Tuesday 17 June 2008
 IFRS for Private Entities (formerly Small and Medium-sized Entities, or SMEs)
The Board continued its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED). At this meeting the Board discussed the key issues relating to section 4 to 12 excluding any disclosure issues and requests for additional implementation guidance. The main decisions are outlined below.
Balance sheet (section 4)
With regard to the presentation of the statement of financial position (balance sheet) the Board decided to:
- Retain the requirement that a private entity should present the statement of financial position based on liquidity if this presentation provides information that is reliable and more relevant than a current/non-current presentation. The Board was nearly equally split on this issue but finally a majority of Board members was of the view that private entities should not be precluded from presentation based on liquidity.
- Not simplify the criteria for current/non-current classification of assets and liabilities, that is, not to exclusively base this classification on the 12 months criterion.
- Retain the requirement that the current portion of a non-current liability should be presented separately as part of current liabilities
Income statement (section 5)
The Board decided to delete the requirements in paragraph 5.10 for additional disclosures if an analysis of expenses by function is chosen since these disclosures are already required by other sections.
No decision was made on whether changes in fair values should be presented separately on the face of the statement of comprehensive income (income statement). The staff was asked to further elaborate the implications of such a presentation requirement.
Statement of changes in equity and statement of income and retained earnings (section 6)
The Board agreed that a combined statement of comprehensive income and retained earnings should only be permitted if the changes to equity during the period arise from profit and loss, payment of dividends, corrections of prior period errors and changes in accounting policies. In case other equity transactions with owners occur, a separate statement of changes in equity would be required.
Statement of cash flows (section 7)
The Board reaffirmed its decisions that all private entities should be required to present a statement of cash flows and that operating cash flows should be presented using either the direct or indirect method.
Consolidated and separate financial statements (section 9)
The Board agreed the following:
- Not to provide exemption from the requirement to present consolidated financial statements, i.e. the Board reaffirmed its decision that all private entities that are parent entities should prepare consolidated financial statements.
- Not to provide a temporary control exemption.
- To retain and probably enhance the guidance on combined financial statements. A majority of Board members was of the view that quite often two or more private entities are controlled by a single investor and, therefore, private entities should be encouraged (but not required) to prepare combined financial statements.
- To allow in the separate financial statements different accounting policies for categories of investments, for example, to measure associates at fair value through profit and subsidiaries at cost. This decision is a consequence of the general decision made at the May 2008 meeting that all accounting policy options in full IFRSs should also be available for private entities.
Accounting policies, estimates and errors (section 10)
The Board in principle confirmed the accounting policy hierarchy in paragraphs 10.2 to 10.4. However, the Board decided to amend paragraph 10.4 to clarify that an entity may, but is not required to look at full IFRSs and to exclude pronouncements of other standard setting bodies from the hierarchy.
Financial assets and financial liabilities (section 11)
The Board had a thorough debate on the guidance regarding financial instruments.
The Board decided to reorganise the section to make application easier. In particular it should be clarified by use of examples that the cost model will be appropriate for most of the financial instruments usually held by private entities. In this context the Board decided not to define cost/amortised cost as the default measurement basis since this would require explicit guidance for financial instruments that are to be measured at fair value such as derivatives and embedded derivatives.
Among other things the Board also decided to:
- Remove the option in paragraph 11.1 to apply IAS 39 and IFRS 7 in full instead of section 11. However, the Board acknowledged that this is a tentative decision and decided to redeliberate this decision after Section 11 has been reorganised as outlined above.
- Not add an 'available for sale' category for financial assets to section 11.
- Not permit straight-line amortisation of discounts and premiums as an alternative to the effective interest rate method.
- Not permit a 'shortcut method' for hedge accounting.
- Not include additional guidance on measuring hedge effectiveness. Instead, such guidance should be included in the training materials developed by the IASC Foundation.
- Add additional guidance to clarify which types of risks can be hedged in accordance with paragraph 11.31.
- Add guidance on accounting for factoring and similar transactions.
- Clarify that interest rate swaps must be measured at fair value through profit or loss.
- Clarify that an impairment loss for an equity instrument carried at cost because it is not publicly traded and its fair value cannot otherwise be measured reliably should be the difference between the asset's carrying amount and the best estimate (which will necessarily be an approximation) of the amount (which might be zero) that the entity would receive for the asset if it were to be sold.
The staff was asked to redraft section 11 accordingly for discussion at a future meeting.
Inventories (section 12)
The Board decided to:
- Not permit using IAS 2 in full instead of section 12.
- Allow measuring inventory at the most recent prices if the results approximate costs.
- Not allow LIFO as an inventory cost method.
Technical Plan
The Board discussed a revised IASB work plan and revised project plans of all projects currently on the active and research agenda, including projects undertaken directly by the staff of the IASB as well as projects on which the IASB is working jointly with FASB and other standard setters. All technical plan papers were omitted from the observer notes.
The staff noted that all proposed revisions regarding staffing, scope etc. take into account the 'mid-2011 completion goal' discussed at the April 2008 joint Board meeting for projects that are part of the Memorandum of Understanding between the IASB and FASB (MoU).
The staff pointed out that overall 31 projects need to be finalised and 41 documents are intended to be published by 30 June 2011. According to staff the IASB intends to increase its staff by ten members by the end of 2008.
For each individual project the project plan was briefly introduced by senior staff of the IASB or FASB, respectively. Board members were then asked for their individual comments. No formal decisions regarding the way forward and next due process steps were made. Also no technical issues were discussed.
The staff announced that the revised IASB work plan will be published on the IASB's website shortly after the meeting. The revised work plan was not formally adopted by the Board at this meeting. The staff intends to make the following formal changes to the work plan:
- Show due process documents already published in addition to forthcoming documents
- Retain the classifications 'Active Agenda' and 'Research Agenda' but simplify the layout by reducing the number of sub-categories
The following projects/issues were discussed in more detail:
Financial statement presentation
The staff noted that this project was one of the most challenging regarding the timetable and proposed to cut back the scope. Some Board members noted that the scope as outlined in the revised project plan is too restricted and questioned whether this project should be continued. In particular, the exclusion of presentation and recognition of other comprehensive income and recycling was mentioned in this context. However, no final decision regarding the way forward was made.
Liabilities and equity (research agenda)
FASB staff was of the view that the project is adequately staffed, that an ED is expected to be published by the end of 2009 and that the project can be finalised by 30 June 2011. The staff noted that the project is still on the research agenda and that no formal agenda decision has been taken, yet.
One Board member strongly disagreed and noted that in light of the current problems with IAS 32 and the 'confusing' DP issued by the FASB it the timetable cannot be met. This Board member also raised the concern that the liabilities and equity project will cause political pressure and that it is very time consuming to deal with that. Some members of the IASB staff seemed to agree to this statement. However, no final decision regarding the way forward was made.
Leases
The staff noted that this project will address lessee accounting only and that a DP is expected to be published in November 2008. Some Board members expressed their disappointment that lessor accounting is not addressed but appeared to acknowledge that the reduction in scope is a necessary step to meet the timetable.
Liabilities (Amendments to IAS 37 and IAS 19)
The staff noted that the project manager of this project is on leave until September 2008 but that the work will be continued after her return. A final standard is expected to be published by the end of 2010 or beginning of 2011.
Some Board members expressed their frustration with the progress made since the publication of the ED in 2005 and strongly recommended finalising this project as soon as possible. The Board noted that re-exposing the ED needs to be considered but no strong views were expressed in this regard.
Consolidation
The staff emphasised that high pressure has been put on the IASB mainly by regulators to finalise this project. The staff intends to go proceed with the project as follows:
- Present a 'consolidation package' integrating IAS 27 and SIC 12 in July 2008
- Not publish a DP but hold roundtables
- Publish an ED in Q4 2008
One Board member disagreed with the timetable and noted that this project interrelates with the derecognition project and, consequently, cannot be finalised without having expressed views on derecognition. This Board member also questioned the usefulness of roundtables with regulators since they may have different objectives and are not the primary target group. Another Board member responded that the dialogue with regulators may help avoiding 'surprises'.
Extractive activities (research agenda)
The staff noted that a DP is expected to be published in December 2008.
One Board member questioned whether it is worth proceeding with this project in light of the current resource constraints and recommended stopping the project. However, there seemed to be a majority view among Board members to proceed with the project. These Board members mainly noted that the current standard IFRS 6 is only a temporary standard, a lot of work has been performed by other standard setters, and very large companies are affected by accounting for extractive activities. The Chairman announced that the IASB will ask for a formal agenda decision in due course and that the DP will be published independent of the timing of the agenda decision.
Conceptual Framework Phase D: Reporting entity
The staff pointed out that a DP was recently issued but that there is currently no further plan for this project. Some Board members expressed their surprise that there are no plans to proceed with the project even though a DP has been issued. These Board members recommended carrying on with the project. No decision was made in this respect.
Potential agenda item: Disclosure project
The FASB staff informed the Board that the FASB is considering to begin a high-priority project to develop a principles-based disclosure standard that would replace some disclosure requirements in individual standards and would probably also introduce specific requirements for the structure and organisation of the notes. The Board was asked whether the IASB has any interest in participating in such a project.
The Board agreed not to participate in such a project but to closely monitor the FASB's work and to decide on an IASB project later.
Potential agenda item: Improving and simplifying IFRS 2 Share-based Payment
At the November 2007 Board meeting after finalising the deliberations on amendments to IFRS 2 Vesting Conditions and Cancellations the Board asked the staff to set up a small research group of staff and Board advisers to examine critical IFRS 2 issues and possible options for improving and simplifying IFRS 2. The staff noted that no detailed research has been carried out yet and recommended postponing further research until June 2011.
One Board member strongly disagreed with this proposal and pointed out that resolving the fundamental IFRS 2 issues is more important than many projects the IASB is currently spending time on. Finally, the Board directed the staff to complete the analysis for discussion at a future meeting.
Wednesday 18 June 2008
Fair Value Measurements – Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets: Meeting update
The staff presented a summary of the first meeting held on 13 June 2008 of the Expert Advisory Panel.
The staff noted that the purpose of that meeting was to identify the issues arising on valuing financial instruments when markets are no longer active and that possible solutions will be discussed at future meetings.
In addition the staff noted the following:
- No decision was made regarding the form of guidance the panel will provide, e.g. best practice guidance or input for amendment of standards.
- Subsets of the issues identified will be discussed by a subgroup of panel members at the next meetings in July (measurement issues) and August (disclosure issues). Meeting dates have not yet been confirmed. The meetings will be held in private sessions with public updates being provided at the July and September Board meetings.
- The last meeting is expected to be in September 2008.
Updates on the activities of the panel are also available on the IASB's website.
Fair Value Measurements
Following the joint IASB-FASB meeting in April 2008 the Board discussed the way forward in this project. At the joint meeting the IASB decided not to re-debate all aspects of the Fair Value Measurement discussion paper (the DP), i.e. not to fully re-debate FAS 157 Fair Value Measurements on which the DP is based. Instead the Board agreed to redeliberate certain areas of confusion or areas in which FAS 157 had proved difficult to apply.
The staff presented an analysis of issues raised in the DP and provided recommendations on whether a particular issue should be redeliberated or not. Technical aspects of fair value measurement were not discussed at this meeting.
The Board agreed to discuss further the topics listed below. These topics will be redeliberated mainly because the Board did not express a preliminary view in the DP and/or comments received on the DP indicated a need for further discussion:
The exit price measurement objective
The Board agreed to consider both entry and exit notions of fair value measurement based on the standard-by-standard review currently performed by the staff.
The market participant view
In general the Board reaffirmed its preliminary view in the DP. However, the staff was asked to improve the wording in order to address concerns raised by constituents. In particular, it should be clarified how to apply the market participant view in cases where no market exists (for example, liabilities that cannot be transferred).
Transfer vs. settlement of a liability
The Board agreed to a staff analysis that this is an important cross-cutting issue for other Board projects, particularly, amendments to IAS 37.
Transaction price and fair value at initial: Day one gains and losses
This issue is considered to be interrelated with the entry vs. exit price issue.
The principal (or most advantageous) market
The Board reaffirmed the preliminary view in principal but noted that questions about the practical application needs to be resolved.
Valuation of liabilities: Non-performance risk
There seemed to be a broad consensus to reaffirm the preliminary view that non-performance risks needs to be considered when measuring the fair value. However, the majority of Board noted that this is an important cross-cutting and that there are unresolved issues with regard to presentation (of the counter-entry) and disaggregation.
Highest and best use
The staff intends to address comprehensively all issues relating to 'different markets'.
Bid-ask spreads: Applicability of mid-market pricing to all levels of the hierarchy?
The staff noted that the Board still needs to reach a preliminary and that the question of which transaction costs are to be included will be addressed in this context.
Issues not discussed
- Disclosures: Redeliberation in light of current market environment
- Application guidance: Redeliberation in light of current market environment
Topics not to be redeliberated
The Board decided not to redeliberate the following five topics:
1. Attributes (characteristics) specific to an asset or liability
2. Whether transaction costs are separate from fair value
The staff intends to discuss any outstanding issues in connection with bid-ask spreads. (this sentence relates to bullet 2)
3. Three-level fair value hierarchy
Accepted as described in the Discussion Paper without any further deliberations
4. The prohibition of blockage factor adjustments at all levels of the hierarchy
The Board had a thorough debate on this issue. One Board member emphasised that the majority of constituents disagreed with the preliminary view expressed in the DP. Finally, there seemed to be a consensus not to redeliberate the issue but to deal with the concerns in the feedback statement. The staff was asked to review the comments received to ensure that the Board 'has not missed anything' in reaching the preliminary view.
5. The unit of account for financial assets and liabilities
The staff noted that the topics not to be discussed by the Board are broadly consistent with the principles in IFRSs and that they can therefore be addressed in the exposure draft in a way that considers the concerns raised by constituents and is consistent with FAS 157.
FASB Hedge Accounting Project – Education session
FASB staff gave a presentation on an exposure draft (ED) on simplifying hedge accounting under SFAS 133 recently published by the FASB. No decisions were made at this education session.
In an opening remark the staff noted that the objective of the ED is to simplify accounting for and to improve financial reporting of hedging activities. It was also noted that two of the FASB Board members dissented from the issue of the ED, mainly as the ED would not lead to convergence with IFRS and as some of the complex portion hedging would still be allowed.
One Board member asked if the FASB considered requiring mandatory fair value measurement for financial instruments. The FASB staff replied that this has been considered but discarded due to time constraints which would have contradicted the idea of having a short-term solution.
The FASB staff then began to present the proposals of the ED. It was emphasised that the eligibility criteria for hedged items would not be changed. Furthermore, the ED would introduce what was called a 'fair value methodology' approach to hedge accounting. The consequences of that approach would be:
- No bifurcation of risk (with exceptions)
- Abolishment of shortcut method and critical terms match
- No quantitative effectiveness test required generally.
The FASB staff then turned to depict the major changes that would be introduced by the ED.
Hedge effectiveness
The FASB explained the new principles that would be established under the ED regarding the hedge effectiveness requirement. It was noted that the quantitative test that 'proves' the effectiveness of a hedging relationship would no longer be required if a qualitative analysis showed a 'reasonable' economic offset between hedging instrument and hedged item. If this is not obvious, however, a quantitative test would still be required. One Board member told the staff that some constituents would have the impression that not requiring an effectiveness test would result in not recognising any ineffectiveness at all. The FASB staff explained that although there would be no effectiveness test required, an entity would still have to measure any ineffectiveness.
Another Board member asked what was meant by the term 'reasonable'. The FASB staff answered that there is no quantitative threshold for this. It was also questioned whether an effectiveness assumption would still be required given that all ineffectiveness would be recognised in profit or loss anyway. The FASB staff responded that the FASB considered this, but that not requiring some notion of effectiveness would essentially result in a fair value option for non-financial items by way of designation. It was also noted that if circumstances suggest that the assumption of effectiveness no longer holds true, effectiveness would have to be reassessed.
Dedesignation
The FASB staff then presented the new dedesignation criteria. It was highlighted that voluntary dedesignation would no longer be permitted under the ED's approach. Instead a hedging relationship would be discontinued if the hedging instrument terminated, sold or expired or would no longer meet the criteria in SFAS 133.21 and .22. Also entering into a derivative contract offsetting the hedging derivative would be consideration effective termination. One Board member asked if this would also trigger recycling of the amount deferred in equity in a cash flow hedge of a forecasted transaction. The FASB staff explained that provided the forecasted transaction is still considered to be highly probable the amount would continue to be deferred until the hedged item affects profit or loss.
Hedged risk
The FASB staff then turned to the definition of hedged risk under the ED. It was noted that the general approach would be that only all risks can be designated with two exceptions:
- Foreign exchange risk
- Interest rate risk in hedge of an entity's own debt if designated at inception.
This would reduce the situations where bifurcation of risk would be possible. It was noted that the designation of a proportion would still be possible.
One Board member asked why these two exceptions were made. The FASB explained that changing the hedge accounting requirements for foreign exchange risk under SFAS 133 that had been carried over from SFAS 52 would have required redeliberating and amending SFAS 52. Regarding the second exception it was argued that this has been done for convenience reasons as entities have indicated they prefer issuing fixed rate debt and then swapping it into variable rate debt, in which case they would have to apply hedge accounting in the absence of invoking the fair value option for the debt instrument. That would have resulted in those entities being required to present changes in their own credit risk inherent in their issued debt. Another Board member asked why this choice would not be permitted for assets. The FASB staff responded that the FASB considered it useful information if users of financial statements would not only see what an entity has hedged, but also what it has not hedged. This would be implemented with the ED's hedge accounting model.
One Board member asked about the interaction of the 'all risks' approach and measuring ineffectiveness and, if necessary, any quantitative effectiveness testing. The FASB staff highlighted that if all risks are designated then all changes in value of the hedged item caused by these risk would be reflected in measuring ineffectiveness (or when testing effectiveness). This is, however, different in a scenario where the ED would still allow designating risk components.
Measurement of hedged items in a fair value hedge
The FASB staff noted that the ED would still require the hedged item to be adjusted for fair value changes. It was also noted that hedged item and hedging instrument must be measured separately and that all contractual cash flows must be included.
Measuring and reporting ineffectiveness in a cash flow hedge
The FASB then continued to present the accounting changes for cash flow hedges. It was noted that the ED would implement the hypothetical derivative method (which compared the actual hedging instrument with a hypothetical derivate that would perfectly offset the risks from the hedged item) and any difference in the value between this derivative and the actual hedging instrument would be reported in profit or loss as ineffectiveness. The FASB staff also highlighted that the approach set out in Implementation Guidance G20 which allows deferring changes in the time value of an option in a cash flow hedge would still be allowed under the ED, but would be moved to the main body of SFAS 133. It was also noted that the time value must be amortised using a 'rational basis'.
Disclosures
The FASB staff then explained the new disclosure requirements under the ED. It was noted that a reconciliation would be required that showed reported amount in the balance sheet, any hedge adjustment and other fair value changes. Furthermore, if an entity hedges the interest rate risk in issued debt, it would be required to disclose the impact of any derivatives on maturity and interest rate of the debt.
Partial-term hedging
At the end of the session, the FASB staff was asked if partial term-hedging would still be possible. FASB staff response was no.
The Chairman thanked the FASB staff for the presentation and closed the session.
Thursday 19 June 2008
Annual Improvements Project – 2008
The purpose of this session was to discuss possible improvements to IFRSs for inclusion in the 2008 Annual Improvements Process. The staff presented three proposed items:
- IAS 7 Statement of Cash Flows - Classification of expenditures
- IAS 36 Impairment of Assets - Unit of account for goodwill impairment test
- IFRS 2 Share-based Payment - Scope of IFRS 2 and revised IFRS 3
IAS 7 Statement of Cash Flows - Classification of expenditures
This proposal has been recommended from IFRIC for resolution via the Annual Improvements Process. The issue that should be addressed is whether expenditures that do not result in the recognition of an asset can be classified as a cash flow from investing activities in accordance with IAS 7. This issue is most prevalent in extractive industries due to the accounting policy choice provided in IFRS 6 Exploration for and Evaluation of Mineral Resources as an asset or an expense, but could be easily extended to other scenarios.
The staff noted that the wording in IAS 7 is not definitive and that IFRIC considered two possible views of classifying such cash flows:
- View 1: all expenditure intended to enhance future cash flows or income may be presented as investing activities.
- View 2: expenditure that is immediately expensed should be recognised in the statement of cash flows as an operating activity.
The staff recommendation was that IAS 7 should be amended to state that only expenditure that results in asset recognition can be classified as 'investing' in the statement of cash flows. Specifically, the staff proposed the following:
- To address the issue in the annual improvements project;
- To amend IAS 7 to make an explicit statement that only expenditure that results in a recognised asset can be classified as a cash flow from investing activities;
- To make no consequential amendment to IFRS 6 that would clarify that the accounting policy choice provided by that Standard only covers recognition and measurement, but to make some statements in the Basis for Conclusions of IFRS 6;
- To require retrospective application and provide no relief for first-time adopters;
- To include this amendment in Part I of the Annual Improvements ED (that is, acknowledging that this amendment would result in an accounting change in some instances);
- To solicit comments as part of the invitation to comment.
One Board member expressed his consent with the staff recommendation and stated that an entity has other possibilities to make clear in its financial statements that it considers certain expenditures as investing activity although presented as 'operating' in the statement of cash flows.
Other Board members had drafting comments, but the Chairman proposed that these should be dealt with offline. The Chairman then took the vote on this issue. The staff proposals were agreed to unanimously.
IAS 36 Impairment of Assets - Unit of account for goodwill impairment test
The next issue presented by the staff was the need for a further clarification what was the largest possible unit for allocating goodwill when testing for impairment in accordance with IAS 36. IAS 36.80 states that goodwill arising from a business combination should be allocated to (groups of) cash-generating units for impairment testing. The level of this allocation should be the lowest level where management monitors goodwill. However, this unit may not be 'larger than an operating segment determined in accordance with IFRS 8'.
Practice has taken differing views regarding what is meant by 'operating segment' in this context - the operating segment as defined in IFRS 8.5 or the operating segment level determined after applying the voluntary aggregation criteria as permitted by IFRS 8.12.
The staff recommended referring to the definition of an operating segment in IFRS 8.5 for the purposes of determining the appropriate level of allocation when applying IAS 36.80. This should be done by amending IAS 36.80 to make this clear. The main argument for this is that the Board aimed to look at the lowest level where management monitors its goodwill for impairment testing purposes when it developed IAS 36 and that this view would also avoid masking impairment losses by offsetting effects possibly resulting from the aggregation of operating segments.
Furthermore, the staff recommended the following:
- To address this issue in the annual improvements project;
- To propose no consequential amendment to IFRS 8;
- To propose prospective application and no relief for first-time adopters:
- To include the proposed amendment in Part I of the Annual Improvements ED (that is, acknowledging that this amendment would result in an accounting change in some instances);
- To solicit comments as part of the ED's invitation to comment.
The Board agreed with the staff proposals.
IFRS 2 Share-based Payment - Scope of IFRS 2 and revised IFRS 3
The final issue for discussion at this session was the interaction between the IFRS 2 and revised IFRS 3 Business Combinations. The Board received a request if due to the changes to IFRS 3 formations of a joint venture would now be within the scope of IFRS 2. The staff also highlighted that this question could be extended to common control transactions and hence, included such transactions in the proposal.
IFRS 2 excludes from its scope transactions that meet the definition of a business combination in IFRS 3. However, the revision to IFRS 3 changed the definition of a business combination. The request noted that at least for the formation of a joint venture the definition of a business combination under IFRS 3 revised 2008 is not met. This could lead to the conclusion that such transactions are now within the scope of IFRS 2.
The staff noted that it did not think that the Board intended to change the scope of IFRS 2 when revising IFRS 3 and consequently recommended that the Board should amend IFRS 2.5 to reaffirm that the transactions mentioned above are outside the scope of IFRS 2.
Additionally, the staff made the following recommendations:
- To include this issue in the annual improvement project;
- To propose no consequential amendments to other standards;
- To provide no relief for first-time adopters;
- To include the proposal in Part II of the ED (that is, it is considered to be an editorial change only with no changes to accounting);
- To solicit comments as part of the ED's invitation to comment.
The staff highlighted that there would only be a short implementation period between the publication of the amendment (expected April 2009) and the effective date of IFRS 3 revised, which is 1 July 2009. However, the staff considered this acceptable as the amendment would not change existing practice.
The Board agreed with the staff proposals.
IFRIC - Approval of Final Interpretations
The IFRIC coordinator and staff presented to the Board requests for ratification of two Interpretations:
- Net Investment in a Foreign Operation
- Agreements for the Construction of Real Estate
It was noted that both Interpretations have been approved by IFRIC with no objections.
Net Investment in a Foreign Operation
The Interpretation would provide guidance on how to apply IAS 21 The Effects of Changes in Foreign Exchange Rates and IAS 39 Financial Instruments: Recognition and Measurement with regard to hedging of and hedge accounting for net investments in foreign operations.
One Board member highlighted that this has been a particularly difficult interpretation as the underlying issue is complex itself and expressed his acknowledgement of the work done by the IFRIC staff and other contributors.
The chairman then asked the Board members if they would ratify the Interpretation. The Board agreed unanimously.
The staff then discussed a related issue arising from the proposed amendments to IAS 39 regarding exposures qualifying for hedge accounting. In May 2008 the Board reaffirmed its decision that these amendments should be applied retrospectively. The Interpretation would require prospective application. Furthermore it was noted that it is unclear if the Board would require retrospective application for future changes to the hedge accounting requirements. The Board then discussed in length the principles both the Board and the IFRIC apply when they decide whether to require retrospective or prospective application.
While the Board reaffirmed its decision to require retrospective application of the amendments to IAS 39 for the reasons stated in the redeliberations of the Exposure Draft, it was agreed (with one Board member dissenting) that the effective date should be postponed to annual periods beginning on or after 1 July 2009. This was mainly done to allow entities to revisit their hedge designations and avoid restatements of the comparative period.
Agreements for the Construction of Real Estate
The IFRIC coordinator then moved on to present the second Interpretation for ratification. Agreements for the Construction of Real Estate would provide guidance on how to apply IAS 11 Construction Contracts and IAS 18 Revenue to real estate agreements.
The IFRIC staff highlighted that there have been changes to the flow chart that is part of the Interpretation and that specific disclosure requirements for 'continuous transfers' were added that are similar to the disclosures required by IAS 11.
Furthermore it was noted that this Interpretation would not lead to convergence with US GAAP. One Board member noted that regarding this issue there had never been convergence between US GAAP and IFRS.
Another Board member asked why there is no 'no analogies' paragraph in the Interpretation. The staff explained that IFRIC considered the guidance given in the Interpretation would also be appropriately applicable to other transactions outside the real estate sector, but broadening the scope would have consumed much more time. So it has been decided to implicitly allow analogising by not explicitly prohibiting it, but to make clear in the Basis for Conclusion that there are boundaries for analogising.
A Board member asked why the interpretation would have to be applied retrospectively. The staff answered that IFRIC considered it important that the revenue figures are comparable.
The Chairman then took the vote on the Interpretation. The Board agreed unanimously.
The staff then asked the Board if re-exposure was required. It noted although the near-final version changed compared to the ED, this was done to reflect comments from constituents. However, the staff highlighted that these changes would not change the answers derived from applying the Interpretation and hence, recommended not to re-expose the Interpretation.
The Board agreed.
Amendments to IFRS 5 – Discontinued Operations
This session was intended to discuss sweep issues arising from Board members' review of the pre-ballot draft of proposed amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and the discussions at the FASB meeting at 14 May 2008 on potential changes to SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The goal of this project is to amplify the definition of a discontinued operation in IFRS 5.
Two issues were discussed at this meeting:
- Issue 1: Subsidiaries that meet the criteria to be classified as held for sale on acquisition
- Presentation on the statement of comprehensive income
- Disclosure exemptions.
- Issue 2: Disclosures for all components of an entity that either have been disposed of or are classified as held for sale
- Unit of disclosure
- Use of proceeds from disposal activities.
Subsidiaries that meet the criteria to be classified as held for sale on acquisition
Presentation on the statement of comprehensive income
Regarding the first part of issue 1, the staff asked the Board if it would agree to a change in the definition of a discontinued operation. The staff informed the Board that the FASB intended to include bundles of asset in that definition. This would result in removing the floor of an operating segment as defined by IFRS 8 if it is not a subsidiary. The Board discussed the pros and cons of extending the definition proposed by the FASB. While there seemed to be some consensus for the idea, once the staff clarified that FASB plans to take this approach to scenarios outside a business combination, but to acquisitions in a broader context, the Chairman proposed that this is not a sweep issue anymore as these are new facts the Board would have to vote on. The staff was asked to bring this particular issue back at a later point.
Disclosure exemptions
The staff asked the Board if discontinued operations should still be provided with exemptions for both the discontinued operations and business combinations disclosure requirements.
The Board agreed to provide these disclosure exemptions provided it could agree on the first part of issue 1.
Disclosures for all components of an entity that either have been disposed of or are classified as held for sale
Unit of disclosure
The proposed amendments would require providing certain disclosures for all components of an entity that either have been disposed of or are classified as held for sale. The staff noted that these requirements were silent on the issue of aggregation. The Board was asked if it would explicitly require disclosure for every single component meeting the criteria or remain silent on the issue and let entities and their auditors decide on the appropriate level of aggregation. The staff recommended the latter. One Board member noted that it would be a very burdensome requirement for prepares if aggregation would be prohibited and every item would have to be reported on separately.
The Board agreed.
Use of proceeds from disposal activities
The last issue discussed at this session was the question still to require a disclosure related to the intended use for the proceeds from the disposal activities, mainly for reasons of providing forward-looking statements when requiring such a disclosure and that entities often cannot specify the intended use at the reporting date. The staff proposed to delete this specific disclosure requirement.
The Board agreed.
Financial Statement Presentation – Phase B
(FASB staff joined by video conference)
The purpose of this session was to resolve the open issues identified by the staff when drafting the pre-ballot draft of the forthcoming discussion paper (DP).
Implication of scope change
The Board discussed the implications of the scope changes agreed at the April 2008 joint board meeting. At that meeting the Boards decided to retain the existing guidance on presentation of other comprehensive income (OCI) in the statement of comprehensive income, not change existing standards regarding items to be recognised outside profit or loss and not include additional segment and liquidity disclosures.
Several Board members expressed their disappointment about the reduction of scope and noted that the most advantageous parts of the project have been excluded. In particular, one Board member noted that the part on segment disclosures would have been a good opportunity to eliminate flaws in IFRS 8 Operating Segments.
However, there seemed to be a broad consensus that the Board has to stick with the decisions made in April 2008 and consequently the following decisions were made:
- The project will not seek to change existing standards relating to which items are recognized outside of profit or loss, thereby retaining the current ad hoc approach to items reported outside of profit or loss and the recycling mechanism
- The DP will present two options for OCI presentation:
- a. Present OCI items in a separate section similar to how OCI is presented in a single statement of comprehensive income.
- b. Classifying OCI items within the operating, investing and financing categories.
- To include in the DP a paragraph explaining the Board's 'long term goal' of presenting all changes in assets and liabilities in one of the functional sections/categories in the statement of comprehensive income, that is, the goal to eliminate OCI items and the recycling mechanism. In addition, the DP will explicitly seek input from constituents on this long term goal.
- When OCI is presented in a separate section an entity should indicate what category (operating, investing or financing) each OCI item relates to.
- No further separation of OCI items should be required in the statement of financial position and the statement of cash flows.
- Not to include as part of this project additional segment disclosures.
- Not to include as part of this project liquidity disclosures. However, the previously agreed additional disclosures of contractual maturity information about short-term and long-term assets and liabilities should be retained in the project scope.
In addition the following decisions were made with regard to the scope of the project:
- Not to extend intraperiod tax allocation; i.e. income taxes should continued to be allocated in the statement of comprehensive income in accordance with current guidance and income tax assets, liabilities and cash flows should be presented in a separate section in the statements of financial position and cash flows, respectively.
- Not to change the requirements of earnings per share presentation; i.e. the current requirements of IAS 33 Earnings per Share will be not be changed.
- Not to include additional capital management disclosures; i.e. the current requirements of IAS 1 Presentation of Financial Statements would not be changed.
- Not to discuss offsetting of assets and liabilities as well as disclosures of information about measurement bases and measurement uncertainty; i.e. the current requirements of IAS 1 would not be changed.
Sweep Issues
Definition of operating and investing categories
The pre-ballot draft of the DP (some paragraphs were reproduced in the observer notes) stipulates that within the business section '(t)he operating category should include assets and liabilities that management views as related to the central purpose(s) for which the entity is in business (and changes in those assets and liabilities)' and that '(t)he investing category should include assets and liabilities that management views as unrelated to the central purpose for which the entity is in business (and any changes in those assets and liabilities)'.
Several Board members raised the concern that these definitions may lead to arbitrary classification and that the classification heavily depend on management's intentions (similar to the guidance in IFRS 8); e.g. management could try to move loss generating activities to the investing category. Other Board members responded that the risk of manipulation is relatively low since an entity needs to explain its classification at the beginning and has to stick with it.
Finally the Board decided by majority vote to retain the definitions in the pre-ballot draft and to keep the labels operating category and investing category.
Labels for financing and equity sections
The Board was asked whether the labels of the 'equity' section and the 'financing' section should be kept or whether the labels should be changed to 'equity financing' and 'non-owner financing' in order to illustrate that both sections relate to financing. In addition, the FASB staff informed the Board that the FASB has tentatively decided to change the label of the 'equity' section to 'equity financing", thereby retaining the label 'finance' section.
The Board found it confusing to have a 'finance' section and an 'equity finance' section with the 'equity finance' section not being a sub-section of 'finance' and therefore disagreed with the FASB labelling.
The Board decided not to change the labels.
The reconciliation schedule and the indirect schedule
Regarding the reconciliation schedule (reconciliation of cash flows to net income) the staff suggested the following changes:
- The 'cash flows not affecting income' column should be eliminated from the schedule and be combined with the 'accruals and systematic allocations' column. The combined column should then be labelled 'accruals and systematic allocations that are not remeasurements'.
- The equity section should be omitted from the cash flow information that is used as the starting point for the reconciliation schedule.
One Board member noted that as a result of the first proposed change the reconciling item relating to cash inflows from issuing a bond would be shown in the 'accruals and systematic allocations that are not remeasurements' column even though such an item has nothing to do with accrual accounting. This Board member also pointed that the contents of this column would be heterogeneous and that some entities may even end up with only one reconciliation column. The staff responded that they are fully aware of these disadvantages but that the change was proposed because of difficulties in determining cash flows that never affect income. The staff noted that e.g. for zero coupon bonds the classification would be difficult and that there are many other items that do not affect income incidentally but may affect income later.
Eventually, the Board agreed to the staff recommendations.
Regarding the indirect schedule (reconciliation of net income to cash flows) currently required by US GAAP the Board decided that such a schedule should not be required under IFRSs and that the DP should not address the indirect schedule at all.
Disaggregation by function and nature
Subject to editorial changes the Board agreed to the preliminary views on disaggregation by function and nature in the statement of comprehensive income. According to the paragraphs reproduced in the observer notes an entity should disaggregate income and expense items first by function and should provide further disaggregation by nature with both disaggregation steps being required only when they enhance the usefulness of information.
The Board was concerned with the illustrative example provided by staff showing 27 line items in total continuing operating income alone. Several Board members noted that such a statement of comprehensive income would be much too detailed and that presenting cash flows in accordance with the cohesiveness principle would be burdensome. The Board asked the staff to emphasise in the DP that only the main items should be shown on the face of statement of comprehensive income and that further disaggregation should be presented in the notes.
The statement of changes in equity
The Board decided not to consider any further changes to the statement of changes in equity, i.e. to limit the preliminary views to the decisions already reached in phase A of the project.
Disaggregation in the discontinued operations section
The Board agreed not to include in the DP any specific disaggregation requirements for discontinued operations.
Disclosure of total assets and total liabilities
The Board decided that an entity should disclose total assets and liabilities either on the statement of financial position or in the notes. In addition, an entity that presents its assets and liabilities in short-term and long-term subcategories should also disclose totals for short-term assets, short-term liabilities, long-term assets and long-term liabilities.
Issues not yet fully deliberated
Foreign currency gains and losses
The staff noted that according to the decision not to address OCI issues the pre-ballot draft of the DP no longer contains the preliminary view that foreign currency translation adjustments (FCTAs) should be presented in a separate section. For the DP to be complete on foreign currency gains and losses the staff presented guidance on the classification of foreign currency gains and losses other than FCTAs.
The Board agreed to the staff recommendation to include the following preliminary view:
An entity should display transaction gains and losses, including the components of the net gain or loss on remeasuring the financial statements of an entity into its functional currency, in the same section and category as the assets or liabilities that gave rise to the gains or losses.
Basket transactions
This issue relates to the presentation of gains/losses and cash flows that result from single transactions that involve the purchase or disposal of multiple assets, or a combination of assets and liabilities, that are classified in more than one category under the working format (basket transactions).
The Board decided to present in the DP an allocation approach and alternatives for presenting basket transactions without allocating the effects to the multiple categories.
Regarding the allocation approach the Board decided that:
- Amounts allocated to determine gain or loss should be based on the relative fair value of non-cash assets, that is, no relative fair value allocations should be made to liabilities and cash.
- No hypothetical cash flows should be allocated to liabilities in a basket transaction, that is, no cash flows would be allocated to liabilities.
Way forward
The staff intends to circulate to the Board a second pre-ballot draft in early July 2008 and a ballot-draft in August 2008. The DP will have a comment period of six months and is expected to be published in early September 2008.
Friday 20 June 2008
Extractive Activities
The Extractive Activities project team discussed progress made towards producing a Discussion Paper on key features of an accounting model for certain aspects of minerals and oil and gas reserves and resources. This discussion focused on asset definition, recognition and unit of account issues.
Asset definition
The project team noted that their proposed approach was to focus on the definition of an asset in the current IASB Framework (and, to a lesser extent, current activities on the revised asset definition as a result of the Framework project), rather than on the traditional approach to asset recognition in this sector, phases of an extractive project.
The project ream had identified two types of asset and items that might be within those broad categories:
Intangible assets: including legal instruments/approvals necessary for undertaking 'upstream' extractive activities (for example, mineral rights, development permits, etc); and information (such as geological data confirming or not the presence of mineral resources in a particular area).
Tangible assets: including mineral, oil and gas deposits and property, plant and equipment used to access and extract those resources.
The Board expressed broad agreement with the approach. However, there was a great deal of detailed discussion about 'information' intangibles and the proposed 'flip' from intangible (the right to exploit) to tangible (the resources themselves).
Board members noted that information by itself was unlikely to be an asset-it could only enhance the value of an asset.
Others disagreed, noting that information (e.g. the results of geological surveys) could be sold. In response, Board members noted that information may be an asset, but without the right to exploit it, it was probably not worth very much. There appeared to be agreement that in this context legal rights were precedential.
The project team presented two views of when reserves and resources would meet the definition of an asset. One view would require all the rights (including permits, licences, and approvals) necessary for development and production be in place before a mineral resource could be recognised on the balance sheet. The project team noted that this took a narrow view of control of the asset. The alternative view would require the entity to have the legal rights to the minerals sufficient to allow then to extract those resources and to deny access to them by others; to have received approvals that give the entity a reasonable expectation that it will be able to exercise those rights; and has an unrestricted right to apply for any outstanding rights or approvals that are ancillary in nature and expected to be received in a timely manner. This second view is seen as consistent with 'rational economic behaviour of entities and financial statement users' and presumably reflects significant elements of current practice.
The Board seemed to accept that both views were possible at this stage, although some did seem concerned about the cliff effects of the proposed recognition.
The discussion moved on to when an asset should be recognised. Again, two views were presented: one a narrow view based on an assessment of whether the exploration and evaluation activities have been 'successful'. The alternative position views economic benefits more broadly to include the potential benefit to the entity if it were to sell the property. However, one Board member suggested that recognising and measuring the reserves and resources as a separate (tangible) asset was not necessary. In his view, the one thing that remains constant is the right to exploit. Once minerals have been discovered, the right becomes more valuable. The communication to users might be clearer if it were the mineral rights that were re-measured rather than the resources. This interesting point was not explored further, but may be developed by the staff.
The Board then discussed unit of account issues. The Board seemed to have general agreement with the project team's conclusions:
- (a) infrastructure assets that generate largely independent cashflows are excluded from the unit of account - in other words, the unit of account can be no greater than a cash-generating unit, as determined in accordance with IAS 36;
- (b) infrastructure assets that are physically and commercially separable are excluded from the unit of account - in other words, this applies to assets which could realistically be moved to other operations and the movement of these assets could be economically justified. In contrast, assets that are commercially inseparable include assets that, although being physically separable, may be more economic to abandon or decommission than to physically move them to a new location. Examples might include assets that are dedicated to the property because either:
- (i) they are not readily movable (e.g. offices, concentrator, dedicated rail facilities etc); and/or
- (ii) are specialised so there is no other economic use for the assets; and
- (c) infrastructure assets that have different useful lives from the reserves are excluded from the unit of account.
The project team will next meet the Board in September 2008 at which time they will concentrate on disclosure issues. It is still intended to have a Discussion Paper published in December 2008.
Conceptual Framework Phase B: Elements and Recognition
Before the staff could introduce the topic, a Board member challenged the meeting's working definition of a liability, which he saw as precluding performance obligations (and thus contrary to the Board's work in the revenue section of the Framework project). In his view the clause addressing 'economic obligations' displayed tortured reasoning:
An economic obligation is something that is capable of resulting in cash outflows or reduced cash inflows, directly or indirectly, alone or together with other economic obligations.
The Board member warned that restricting the definition to cash outflows/ reduced cash inflows would have serious unintended consequences-especially for the Board's standards on share-based payments. After some debate, the staff agreed that 'economic resource' could be substituted for 'cash'. In addition, the staff noted that the FASB, in education session, had suggested that the introduction to the definition should be amended as follows:
A liability of an entity is a present unconditional economic obligation that is enforceable against the entity.
The Board noted the amendment and agreed.
When do Statutes, Laws and Regulations give rise to a Liability?
The Board agreed that when an event occurs that triggers the requirements of a statute, another party can demand that the entity perform as specified by the statute. The triggering events and the performance required vary by statute and can depend on the facts and circumstances of the situation. The Board discussed two of the three staff examples.
Carbon emissions: At an interim reporting date a company emitting carbon is within its emissions limit and has sufficient emission rights to cover those emissions. It expects to emit more carbon during the whole of its financial year than it is allowed or for which it hold emission rights.
The Board (by a majority) agreed that, at the interim reporting date, the entity does not have a liability. It has sufficient emission rights to cover its current emissions. As such, it has not breached its statutory obligations and has no liability. Board members noted that the expected exceeding of the emissions limit later in the fiscal year would be a matter for disclosure at the interim reporting date.
Speeding ticket: Whether an obligation exists would depend on facts and circumstances. For example, if a driver triggers a speed camera, it may take several days before the speeding ticket is delivered. In other cases, it will be delivered by the roadside. Thus, there may be some element of estimation of 'incurred but not reported' obligations.
In addition, the Board agreed that statutory obligations could be either unconditional; conditional; or unconditional with an associated conditional element. The Board cautioned the staff to be careful in how they explained this: the obligation was unconditional, but it can only be measured by reference to the conditionality.
Dealing with Uncertainty about the Existence of a Liability
The Board agreed that uncertainty about existence of an asset or a liability should be addressed when ascertaining whether the definition of the element is met. Thus, uncertainty will be addressed in how the definitions are to be applied-in the accompanying guidance for applying the definition.
The staff was encouraged by some Board members not to be apologetic about this approach. The purpose of the Framework was not to give preparers 'safe harbours' in difficult areas. There were plenty of examples of when determining whether there is a liability is a difficult judgement call.
Applying the definition
The Board had a tortured debate about applying the definition to specious/ frivolous lawsuits and 'The Hamburger'. There was eventual agreement that The Hamburger was an 'incurred but not reported' type of obligation. The lawsuit was more problematical because even in a specious lawsuit, the defendant will (i) expect to win and pay nothing; but (ii) will need to be represented by a lawyer. However, a majority of the Board agreed that the correct measure of the liability in this example would be zero (with disclosure).
The Board agreed that additional standards-level guidance should be developed on how to apply the concepts in the Framework.
Summary of Tentative Decisions/ Liability Definition Examples
The Board agreed two documents without debate: a summary of the Tentative Decisions taken on this phase of the Framework project and a series of examples of applying the liability definition. Both documents would form the basis for drafting the Discussion Paper on this Phase of the Framework project.
This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.
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