigger remeasurement.

Way forward

The staff was asked to redraft the chapter taking into account the decisions made at this meeting and also to address the concern that the customer consideration measurement approach may be in contradiction to the Conceptual Framework. A revised draft will be discussed at a future meeting.

Fair Value Measurements

The issue was added to the agenda with short notice and no observer notes were available.

The staff informed the Board that the Financial Stability Forum has established an expert advisory panel to assist the IASB in enhancing its guidance on valuing financial instruments when markets are no longer active.

In addition the staff noted the following:

• The first meeting will take place on 13 June 2008.
• At the first meeting the panel will decide on the form of guidance issued, e.g. best practice guidance or input for amendment of standards.
• The duration of the panel is expected to be two or three months.

Thursday 22 May 2008

Liabilities – Amendments to IAS 37

The staff presented an analysis of the comments received on the exposure draft relating to the proposed amendments to IAS 19 Employee Benefits. IAS 19 was would be amended as part of the liabilities project principally to converge the accounting for termination benefits with US GAAP (in particular with SFAS 146 and SFAS 88 but not necessarily with all aspects of US GAAP).

The staff pointed out that, overall, most respondents were in favour of the proposed amendments, though some concerns have been raised.

Definition of termination benefits

Some constituents asked for clarification of the term 'short period' in the definition of voluntary termination benefits. In particular, they asked whether 'short period' relates to (1) the period between the employer making the offer and the employee's acceptance of the offer or (2) the period between the employee's acceptance and the actual termination of the employee.

The Board agreed that (2) was the intended interpretation and to clarify this in the proposed paragraph 7(b) of IAS 19. There seemed to be a consensus that judgement is required in determining what a 'short period' is. The Board decided not to give any further guidance in this respect.

The Board agreed to a staff analysis that the term 'short period' implies that the bonus feature of (voluntary) long-term early retirement programs does not meet the criteria of a termination benefit even if such bonus features are not compensation for services rendered by the employee.

Recognition of termination benefits

The main concerns raised by respondents were:

• The proposal to recognise voluntary termination benefits only when the employee accepts the offer is inconsistent with the unconditional and constructive obligation principles set out in IAS 37 in cases where the entity cannot withdraw the offer (irrevocable voluntary termination benefits).
• More guidance should be provided on whether recognition of involuntary termination benefits requires specific communication to individual employees or just to the affected group of employees.

Regarding the first issue the Board decided that irrevocable offers of voluntary termination benefits should be treated in the same way as involuntary termination benefits and that the proposed paragraph 137 of IAS 19 should be amended accordingly. Regarding the second issue Board members expressed mixed views. Finally, there was a consensus that communication of the termination to each of the individual employees affected is not required for a present obligation to exist. A majority of Board members was of the view that the affected employees or group of employees must be aware of the fact that they are to be terminated. That is, a general statement that, for example, 10% of the employees of an entity will be terminated would not be sufficient. Subject to some drafting comments the Board agreed to amend the proposed paragraph 138 to something like:

...an entity shall recognise a liability and expense for involuntary termination benefits when it has a plan of termination that it has communicated to each of the affected employees being terminated, and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn...

Recognition of involuntary termination benefits that relate to future services

Some respondents suggested that involuntary termination benefits paid in exchange for future services should be recognised in the same way as voluntary termination benefits rather than spread over the assumed future service period. These constituents believed that the communication of the plan is the obligating event and the entity should recognise the amount that it expects to pay. Other respondents commented that the standard should also provide for situations where voluntary termination benefits would be provided in exchange for future services.

The Board reaffirmed its decision that because of the notion of 'short period' voluntary termination benefits can never be recognised in exchange for future services and agreed to clarify this in the basis for conclusion.

The Board also reaffirmed its decision that involuntary termination benefits in exchange for future services should be recognised over the period of the future services.

IFRS 1 First-time Adoption of IFRSs – Transitional Issues:

The Canadian Accounting Standards Board (AcSB) provided follow-up analysis of the issues discussed at the March 2008 meeting. At the March 2008 meeting the Board decided to proceed with the following proposed exemptions to IFRS 1 but asked the AcSB staff to draft amendments taking into account the Board's decisions and comments made at that meeting.

• Reassessment of accounting under previous GAAP
• Retrospective restatement of fair values
• Oil and gas industry issue: Full cost accounting

Regarding a fourth issue dealing with derecognition of financial assets and financial liabilities, the Board was less supportive of providing an exemption and asked the AcSB staff to investigate whether the exemption regarding the retrospective restatement of fair values would resolve the issue.

In addition, at this meeting the AcSB staff presented a proposed amendment to IFRS 1 relating to non-IFRS-compliant amounts in property, plant and equipment. This issue was raised by the Canadian rate-regulated industry.

Reassessment of accounting under previous GAAP

The AcSB staff amended the March proposal by clarifying that the amendment should only apply when the previous GAAP required the same accounting treatment and that an entity would be permitted not to reassess the accounting for a past transaction.

The AcSB staff recommended that the following principle be added to IFRS 1:

This IFRS permits a first-time adopter not to reassess the accounting for a past transaction at the date of transition to IFRSs, based on facts and circumstances at that date, when previous GAAP had introduced the same accounting as IFRSs based on an assessment of facts and circumstances at an earlier date. A first-time adopter electing not to reassess its previous accounting in such circumstances shall continue to use the assessment made in accordance with the previous GAAP.

The Board agreed to the proposed amendment subject to drafting suggestions. In particular, the Board decided that 'same accounting' should be replaced by 'identical accounting and assessment'.

Retrospective restatement of fair values

The AcSB staff was of the view that a broad linkage of IFRS 1 to the impracticality guidance in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors would risk that the exception not only captures retrospective restatement of fair values but also other, probably inappropriate items.

Consequently, the AcSB staff recommended proceeding with the (slightly redrafted) proposal presented at the March meeting:

This IFRS prohibits a first-time adopter from retrospectively determining fair values as of dates prior to the date of transition to IFRSs when those fair values were not available when IFRSs required them to be determined. When a fair value was not available, an entity shall use in its place the carrying amount at that date under its previous GAAP.

The Board agreed.

Oil and gas industry issue: Full cost accounting

The AcSB staff provided an analysis regarding the need for accompanying disclosure requirements if an entity elects to measure oil and gas assets in the development and production phase at the amount determined under previous GAAP. According to this analysis the election to use the proposed exemption would normally result in the oil and gas assets as a whole being measured at a higher amount than if they were reported using the IFRSs effective at the reporting date for its first IFRS financial statements. In addition, the existing IFRS 1 would not require disclosures since the exemption would not result in using fair values as deemed cost and, accordingly, would not be covered by paragraph 44 of IFRS 1.

The AcSB staff suggested adding the following paragraphs to IFRS 1:

The exemption:

19A An entity may elect to measure oil and gas assets at the date of transition to IFRSs on the following basis: (a) exploration and evaluation assets at cost, less any impairment, determined in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources; and

(b) other assets (i.e. those in the development or production phases) at the amount determined under the entity's previous GAAP, first adjusted by the difference between the decommissioning, restoration or similar liability as measured in accordance with IAS 37 and that recognised under the entity's previous GAAP. The adjusted amount is then allocated on a pro rata basis using reserve volumes or related values as of that date. An entity making this election does not apply paragraph 25E for these assets.

The deemed cost for each oil and gas asset determined as above shall be tested for impairment at the date of transition to IFRSs. For purposes of this paragraph, oil and gas assets comprise only those used in the exploration, evaluation, development or production of oil and gas.

Disclosure requirements:

44A. Paragraph 19A provides an exemption for oil and gas assets. If an entity uses that exemption, it shall disclose that fact and the basis on which carrying amounts under previous GAAP were allocated."

The Board agreed.

Derecognition of financial assets and financial liabilities

The AcSB staff concluded that its proposal to introduce a principle prohibiting retrospective fair value measurement would resolve the derecognition issue and withdrew the proposed amendment.

Canadian rate-regulated industry: Non-IFRS-compliant amounts in property, plant and equipment of first-time adopters

The ACSB staff highlighted the following:

• Some Canadian rate-regulated entities have capitalised, as part of the historical cost of property, plant and equipment (PP&E), amounts not permitted to be capitalised in accordance with IFRSs, for example, imputed cost of equity and not directly attributable costs (indirect overheads etc).
• In many cases these costs were capitalised as part of the total cost of an item of PP&E and not tracked separately after inclusion.
• Due to the capital intensive nature of the industry, the age of many items and the difficulty in obtaining fair value information, neither retrospective restatement nor use of fair values as deemed cost is practicable in many cases.

Consequently, the AcSB staff proposed to amend IFRS 1 to include an exemption permitting all first-time adopters facing this issue to elect to use the IFRS transition date carrying amount of an item of PP&E (containing previously capitalised amounts not in compliance with IFRSs) as deemed cost at that date. Under this proposal entities applying the exemption would be required to undertake impairment testing at the transition date.

Most of the discussion was spent on understanding the accounting for these items of PP&E. Some Board members questioned how the impairment test would be undertaken when fair value information can not be obtained. The staff responded that a rough estimate for purposes of an impairment test could be made but that a precise fair value calculation would not be possible in many cases.

Eventually, by majority vote the Board decided to proceed with the proposal but that the exemption should be restricted to rate-regulated entities only.

Way forward

The AcSB staff was asked to prepare an exposure draft on behalf of the Board. The Board decided that the comment period should be 120 days. No Board members indicated that they would dissent.

Friday 23 May 2008

IFRS for Small and Medium-sized Entities

At this meeting the Board started its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED).

The staff presented the key issues that were raised in comment letters on the ED, the reports prepared by field test entities and the IASB SME Working Group meeting in April 2008.

At this meeting the Board was asked to make decisions on general issues and issues relating to some specific sections of the ED. The staff noted that all disclosure issues and specific requests for additional implementation guidance will be combined and addressed separately at a future meeting.

General issues

Stand-alone IFRS for SMEs, Accounting policy options, and Omitted topics

The three issues were discussed together since they are related.

The Board decided that the IFRS for SMEs should be a fully stand-alone standard.

This decision implied all cross-references to full IFRSs being removed. Currently the ED contains two types of cross references:

• Accounting policy options: The ED generally includes the simpler option and allows application of the more complex option by cross-reference to full IFRSs
• Omitted topics: The ED does not address certain topics that are presumed not to be encountered by typical SMEs but allows application by cross-reference to the respective full IFRS

The Board then discussed to what extent the cross-referenced topics should be included in the standard.

By majority vote the Board affirmed its decision that all accounting policy options should be available to SMEs. The Board also decided that the options that the ED had proposed to allow by cross-reference to full IFRSs should be included in an appendix to the standard, that is, not in the main text of the respective section. No decision was made regarding the question whether and to what extent the (more complex) options should be simplified for use by SMEs.

Regarding the nine omitted topics identified in the staff analysis the Board decided by majority vote to include five of them and to be silent on the remaining four:

The topics to be addressed (simplified as appropriate) in the standard are:

• Lessor accounting for finance leases
• Equity-settled share-based payment
• Share-based payment transactions with cash alternative
• Financial reporting in a hyperinflationary environment
• Determining the fair value of agricultural assets

• Segment reporting
• Earnings per share
• Interim reporting
• Insurance contracts (insurers would not be eligible to use the proposed IFRS for SMEs)

No decision was made in relation to the information an SME needs to provide if it presents information on the deleted topics in its financial statements. However, there seemed to be a consensus that this issue should not be addressed in a pervasive disclosure requirement. The staff was asked to bring back a proposal for discussion at a future meeting.

Anticipating changes to full IFRSs

The Board discussed whether the standard should include a principle that the IFRS for SMEs should not try to anticipate evolving changes to full IFRSs but that if a genuine simplification of full IFRSs that is appropriate for SMEs happens to coincide with the direction that the IASB appears to be following in one of its projects, this should not prevent inclusion of this simplification in the IFRS for SMEs.

By majority vote the Board decided not to address this issue since such a principle would not be operational and could put constraints on the development of a separate, fully stand-alone IFRS for SMEs.

Entities that receive funds in a fiduciary capacity

The Board principally agreed to a staff analysis that an entity whose primary business is holding funds in a fiduciary capacity is publicly accountable and hence should be out of the scope of the IFRS for SMEs. This decision implies that an entity that holds funds in a fiduciary capacity as a sideline to its principal business should be permitted to use the IFRS for SMEs if it otherwise qualifies.

However, the Board asked the staff to further elaborate the meaning of 'primary' and to consider consequential adjustment to the definition of scope in section 1 of the ED.

Replace the term fair value

Some constituents noted that the term 'fair value' belongs to the language of valuation experts and is not easily understandable. These constituents suggested replacing the term fair value by a description of what the basis for measurement is in each specific case.

At first a majority of Board members disagreed with this proposal. One Board member noted that the term fair value is currently deliberated as part of the fair value measurement project on full IFRSs and that any decisions in the SME project could be precedential. Other Board members raised the concern that such descriptions could have unintended consequences since they may result in diverging definitions in IFRS for SMEs and full IFRSs.

Finally, the Board agreed to a staff proposal to bring back a draft wording of such descriptions for discussion at a future meeting.

Post-issuance assessment and ongoing review of the IFRS for SMEs

The Board was reluctant being specific regarding the timing of such reviews.

The Board agreed to undertake a post-issuance assessment of implementation problems after two years of financial statements using the IFRS for SMEs are available. Thereafter reviews should be performed when deemed necessary which would be expected to be on a three-year cycle.

Other general issues

In addition, the Board made/confirmed the following decisions without discussing the issues in detail:

• Change the title of the standard to 'International Financial Reporting Standard for Private Entities' with private entities defined similarly to the ED's definition of small and medium-sized entities.
• The standard should not explicitly exclude micro entities (such as fewer than 10 employees). Consequently, no very simple set of standards for micros (a third tier of standards) should be developed.
• The standard should not include special exemptions for entities at the small end of the SME spectrum
• Small listed entities should not be included in the intended scope of the standard.
• No 'undue cost or effort principle' should be included in the impracticability exemption when the standard requires restatement.
• Regarding fair value measurement:
  • An overall 'undue cost or effort' principle should not be added for fair value measurement,
  • The condition 'intent to dispose' should not be added whenever a fair value measurement is required and
  • A condition such as 'is readily realisable' or 'has an observable market price' should not be added whenever a fair value measurement is required.
• Not to change the overall structure of the standard.
• No formal process for developing official interpretations of the IFRS for SMEs should be established.

Issues relating to specific sections of the ED

At this meeting the Board discussed issues relating to sections 1 to 3.

Use by a subsidiary of a full IFRS company (section 1)

The Board agreed that a subsidiary of an IFRS entity should not be allowed use the recognition and measurement principles in full IFRSs but make only the disclosures required by the IFRS for SMEs in its published general purpose financial statements.

Objective of financial reporting and qualitative characteristics (section 2)

The Board deferred most of the decisions in light of the forthcoming exposure draft on Phase A of the conceptual framework project. In particular, the Board deferred the decision whether the final IFRS for SMEs should reflect the changes expected to be proposed to the IASB framework on objectives and qualitative characteristics.

The Board agreed with the staff recommendation that determination of taxable income and distributable income should not be added as objectives of the financial statements of an SME.

Financial statement presentation (section 3)

The Board decided that the IFRS for SMEs should:

• not prescribe financial statement formats, subtotals, minimum line items, sequencing, and note disclosures with more specificity than currently in the ED,
• incorporate the new requirements in IAS 1 (revised 2007) Presentation of Financial Statements, and
• not require two prior years of comparative data.

The incorporation of the requirements in IAS 1 (revised 2007) implies, among other things, that an SME would be required to present a statement of comprehensive income. Additionally, the new titles of financial statements would be used in the final standard but would, similarly to full IFRSs, not be mandatory.

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