Tuesday 16 September 2008

Fair Value Measurements – Credit Crisis: Proposed amendments to disclosure requirements

The staff introduced the session by highlighting the purpose of this session was a response to recommendations made by constituents, notably the Financial Stability Forum (FSF). The two main recommendations by the FSF were:

• Improve accounting and disclosure for off-balance sheet vehicles
• Strengthen standards to achieve better disclosures about valuations, methodologies and uncertainties associated with valuations

The FSF also recommended that the Board address these issues on an 'accelerated' basis.

The purpose of this session was to seek the Board's guidance on the basis by which the staff should develop proposals to amend IFRS 7 in relation to fair value measurement and liquidity risk. Also, the input from this session on off-balance sheet vehicles will be incorporated in the exposure draft on Consolidation expected later this year.

Liquidity risk

The staff presented two possible approaches to enhance disclosures for liquidity risk:

• Leave requirements in IFRS 7 unchanged for non-derivative financial liabilities (ie. liquidity analysis based on contractual maturities), but require disclosures based on expectations by the entity and how the entity manages risk for derivatives.
• Allow disclosure of maturity analysis based on expectation if this reflects the way the entity manages risk

The staff also recommended that, under either approach, the disclosures should apply only to liabilities that are within the scope of IAS 39 and that are settled in cash or another financial asset.

The Board had a lengthy discussion on the issue of allowing entities to disclose only information based on its expectations. Some Board members noted that information about contractual cash flows would also be useful. There seemed to be agreement that any approach should emphasise qualitative disclosures information on why an entity expects timing differences between the contractual cash flow and the expected cash flow and how such risks are managed. The Board suggested that staff consider whether some of the material in the Implementation Guidance of IFRS 7 should be made mandatory.

One Board member raised the issue of embedded derivatives, especially when they are embedded in non-financial host contracts. This Board member also asked whether the staff has considered the impact of increasing the disclosure requirement – something mainly aimed at financial institutions. The staff noted that it is of particular importance to agree the scope and then the appropriate treatment.

The Board agreed that the maturity analysis based on expectation should be accompanied by a contractual maturity analysis and that only instruments with the scope of IAS 39 should be included.

Fair value disclosure requirements

The staff introduced this part of the session by noting that recent market conditions led to requests by several parties to enhance disclosures about fair values. The staff noted that some of the recommendations made will be addressed in the long-term fair value measurement project, but that some short-term improvements in response to the credit crisis could be made: These are:

• Clarifying the fair value hierarchy in IFRS 7;
• Providing more direction on the form of the fair value disclosures, including references to a quantitative tabular format for disclosures; and
• Requiring a reconciliation from period to period for fair value measurements using significant unobservable inputs.

Clarifying the fair value hierarchy in IFRS 7

The staff noted that many entities have adopted an approach to classify fair values in a three-level hierarchy basically consistent with the hierarchy under US GAAP guidance in SFAS 157. These are:

• Fair values measured using quoted prices in active markets
• Fair values measured using valuation techniques for which inputs significant to the fair value measurement are based on observable market data
• Fair values measured using valuation techniques for which inputs significant to the fair value measurement are based on unobservable market data

The staff presented the Board with possible approaches to this:

• Option 1: introduce the SFAS 157 fair value hierarchy into both IFRS 7 and IAS 39 Financial Instruments: Recognition and Measurement.
• Option 2: introduce the SFAS 157 fair value hierarchy into IFRS 7 only.
• Option 3: use the existing fair value hierarchy in IAS 39, which represents what some entities are doing in practice to comply with both IAS 39 and IFRS 7's disclosure requirements.
• Option 4: make no changes to IFRS 7 with regard to a hierarchy, but specify which instruments (or types of instruments) require more disclosure.
• Option 5: make no changes to IFRS 7. Instead, entities could use material from the disclosure section of the expert advisory panel document, which summarises the disclosures users of financial statements would find helpful, in addition to those required in IFRS 7.

The Board agreed to option 3, which was the staff recommendation.

Tabular format for quantitative disclosures

The staff noted that the tabular disclosures required under US GAAP for fair values were well received by users. Staff recommended requiring such disclosures without a mandatory format. The Board agreed.

Requiring a reconciliation from period to period for fair value measurements using significant unobservable inputs

Staff proposed to require a reconciliation from period to period for level 3 fair values with narrative information on movement between levels. The Board agreed. It also agreed to require entities to provide an indication of the level within the hierarchy for unrecognised financial instruments, that is contracts outside the scope of IAS 39.

The staff noted that some had requested mandatory disclosures about fair values in interim reports. The staff highlighted that IAS 34 requires entities to provide information if significant changes occurred during the period. The Board agreed, but directed staff to put in a reminder on that provision.

Disclosure requirement for off-balance sheet entities

The next issue the staff presented were off-balance sheet involvements. One Board member noted that while most of the discussion focussed on financial institutions, the guidance being developed would be applicable to all entities, including corporates. Others suggested that this would lead to second-guessing and re-auditing judgements made by management and signed off by auditors. It was also noted that most of the disclosures would already be required by IAS 1 requirement for disclosure of significant judgements. There seemed to be a general sentiment that the proposal would end up in boilerplate disclosures that are not useful.

The Board was then presented with proposal for disclosure requirements to be incorporated in the new consolidation standard (that standard would replace IAS 27 and SIC-12 including disclosures). The following areas were covered:

• Consolidation decision made by management
• Application of consolidation policy
• Management of reputational risk
• Financial effect related to consolidation decision
• Nature of involvement and risks associated with involvement
• Other considerations

Consolidation decision made by management

The Board had a lengthy discussion on this topic, and while it agreed with the staff recommendation, the Board also asked the staff to consult with the Board advisors after the roundtables taking place later this week. There was general consensus that once an entity rebutted any presumptive indicator of control that is set out in a consolidation standard, that judgement must be disclosed.

The Board also had a lengthy discussion about reputational risk. The staff proposed that disclosures about reputational risk should be triggered only after there has been an event that damages an entity's reputation. At that point, there would also be disclosure of any expected impact on the future. Some Board members disagreed with that proposal and believed forward looking information would be better. Others were concerned about the term 'reputational risk' and asked the staff to rephrase it to what it actually meant.

Financial effect related to consolidation decision

The Board disagreed with the staff proposal to require disclosures of the effect on key financial indicators if an entity changes its judgement whether or not to consolidate an entity.

Nature of involvement and risks associated with involvement

The Board discussed at length the nature of 'involvement' as that term is used in the latest staff draft on consolidation. The discussion centred on possible disclosure of risks associated with involvement. Board members expressed concerns about the definition of 'significant involvement' and the amount of disclosures. There seemed to be no clear direction in the discussion (including items discussed that were omitted from the official observer notes), but it was clear that the Board seemed not convinced by the approach taken by the staff. In the end it was agreed to wait for the outcome of the roundtable on consolidation and then re-debate this issue along with other issues.

Fair Value Measurements – Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets: Update

The staff presented the Board with an update on the work of the expert advisory panel formed in response to recommendations from constituents. The panel's task is to develop best practice guidance on measurement and disclosures for financial instruments in inactive markets. It was noted that the panel had met six times and will meet again in October. One single document would be published covering both measurement and disclosure. A draft report has just been posted on the IASB's website. The staff informed the Board that although comments would be solicited until 3 October, comment letters would not be published on the IASB's website. Asked by a Board member, the staff confirmed that this non-mandatory guidance would be considered when developing the fair value measurement standard and, hence, might become mandatory in the future.

IFRIC Update

The IFRIC Coordinator gave a brief update on the IFRIC's activities. No substantive issues were raised during discussion.

Annual Improvements 2009

The staff presented an item it proposed to be included in the annual improvements process 2009. IFRIC 13 requires consideration received or receivable to be allocated between award credits and other components of a sale. The allocation must be done by reference to fair value. If fair value for the awards credits is not directly observable, it must be estimated. This could be done by reference to the awards redeemable. As fair value both refers to the value of the award credits and the value of the awards to be redeemed, this could be interpreted to mean that both fair values are equal. To avoid any confusion the staff recommended addressing this issue via the annual improvements process and proposed some wording that was omitted from the observer notes. The Board agreed. One Board member asked to avoid using the term 'redemption value' as this is in some jurisdictions, for legal reasons, a cash amount close to zero.

Amendment to IFRS 1 – Transitional Issues Faced by Jurisdictions Expected to Adopt IFRSs in Coming Years

The purpose of this session was to resolve five additional matters that arose during the balloting of the exposure draft of proposed additional exemptions for first-time adopters in IFRS 1.

Need for additional exemption related to IAS 17

The staff informed the Board that on further reflection, this additional exemption was considered unnecessary. The Board agreed.

Fair value before the date of transition to IFRSs

The staff expressed concerns about the necessity of this additional exemption. The reason was the risk that values for items previously derecognised would under IFRSs be determined with hindsight. On balance, the staff recommended to delete this additional exemption from the exposure draft. The Board agreed.

Decommissioning, restoration and similar liabilities included in the cost of PP&E

The Board had a lengthy discussion on whether and how to allocate the additional asset resulting from an asset retirement obligation recognised as a liability between cost of sales, inventory and PP&E. In the end, the Board seemed to lean towards a retained earnings approach (that is, recognising the cost for the liability in retained earnings), but it was agreed that more work would have to be done on this issue.

Oil and gas assets

The staff highlighted that the Basis for Conclusions provided the rationale on why the Board agreed to provide an exemption for the measurement of oil and gas assets. Some Board members questioned the relevance and, hence, the inclusion of the words used. After some debate, the Board agreed to delete the paragraphs concerned in the Basis for Conclusions.

Question regarding additional circumstances in which relief is necessary for assessments under previous GAAP before the date of transition

Some Board members questioned the inclusion of a specific question in the Invitation to Comment, which had been specifically requested by some (other) Board members. The Board agreed to keep the question in the Invitation to Comment.

Revenue Recognition

The Board continued its deliberations on the customer consideration approach. Specifically, the staff said that the objective of this meeting was to discuss possible options of an onerous test (that is, a test whether a contract has become onerous) and possible exceptions to the Board's tentative general decision not to remeasure. The two issues represent items which the Board were not able to conclude on at the July Board meeting.

The staff presented two possible approaches that would trigger a remeasurement of the performance obligation, one of which is cost-based and the other being margin-based. Under the cost approach an entity would remeasure its performance obligation, if its cost of performance exceeded the carrying amount of the performance obligation. Under the margin approach, remeasurement would take place if measurement of the performance obligation in accordance with IAS 37 (or another similar current price) exceeded the carrying amount of the performance obligation.

The staff discussed the advantages and disadvantages of each model. The cost model has the advantage of being fairly easy to apply and of limiting the occasions of remeasurement to unforeseen events. However, by doing so it would, in essence, defer recognition of adverse changes to future periods. The margin-based approach takes into account changes in the entity's margin and would, hence, be a more reliable reflection of the value of the performance obligation. The disadvantage of this lies is a higher complexity.

Some Board members asked for clarification as to the scope of the project and the items/instances that would not fall under either of the approaches proposed. The staff acknowledged that the most likely candidates would be financial instruments and insurance contracts, for which a different model was envisaged (see below). One Board member said that there might even be a third category of arrangements, namely service concessions. Focussing on the onerous test, he remarked that the cost model would be entity-specific, whilst the margin-based approach would take into account all changes in price. Either approach would not take pre-existing inventory into account, which would lead to a mismatch anyway.

Another Board member said that he got the impression that staff was proposing a complete shift in measurement attribute. Under the cost approach an entity would initially measure its performance obligation at fair value and subsequently at an entity-specific amount. He questioned the idea of there being a concept of 'cost' of discharging of a liability. Cost was defined for assets, not for liabilities.

The chairman asked the staff whether the onerous test would be one-sided only, that is, remeasurements would be recorded only if they resulted in an increase of the performance obligation. The staff confirmed that this was how they envisaged the test to work. One Board member replied that such a procedure would be in total contradiction to other parts of the literature. He cited the Board's proposed approach to remeasuring non-financial liabilities under IAS 37, where the remeasurement would take place both directions.

The Board discussed the issues intensively, and there was no predominant view. After a lengthy debate, the chairman took a straw vote as to which approach Board members preferred. Seven members were in favour of the cost model, the other six favoured a margin-based approach.

The Board finally turned to the question whether or not the forthcoming Discussion Paper should acknowledge that a second model might have to be developed for those items/instances where remeasurements seemed appropriate (in contrast to the Board's general view on remeasurements). Nine Board members advocated such an approach. Rather than having a majority and an alternative view being presented in the Discussion Paper, the Board recommended to list the circumstances that might warrant a deviation from the basic principle and to specifically ask the constituents whether they agree.

The chairman asked the staff whether they had all information they needed in order to draft the section. The staff acknowledged that this was the case and that they did not plan to come back to the Board. The chairman thanked the team and closed the meeting.

Wednesday 17 September 2008 (Morning Only)

IFRS for Private Entities (formerly IFRS for SMEs) – Recognition, Measurement, and Presentation

The Board resumed its redeliberation of the proposals in the exposure draft (ED) of a proposed IFRS for SMEs. At this meeting th Board discussed issues relating to Sections 28 - 38 of the ED. The staff presented the Board with the following issues and its recommendations:

Income taxes

The Board considered but rejected a taxes payable with disclosure approach for deferred tax. The Board had a considerable and, in part, emotional debate on how users of IFRS for private entities financial statements are served best. Some Board members had very strong views on this topic and highlighted that deferred tax liabilities and assets would provide useful information. Many other Board members had sympathy with the many respondents that said the temporary difference approach prescribed by IAS 12 Income Taxes (and essentially as proposed in the ED) is too difficult for many private entities. It was highlighted by some that requiring the conceptually right approach will not be accepted by many jurisdictions and hence, if the Board could not agree on a consensus position taking into accounts concerns raised that could potentially put at stake the success of the project. The Board discussed possible ways to simplify deferred tax recognition and measurement that take into account the needs of users of private entity financial statements and cost-benefit considerations. The Board asked the staff to develop the following two approaches and present their recommendation at a future meeting:

• A new approach that would aim to approximate the amounts recognised under IAS 12 but remove many of its complexities by recognising only those deferred taxes relating to book-tax differences in items of income or expense that are expected to reverse (and therefore affect an entity's cash flows) in a relatively short term.
• Starting from the temporary difference approach in IAS 12, but making simplifications in areas considered particularly complex.

The Board expects to issue an ED on income taxes later in 2008 One of the aims of that ED is to enhance understandability by substantially rewriting IAS 12. The staff will take this redrafting into account when rewriting Section 28.

Hyperinflationary economies

The staff asked the Board whether to change the ED to include all of the characteristics that indicate hyperinflation as listed in paragraph 3 of IAS 29 Financial Reporting in Hyperinflationary Economies in the final IFRS for Private Entities.

The Board agreed.

Foreign currency translation

The staff proposed to the Board that the final version of the IFRS for Private Entities should prohibit entities from recycling through profit or loss any cumulative exchange differences that were previously recognised in equity on disposal of a foreign operation to reduce the administrative burden of detailed tracking.

The Board agreed.

However, on the second issue that private entities should be allowed simply to elect to deem their local currency as their functional currency if the law requires that financial statements be presented in the local currency, the Board disagreed with the staff recommendation that this 'deemed' functional currency approach should be allowed.

Related parties

The staff proposed that the final amendments to IAS 24 Related Party Disclosures, currently in exposure draft phase, should be reflected in the final standard.

The Board agreed.

Agriculture

The Board was presented with an proposal that the cost model should not be added as an accounting policy choice for private entities since the addition of an 'undue cost or effort' exception to the requirement to apply fair value measurement, as proposed in the ED, is considered a sufficient simplification.

The Board agreed.

Assets held for sale

The staff proposed that there should be no 'held for sale' classification for non-financial assets, or groups of assets, and the requirements for assets held for sale should be dropped from the final standard. Instead the decision to sell an asset should be added as an impairment indicator.

The Board agreed

Discontinued operations

It was proposed that private entities should be required to identify and segregate amounts for discontinued operations in the statement of comprehensive income for the current and all prior periods presented in the financial statements, unless impracticable.

The Board agreed.

The staff informed that Board that the definition of a discontinued operation currently refers to components of an entity that are classified as held for sale and, hence, will need to be amended due to the Board's decision directly above.

First-time adoption

The staff presented a proposal that all of the IFRS 1 optional exemptions for first time adopters (for example, parent and subsidiary adopt at different times, and deemed cost for investment property and intangibles) should be added to Section 38 so they are available to private entities adopting the IFRS for Private Entities for the first time.

The Board agreed

In addition, the staff proposed that an entity should not be allowed to benefit from the special measurement and restatement exemptions available under Section 38 more than once.

The Board agreed.

Outstanding issues

The staff noted that there are still a few outstanding issues that have been deferred at previous meetings, and staff recommendations on these will be brought to the Board at the October and November Board meetings. Some of the main outstanding issues relate to restructuring the financial instruments section, concepts and pervasive principles, classification of equity and debt, measurement of equity-settled share-based payments, accounting for defined benefit plans, impairment of goodwill, and lessee recognition of rent expense under an operating lease.

Liabilities and Equity – Education Session on European cooperatives

FASB staff joined by video conference.

Representatives of the European Association of Co-operative Banks gave a presentation on principles and mechanisms of co-operatives and the impact of the proposals set out in the Discussion Paper Financial Instruments with the Characteristics of Equity. As this was an education session, no decisions were made.

The representatives informed the Board about the following topics:

• General information about co-operatives
• Shares of co-operatives and share purchases
• Dividends
• Retained earnings
• Redemption of shares
• Liquidation

After this introduction into the mechanisms of co-operatives, the representatives highlighted their current treatment of co-operatives' interests under IFRS, especially in Europe. It was noted that many entities inserted a 'right to refuse redemption' clause in their statutes to be covered by IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments.

Under the ownership approach proposed in the Discussion Paper, it was pointed out that the redemption formula would not approximate fair value as shares of co-operatives were usually redeemed at face value.

Board members asked questions to get a better picture about the problems co-operatives would face under the proposals. At the end of the session, the project staff highlighted a possible issue as the proposals have a substance (of terms and conditions of the contract) notion and as the right to refuse redemption could be deemed as non-substantive this could prevent equity classification under the ownership approach.

The Chairman thanked the representatives for the presentation and closed the session.

Thursday 18 September 2008

Issues Relating to IFRS 2 Share-based Payment

The Board started the third day of the Board meeting with a staff paper on issues that have arisen since IFRS 2 Share-based payment was issued in 2004. The purpose of the session was to discuss and decide whether (and if so, how) the issues identified should be addressed. To structure the issues the staff has classified the issues:

• Category A: issues that require revisiting the principles underlying IFRS 2.
• Category B: issues for which some assert the IFRS 2 guidance as incomplete or unclear - this category has the following subcategories:
  • Issues where no further action is required
  • Issues that should be referred to the Annual Improvements Project
  • Issues that should be referred to another Board project
  • Category C: issues arising from an implicit or explicit divergence between IFRS and US GAAP

Category A

The issues addressed in this category, which are based on a petition submitted to the IASB earlier this year (and in similar form to the SEC) encompass the following:

• Accounting for cancellations;
• The measurement date; and
• Accounting for modifications that are not intended to be beneficial to the employee.

The staff recommended that none of the issues should be added to the IASB's agenda as no new arguments were raised that would form a basis for reconsidering the Standard. The Board agreed.

Category B

The staff informed the Board that issues allocated to this category were submitted by constituents as they believe the guidance under IFRS 2 is unclear. To facilitate the discussion, the issues were further subdivided.

No further action required

The following issues were presented to the Board:

• Awards that can unvest and 're-vest'
• Matching share awards
• Investment manager fees
• Distinguishing between service and performance conditions in the non-employee model
• Can service and performance conditions be non-contemporaneous?

The Board briefly discussed some aspects of the issues in this subcategory. It was decided to move the first two issues into the category of issues to be referred to the annual improvements project. The Board agreed for the remaining issues that no further action was required.

Issues to be referred to the Annual Improvements Project

The staff then turned to the second subcategory, issues to be referred to the Annual Improvements Project for resolution by minor amendments:

• Accounting for continuous service in the non-employee model
• Multiple interactive vesting and non-vesting conditions
• Modification - interaction of multiple changes where some are beneficial to the employee and some are not
• Accounting for deferred tax liabilities

The Board agreed with the staff recommendation to refer these issues to the Annual Improvements Project.

Issues that could be referred to another Board project

The staff informed the Board that these issues would be best resolved when referred to other Board projects:

• Retiree eligible awards and other cases where the conditions appear to change from being vesting conditions to being non-vesting conditions
• Accounting for tax reimbursement rights
• Accounting for deferred taxes on 'share-based payments' that are not within the scope of IFRS 2

After a short debate, the Board agreed with the staff recommendation.

Category C

According to the staff issues in this category represent implicit and explicit differences between IFRSs and US GAAP. The staff recommended that the Board revisits a decision on these items once the projects on taxes and debt/equity are complete.

The Board agreed.

It was also agreed that any changes should, if possible, be incorporated in the currently proposed changes to IFRS 2, which would also merge the existing Interpretations into the Standard.

Fair Value Measurements – Exposure Draft on Fair Value Measurements

The staff introduced the session by highlighting the objectives and timeline. The purpose of the session was to seek the Board's decision on:

• Whether an fair value measurement exposure draft should state that fair value reflects the highest and best use of an asset; and
• Whether blockage factors should be excluded from fair value measurement.

Blockage factors

The staff started with the second issue on blockage factors. The staff highlighted that it only sought the Board's input on this type of discount, not on other discounts or premia. The staff defined a blockage discounts as a discount that represents a discount to the quoted price of an instrument (usually equity securities) to reflect the reduction in the price if the entity were to sell a large holding of instruments at once.

The Board had a lengthy debate on this. Some Board members were concerned about ignoring blockage factors as they would represent a real economic phenomenon. Others were of an opposite opinion and referred to academic research on the subject. It was noted that this is more of an issue of the unit of account and if one measured one security it would not carry a blockage discount. It was also acknowledged that it would be difficult to determine the blockage, mainly as there could be other factors leading to a discount or premium that could hardly be separated.

Finally, the Board agreed that for all levels of the proposed fair value hierarchy (1,2 and 3) blockage discounts should not be adjusted by a blockage factor.

Highest and best use

The staff then presented to the Board an analysis of the highest and best use-concept.

Some Board members where concerned over the term 'legally permissible' as the notion is more intended to cover situation where it the best use would be illegal.

The Board had a considerable debate on how the amounts necessary to make the decision on highest and best use are determined, notably whether the option to have a different use should be included if the current use of the asset is different from the highest and best use.

The staff then asked the Board whether a fair value measurement should reflect the highest and best use.

The Board agreed.

The Board made the decision to include an explanation and application guidance on how the criteria of 'physically possible', 'legally permissible' and 'financially feasible'.

It was also decided that the entity should disclose the value of an asset on its current use if it is different from the highest and best use.

Furthermore, the Board agreed to clarify in an exposure draft that the search for the highest and best use does not have to be exhaustive.

Fair Value Measurements – Credit Crisis: Proposed amendments to disclosure requirements

The staff working on improving liquidity risk disclosures asked the Board in this unheralded session to confirm their decision made on liquidity disclosures. The staff presented the Board with an agenda paper that was not publicly available and was basis for the discussions. The staff structured this brief session by looking at the following type of instruments:

• Stand-alone derivatives;
• Non-derivative financial liabilities; and
• Embedded derivatives in financial hosts.

IAS 24 Related Party Disclosures – State-controlled Entities and the Definition of a Related Party

The staff introduced the session by stating that its purpose would be

• To review the proposed exemption for state-controlled entities;
• To clarify follow-up issues on the definition of a related party; and
• To reach a consensus on the interaction of the proposals with other IFRSs.

Review of the proposed exemption for state-controlled entities

In February 2007, the Board had issued an Exposure Draft of amendments to IAS 24 with regard to state-controlled entities and the definition of a related party. Under that proposal entities which are controlled or significantly influenced by a common state would have been exempt from the disclosure requirements of IAS 24, unless influence – evidenced by an indicator approach – existed between those entities.

The majority of those who commented on the proposed amendments agreed with the Board in general, but had questions as to how the approach would have to be applied in certain situations and, hence, asked for clarifications. During the redeliberations the Board made changes to its proposal which were summarised by the staff in tabular format. The application of the revised proposal was depicted in a flowchart. Both the table and the flowchart were included in observer note 13B paras. 14 et seq. (available from the IASB's website).

The staff did a thorough review of the decision taken so far and came to the conclusion that the revised proposal was both complex and not cost-beneficial. Therefore, the staff proposed not to finalise the current ED, but to pursue an alternative approach. The staff presented three alternative approaches to the Board:

• Approach 1 would require all state-controlled entities in a certain country to disclose a statement that a significant proportion of the entities' business transactions were related party transactions with other state-controlled entities, if state ownership was pervasive.
• Approach 2 would require the same as approach 1, but would be based on pervasive transactions with other state-controlled entities rather than on pervasive ownership.
• Approach 3 would drop any pervasiveness notion and would foresee a simple disclosure that a certain percentage of the entity's transactions were with state-owned entities. This approach was recommended by the staff should the Board decide not to continue with the revised proposal.

The Board had a lively debate on the issue. One Board member said that a state-controlled entity could not possibly know whether or not the entity it is dealing with was also under state control. The only fact such an entity would be aware of was who its owner was and that any transactions entered into with the owner were with a related party. He illustrated his view by pointing at two entities that are both state-owned and are doing business with each other. Both entities would individually know whether or not they were influenced by the state; however, they could not reasonably be required to explore whether or not the counterparty was as well. The Board member, therefore, suggested disclosing only those transactions entered into with its immediate parent.

Another Board member questioned the usefulness of such an approach. On the one hand, the state could decide to pool its shares in the entity in a holding company that was wholly-owned by the state and had no other assets but the shares in the entity. Under such a scenario, it was likely that there would not be many transactions between the entity and its owner underlying the control of the latter, so that the disclosure requirement would be meaningless. On the other hand, depending how broad one defined 'the state', the requirement could become overly burdensome.

To illustrate the Board member cited the example of an airline that was owned by the government. He asked the other Board members whether that suggested that the airline needed to disclose each and every ticket sale with an employee of the Ministry of Defense, the Navy, the Army, etc.

In the end, the Board voted 10:3 in favour of the staff's proposal, that is, not require any disclosures for related party transactions of state-controlled entities, but instead to require an explicit statement of the entity ('a health warning') that its financial statements were influenced by the fact the entity was owned by the state and that the entity was unable to decide which transactions would have been influenced by its owner. Where possible, the degree of influence should be disclosed as well by some qualitative remark ('heavily', 'the majority', etc.).

The staff pointed out that the Board's tentative conclusion above would be a significant deviation from the proposal contained in the ED and would, thus, require re-exposure.

Follow-up issues on the definition of a related party

With regard to the definition of a related party the Board agreed unanimously with the staff

• Not to treat entities as related parties merely because one entity's member of key management personnel has significant influence over the other entity;
• To maintain the position in IAS 24 under which a person has joint control over one entity and significant influence or joint control of the other, but to resolve internal inconsistencies identified during the comment letter process;
• To amend the ED to include close members of key management personnel's family when determining whether related parties exist;
• Not to explore whether or not an entity can be a member of key management personnel (given the limited scope of the project); and
• To maintain the requirement that a multi-employer plan remain a related party of its sponsoring entities.

Interaction of the proposals with other IFRSs

Finally, the staff presented two issues where the proposals regarding related parties interacted with requirements in other standards, namely IFRS 8 (Operating Segments) and IAS 19 (Employee Benefits). With regard to IFRS 8 the issue was whether to treat entities that are state-controlled as a single customer under IFRS 8.34. So far, the Board has tentatively concluded that state ownership alone does not warrant treating all state-controlled entities as a single customer. The staff recommended leaving the decision to the entity's judgment on the principle that an entity shall provide information about the extent of its reliance on major customers.

The Board believed that the segment disclosures ought to be consistent with the reasoning envisaged for the revised IAS 24. Hence, it would not be conceivable to state, on one hand, that the entity was not aware of the fact whether or not a third party it is transacting with was state-controlled while on the other hand treating that party together with others as a single customer. The Board asked the staff for more guidance on this issue.

The second issue related to the fact that changing the definition of a related party would implicitly change the definition of a qualifying insurance policy - something constituents might not be aware of. Therefore, the staff proposed adding a footnote to the Basis for Conclusions of IAS 19 stating that the definition of a qualifying insurance policy referred to a related party as defined by IAS 24 as amended in 2008.

The Board agreed.

Insurance Contracts

The staff presented the Board with an education session on the fulfilment value as a possible measurement basis candidate identified by many respondents to the Discussion Paper on Insurance Contracts. No decisions were made or sought.

The staff noted that fulfilment value would more appropriately reflect the intended settlement by the insurer (by continuous fulfilment and not by transfer or settlement at the balance sheet date). Constituents would seek for a measurement excluding the credit characteristics of the liability. The staff highlighted that they would expect fulfilment value to be identical or at least very similar with a current exit value notion. Board members were particularly interested in these differences and how they could arise. The staff highlighted these possible sources of differences:

• Estimates
• Risk margins
• Day one profit
• Own credit risk

The Board had a lengthy discussion on some aspects of these possible differences.

Some Board member were concerned calling the calculation a 'value' as they seemed not convinced that the amount determined presented a value.

The staff then briefly informed the Board about the next steps. The staff plans to present to the Board at the October 2008 meeting a list and description of all measurement candidates. After consulting with the Insurance Working Group, the staff will ask the Board in November to reach a conclusion on the measurement attribute.

Friday 19 September 2008

Extractive Industries

The purpose of this session was to seek the Board's input on:

• Disclosures for minerals or oil & gas activities; and
• Drafting of the Discussion Paper

The first part was structured as follows:

• Disclosure objective(s) for extractive activities;
• Guiding principles for financial statement note disclosures; and
• Types of disclosure that would satisfy these objectives.

Disclosure objective(s) for extractive activities

The staff presented its proposed disclosure objective for extractive industries:

• Future cash flow prospects from the minerals or oil & gas assets;
• Current period financial performance of the entity; and
• Nature and extent of risks and uncertainties associated with such assets.

It was noted that these objectives are similar to the disclosure objective of IFRS 7 Financial Instruments: Disclosures.

Some Board member noted that although financial performance was identified as one objective, much of the disclosure the staff proposals would require is cash flow information (not on an accrual basis) or is a volume measure. The staff agreed to refine the objectives.

Guiding principles for financial statement note disclosures

The staff noted that the same types of information should be provided across the mining and oil & gas industries, but this is not meant to imply they would have to be identical. Instead they should be directionally consistent and comparable within each industry.

The staff informed the Board that it does not intend to make a split between disclosures within the financial statement and management commentary (which is currently not part of IFRS financial statements) and would await feedback from constituents on this point.

Types of disclosure that would satisfy these objectives

Categories of reserves and resources to be disclosed

The staff presented the volume information they considered as useful. It was proposed to require entities to report, at a minimum, the best estimate of the economically recoverable resources. One Board member asked what was meant by 'economically recoverable'. The staff responded that this was aimed at the probability given a price as many entities would manage on a 'proven + probable' basis and that this was indicated the most appropriate information to be provided.

Another Board member asked what was meant by the best estimate and that the staff should consider using a different notion to avoid confusion with existing IFRS terms. It was also questioned whether sensitivity analyses would be required on the number disclosed. One Board member noted that changes in prices have an influence on the volume and that would be useful information.

There seemed to be agreement to the approach proposed by the staff.

Disaggregation of volumes

The staff proposed to require disclosure of volumes by commodity type and geographical location and that these volumes should be attributed to segments. It was noted that oil sands operations should be separately reported from other oil reserves as they are high cost activities. It was also highlighted that while geographical disaggregation in the oil industry would not be feasible on a property-by-property basis, this would be existing practice for minerals. The Board had a short discussion on how to treat production sharing arrangements.

It was also proposed that the mineral industry should be required to provide information on an property-by-property basis to ensure consistency and comparability within the industry.

Attribution of reserve volumes

The staff presented the proposed treatment of the attribution of reserves that are attributable to the shareholders of the parent entity. It proposed two approaches:

• Only the equity interest of the parent in the reserves; and/or
• Minority interests in the reserves.

The Board discussed whether the approach taken by the staff was in line with the entity concept taken in IFRSs, notably with regard to the treatment of minority as equity. The proposed approach would be unique, as usually disclosures are not separating between majority and minority shareholder.

It was also discussed whether time restrictions should be disclosed and how expected renewals should be treated.

Underlying assumptions for reserve estimates

The staff explained the disclosures for the key assumptions used in estimating the reserves. At a minimum, they proposed the commodity price to be disclosed. The basis for the commodity price assumption could be:

• A market participant view;
• Management's own expectation; or
• A historical average.

One of the Board members expressed his preference for a disclosure based on spot prices plus market participants' expectations.

The Board discussed the pros and cons of the approaches, but leaned towards a market participants' view.

Reconciliations of changes in volume from year-to-year

The staff informed the Board that it would propose a predominantly quantitative reconciliation of the changes in reserves to allow users better understanding the nature and extent of estimation uncertainties. The minimum items of such a reconciliation would be:

• Discoveries and extensions;
• Revisions of previous estimates;
• Production of minerals or oil & gas;
• Acquisition of reserves through the purchase of minerals or oil & gas properties; and
• Disposal of reserves through sale or disposal.

It was noted that there must be further breakdowns to enhance usefulness. The Board seemed to agree.

Value-based information

The staff noted that the previous disclosures would not provide an indication of the amount of future cash flows the reserves could generate. The disclosures would depend on the recognition and measurement of mineral and oil & gas assets. The staff outlined two approaches based depending on whether the assets are measured at cost or at fair value/current value basis.

It was proposed that a standardised current value measurement could be employed. The staff highlighted that this would not be an estimate of fair value; rather, the objective would be to reduce variability and cost of preparing the estimate.

Board members asked the staff to make clear in the Discussion Paper that disclosures would differ depending on the measurement attribute used for mineral and oil & gas assets.

Other types of value-based information

The staff proposed that the Discussion Paper should also include an alternative to a current value approach. In this approach users would be provided with information on the cost structure and the expected production. According to the staff this would enable users to prepare their own valuations. The Board seemed to agree.

Sensitivity analysis

The staff proposed to require sensitivity analyses to enable users estimating uncertainties surrounding volume estimates. The

Board seemed to agree.

Time series of exploration, development and operating costs incurred

It was proposed to require time series information for certain cost incurred. In response to a question by a Board member, it was explained that this was cash-based information. A possible time horizon could be five years.

The staff then gave a brief update on a meeting with the 'Publish what you pay'-initiative. It was highlighted that they requested amendments to the country-specific disclosures and extended cost information.

Drafting the Discussion Paper

The staff informed the Board that they plan to present staff views only and no preliminary view by the Board. It should be published as an IASB document. There should also be explanation why this research project had been undertaken and a list of questions. The staff talked the Board through the proposed structure of the paper and the view the staff would take on the topics. The Board seemed to agree with the approach taken.

The Chairman thanked the staff and highlighted the good work done by the staff.

IFRS for Private Entities (formerly IFRS for SMEs) – Disclosure

The Board continued its redeliberations of an IFRS for Private Entities. At this session the staff sought Board confirmation on disclosures. Nearly all of those recommendations were for further disclosure simplifications, though in a few cases the staff recommended additional disclosures. The staff's recommendations (69 proposals), which were generally consistent with the recommendations of the Working Group, are set out in the attachment to Agenda Paper 6B for the meeting available on the IASB's Website. The Board agreed with the great majority, but not all, of the staff recommendations.

Below are only those proposals (reference to paragraphs in the exposure draft of IFRS for SMEs in brackets) with which the Board disagreed or agreed to with substantive changes.

Financial effect of departure from the IFRS for Private Entities (3.4)

The Board disagreed with the proposal to delete the requirement to disclose for each period presented the financial effect of that departure. This only applied if the entity invoked a true and fair override.

Information about judgements (8.6)

The Board disagreed with the staff proposal to delete the paragraph. However, to avoid boilerplate disclosure, it was agreed to include guidance on how such disclosures could look in the educational materials.

Disclosure of fair values of investment property under the cost model (15.6)

The Board disagreed with the staff proposal to encourage, but not require disclosure of fair value of investment property. It was noted that the staff proposal contained an undue cost or effort exemption. Instead, it was agreed to require disclosure, but to keep the undue cost or effort exemption.

Reconciliation of property, plant and equipment (16.29)

The staff proposed simplifications in the reconciliation per class of property, plant and equipment, especially not requiring separate disclosure of exchange differences and additions due to business combinations. The Board agreed with the exception of additions due to business combinations. It was agreed to disclose these additions separately.

Disclosures on provisions (20.14)

The staff proposed to delete subparagraphs (e), (f), (g) and (h). The Board agreed to delete (e) and (f), but to keep:

• (g) indication of the uncertainties about the timing of outflow; and
• (h) amounts of possible reimbursements (including recognised assets).

Disclosures about contingent liabilities (20.15)

The staff proposed to add and undue cost or effort exemption for disclosing contingent liabilities. The Board disagreed with that proposal.

Disclosures about defined contribution plans (27.37)

The staff proposed to keep the disclosures in 27.37 on the period expense for defined contribution plans. The Board agreed but decided to delete the requirement to disclose the amount of defined contribution expense that had been included in the cost of an asset.

Income tax disclosures (questions 57 and 58)

These questions were skipped as the Board has not yet decided on the recognition and measurement principles for income taxes in the IFRS for Private Entities.

Non-adjusting events after the end of the reporting period (32.9/10)

The Board disagreed with the staff proposals to insert the word 'material' in the paragraph on disclosures about each category of non-adjusting events. The staff informed the Board that IAS 10 Events After the Reporting Period included the word 'material'. The Board then proposed that this should possibly be deleted in full IFRS, too, and asked the staff to liaise with the Annual Improvements project team on this issue.

Non-current assets held for sale (36.8)

While the Board agreed with the addition of a disclosure requirement for major asset (group of assets and liabilities) disposals, it also agreed to require this disclosure only for binding sale agreements and not also for future disposals where a formal plan exists.

Fair Value Measurements – Credit Crisis: Proposed amendments to disclosure requirements

The staff of the Consolidation project returned to continue its discussions with the Board on disclosures for off-balance sheet activities. The purpose was to discuss two issues:

• What instruments should be covered by significant involvement?
• How would disclosures look like?

The staff informed the Board that they might drop the term 'significant involvement' if it proved unhelpful. It was noted that most involvements with off balance sheet entities would be within the scope of IFRS 7 Financial Instruments: Disclosures, but staff proposed to require additional disclosures for the so-called off balance sheet entities. It was acknowledged that this term had to be refined. These additional disclosures would be quantitative and in a summarised tabular form to give users information on the assets held by those off balance sheet entities. One Board member questioned the availability of the data, but the staff responded if involvement is significant, reporting entities should know. The information provided should give users an indication on the degree of exposure to losses by the reporting entity.

Many Board members were again concerned about the notion 'significant involvement' and highlighted that it might cast too wide a net. It was noted that these issues do not arise under US GAAP as the disclosures are only required for a specified subset of entities. Board members highlighted that it was the involvement in excess of what is on the balance sheet that they were aiming at.

The staff then turned to disclosures for relationships outside the scope of IFRS 7. This would frequently occur when the reporting entity was the sponsor of the off balance sheet vehicle, but after setting it up had no further involvement.

However, as seen in the current credit crisis, entities would get involved with these entities again, mainly due to reputational concerns. There was concern about the availability of the information where the sponsor had no means to require the information from the off balance sheet entity. The Board discussed how to approach this. Board members questioned the frequency of helping such vehicles where there has been no obligation to do so and no other involvement. The staff was asked to analyse this.

The Board asked the staff to solicit views of constituents on the disclosures proposed by the staff and to bring the issue back to the Board.

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