(FASB staff joined via telephone)

The Board discussed possible amendments to IAS 39 Financial Instruments: Recognition and Measurement regarding reclassification of financial assets. This was the IASB's response to requests by certain constituents to create a 'level playing field' in this area with US GAAP. The possible amendments would allow reclassification of financial assets out of the category 'at fair value through profit or loss' in certain cases. In the staff proposals there was also additional guidance on impairment of such reclassified assets in the case of a reclassification due to rare circumstances. In the light of the current conditions, the Board will bypass its usual due process (as agreed by the Trustees) and immediately issue the amendment, most probably this week.

The Board discussed four key areas based on a staff draft available on the IASB's website:

• Impairment
• Effective date
• Meaning of the term 'rare circumstance'
• Disclosures

Impairment

The Board discussed whether it was appropriate to introduce additional guidance on impairment based on the provisions under US GAAP in this amendment. It was noted that allowing reclassification in the same circumstances as under US GAAP but without also requiring the same impairment measurement as under US GAAP would not 'level the playing field'. One Board member highlighted that such reclassifications are rare under US GAAP as the impairment rules are a disincentive to reclassification. The Chairman said that the immediate issue before the Board is a political one – to allow reclassification under IFRSs in the same circumstances as US GAAP allows. He suggested that a separate follow-up step could be a working group between IASB and FASB on the subject of impairment (and possibly other issues) to provide a converged solution in the near-term.

The Board had a short discussion about the technical differences of both impairment approaches (both triggers and measurement). It emerged that the guidance under IFRS and US GAAP was too different to be reconciled/converged quickly.

Also, some Board members considered the approach under US GAAP for subsequent impairment tests as 'inferior' compared to IFRS. The Board also considered whether disclosure of expected recoverability along with the effective interest rate would be useful.

There seemed to be general agreement that any solution at this point would not be optimal, but given the circumstances it would be acceptable to proceed. However, as the guidance on impairment would not meet the goal of converging IFRS and US GAAP, the Chairman asked the Board to vote for deleting the relevant paragraph. The Board agreed by vote of 11-2.

Effective date

The Board briefly discussed the effective date for the amendment. The Board agreed that the amendment should be effective 1 July 2008 by vote of 11-2.

Meaning of the term 'rare circumstances'

The Board discussed whether a clarification of the term 'rare circumstances' should be provided in the actual standard text, notably whether the current credit crisis is such a 'rare circumstance'. After a short discussion it was decided that the actual text should not refer to the current conditions, but that an accompanying statement of the Board would clarify that the current situation is considered 'rare'.

Disclosures

Disclosures were the last point to be discussed by the Board. One Board member proposed requiring a reconciliation of fair values from the effective date of the amendment and the actual reclassification date (if between issue of the amendment and 31 October 2008), as this would make transparent any reclassifications that could be done with hindsight. The staff and some other Board members thought this was already covered by the amendments. The staff also confirmed that a user would be able to develop an income statement that would exclude the effects of reclassification. The Board agreed.

Other Issues

The Chairman then turned to other issues surrounding the amendments. Firstly, whether the amendments should provide for a possibility to reclassify financial instruments for which an entity invoked the fair value option. The Board objected to this.

Secondly, the Board was asked whether a working group or panel should be set up to provide in the near-term possible approaches to align the guidance under US GAAP and IFRS in certain areas of financial instruments accounting. The Board agreed.

Lastly, the Chairman asked the Board whether they agreed to bypass usual due process and go straight to the publication of the amendment. One Board member strongly indicated that he would dissent as he didn't agree with both the technical content and the bypass of the due process. The Board agreed by a vote of 11-2.

Meeting of IASB with EFRAG

A delegation of EFRAG representatives discussed with the Board various topics of interest.

Credit crisis

The Chairman informed the delegates that the Expert Advisory Panel is in the stage of finalising its guidance and noted that it is more comprehensive than the US guidance published recently. He also noted that it will be clarified that when a market is inactive and there are transactions occurring, an entity would have to identify whether these transactions were distressed or forced.

The Chairman also informed the EFRAG representatives that the IFRS 7 amendments regarding liquidity and fair value disclosures will be published soon with a 60 day comment period and a proposed effective date of 1 July 2009.

One Board member asked the EFRAG representatives about their assessment of the increased involvement of the European Commission in accounting matters and expressed his concerns over the lack of appropriate advice to the European Commission.

The EFRAG Chairman responded that he believed that the IASB reacted to the requests from constituents appropriately and reiterated that the IASB should keep the lead in the standard-setting process. He admitted that in times like these politicians might feel the need to react, but he expected things to get back to normal once the crisis is over. It was noted that there will always be political influence on accounting issues.

On the derecognition project the Chairman of the IASB informed the EFRAG representatives that they will discuss possible approaches to this, but that the Board did not plan to issue any interim Standard on this.

Debt/equity distinction

The EFRAG delegation asked the IASB why only two approaches were picked in the upcoming discussion. The Chairman acknowledged this, but stressed that these were the view of the staff and that the Board would still have to vote on how to proceed in this project. The Chairman of the IASB noted that the concerns of certain constituents with regard to partnerships and co-operatives will be addressed.

Financial Statement Presentation

The representatives from EFRAG emphasised that progress on this project is crucial, as many projects will be affected by the outcome of this project.

IASCF Foundation Trustees meeting

The Chairman of the IASB briefly discussed the just-ended Trustees' meeting in Beijing. It was noted that a final decision on phase one of the Constitution review will probably be made in January.

PAAinE update

The EFRAG Chairman gave a brief update on the Proactive Accounting Activities in Europe (PAAinE). He informed the Board that PAAinE was planning to issue two papers on income tax accounting (lead by the German and UK standard-setters) and share-based payments (led by the French standard-setter). Regarding the latter it was highlighted that this is not a principle review, but more of an analysis of what could be simplified in IFRS 2. The EFRAG Chairman also noted that there are two possible projects on common control (led by the Italian standard-setter) and on emission rights.

Tuesday 14 October 2008 (afternoon only)

Consolidation – US consolidation amendments (Education Session)

A member of the FASB staff made a presentation of the proposed amendments to FASB Interpretation 46(R) Consolidation of Variable Interest Entities. The FASB released the proposals in September 2008. The FASB has proposed amendments to the guidance in FIN 46(R) for determining whether an enterprise must consolidate a Special-Purpose Entity (SPE), including those previously considered qualifying SPEs (Q-SPEs). This was an information/education session in relation to the IASB's forthcoming exposure draft on consolidation, and no decisions were asked for or made.

The FASB staff led the IASB through the FASB's rationale for the changes and the proposed changes themselves. In particular, the staff explained that the removal of the 'Q-SPE' concept in FAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities will remove the scope exception contained in FIN 46(R), which in turn is expected to result in a significant increase of entities subject to the Interpretation.

Much of the discussion focussed on the determination of the 'primary beneficiary' and the proposal that the test in FIN 46(R) be amended such that it is primarily a qualitative one rather than a quantitative one. An entity would be the primary beneficiary of another if it has:

• The power to direct matters that most significantly impact the activities of a variable interest entity, including, but not limited to, activities that impact the entity's economic performance; and
• The right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity or the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity.

Only if this assessment is inconclusive would the entity be required to perform an expected loss calculation using the current expected loss model.

Board members asked for clarification of these proposals, in particular whether the IASB staff's draft consolidation exposure draft was consistent (or as near as possibly consistent) with what the FASB had proposed. The IASB's consolidation project leader noted that, although the words were different, the concepts of control being the power to direct/govern the entity and the rights to benefits (including 'negative benefits') were the same. The IASB's proposals would be directed to a broader class (the IASB does not have the concept of a Variable Interest Entity).

Several Board members were concerned about the effect of a put option in the special purpose entity. They noted that although, when established, the likelihood that the put would be exercised is assessed to be remote, much of the stress in the structured vehicle environment currently has been caused by those puts being exercised. Thus, there is a concern that the presence of a put option in the SPE might defeat derecognition and hence the SPE would always be consolidated.

The Board discussed briefly the proposed disclosure requirements. It was noted that these were controversial, especially among preparers. The Board will be considering disclosures later this week.

Financial Instruments with Characteristics of Equity – Discussion Paper comment letter analysis

The purpose of this session was to provide Board members with an overview of the main issues raised by constituents in the comment letters on the Discussion Paper Financial Instruments with Characteristics of Equity. The staff noted that it plans to come back with more detailed analyses of certain questions at future meetings. Furthermore, the staff explained to the Board that, at the session scheduled for 16 October 2008, it plans to identify possible candidates within the approaches that could be used as a starting point for future deliberations and that a final decision would have to be made at the Joint Board meeting later in October. At this session the staff asked for any questions on the significant comments and issues.

Significant comments and issues from the comment letters were:

• General support for the objective of the project
• General concern of the interaction with the concurrent Framework project
• IAS 32 Financial Instruments: Presentation could be used as a starting point
• The majority of commentators did not support the basic ownership approach (as preferred by the FASB)
• The majority of commentators objected to a classification of a perpetual instrument as a liability
• Classification under the basic ownership approach based on priority at liquidation contradicts the going concern assumption
• Concerns over the classification of subsidiary basic ownership instruments in consolidated financial statements
• The requirements for instruments with redemption requirements are not clear and not operational
• Classification of cooperative shares compared to IFRIC 2 would be different for some instruments
• Scope of FASB document is too narrow

One Board member asked the staff to clarify that the reassessed expected outcomes (REO) approach was mainly discarded because the elements recognised in the financial statements under this approach would not represent assets and liabilities under the Framework. This Board member also encouraged the staff to liaise with the derecognition project team on this issue as one of the proposed approaches of the derecognition project team would be an overriding the asset/ liability definition in the framework.

Wednesday 15 October 2008

Insurance Contracts

Hans van der Veen (Practice Fellow), together with Peter Clark, led an education session that discussed a list of measurement attributes identified by the project staff as 'viable candidates' for selection in the case of insurance contracts. The purpose of the discussion was to identify those candidates for which the Board needed or wanted further information.

AP 3A: Overview

Measurement attributes suggested by respondents to the IASB Discussion Paper

A Board member expressed concern about how the Board's current thinking on revenue recognition to insurance contracts; in particular how to articulate the notion of a performance obligation. The staff agreed that this needed more thought, especially in situations in which claims might trail an annual contract by several months. In many cases, settlement of the obligation was treated as an issue separate from revenue recognition.

A Board member asked for clarification as to the extent that unearned premium model was consistent with the customer consideration model being developed in the revenue project; in particular, would customer behaviour be considered. The staff admitted that the unearned premium model concentrated on the measurement of the unearned premium liability and was silent with respect to revenue recognition; this would need to be clarified.

Another Board member expressed concerns about the current pricing (or entry value) model. The staff noted that there was no support among members of the Insurance Working Group for this approach and that the staff did not intend to develop it further.

Features of a measurement attribute and building blocks

A Board member asked for clarification on the comment in paragraph 6(c) that some respondents to the DP 'argued that the risk margin should reflect the cost of bearing risk, but not include any further profit that the entity or a market participant would require for bearing the risk'. The staff admitted that they do not currently understand what the difference is, but note that some respondents think that the two are different while other respondents think that there is no difference! A Board member noted that some respondents see the two concepts as the difference between the exit price model and the 'settlement model'.

Addressing the issue of the 'cost' of bearing risk, a Board member reminded the Board and the staff that the definition of 'cost' in IFRS was the 'the amount of cash or the fair value of the other consideration given' In his view, this should make exit value and settlement value the same at contract inception.

AP 3B/3C: Candidate Measurement Approaches

The staff noted that the approaches listed in the agenda paper were not listed in any order of preference. In addition, the staff would discuss the objective of the margin(s) included in each if the candidates, but would not discuss in any amount of detail how those margins should be estimated. Finally, some generic issues, common to all approaches, would not be addressed: including policyholder behaviour and policyholder participation; the impact of diversification of risk margins; the attributes of the discount rate in relation to the characteristics of the cash flows of the insurance liability and certain financial statement presentation issues.

The candidates fell in to three groups:

• The current exit value model as proposed in the DP;
• Three variants of the 'current fulfilment model'; and
• An unearned premium model for the pre-claims liability of short-duration contracts.

A Board member challenged the 'current fulfilment' models presented because they were inconsistent with the customer consideration model being developed in the Revenue project. He saw no reason why revenue from insurance contracts should be recognised using different fundamental principles. In addition, the current fulfilment model was inconsistent with the principles being developed by the Board in the IAS 37 project. Another Board member supported this intervention. The staff noted that they had addressed this point later in the paper [paragraph 37]. The first Board member reiterated the point that the current exit value model was the only approach that was consistent with the Board's approaches in its revenue and IAS 37 projects. The staff agreed, but noted that the other possible approaches had been suggested by several respondents. It was a necessary part of the Board's deliberations towards developing an exposure draft to discuss those suggestions.

Board members noted that the current fulfilment models presented all relied to some extent on entity-specific cash flows rather than cash flows that would occur for all market participants. Some Board members were very uncomfortable with using entity specific cash flows because of the lack of rigor over what those cash flows might contain. Others could not find any insights from the summaries of the current fulfilment models presented.

In response to a question from the staff, Board members requested more information from the staff, in particular they wanted the staff to reflect the consistency (or lack of consistency) with the Framework, existing IFRS and other projects. Board members also noted that the answers developed by the staff needed to consider what might happen if the premium received was treated as a deposit rather than revenue.

Agenda Paper 3D was not discussed.

Expert Advisory Panel on Valuation of Financial Instruments in Inactive Markets – Update

The IASB staff noted that on 16 September 2008 it had released on the IASB Website a Draft Document reflecting the views of the IASB Expert Advisory Panel Measuring and disclosing the fair value of financial instruments in markets that are no longer active. 39 comment letters had been received: these had been broadly supportive but some had raised technical concerns.

In particular, in the measurement section, there was uncertainty about consistency between the EAP's paper and the comments of the US Securities and Exchange Commission's Office of the Chief Accountant released on 30 September and the related FASB staff position on FAS 157. The IASB staff has clarified (IASB Press Release 14 October 2008) that they are of the view that the documents are consistent. The staff will incorporate an example from the FASB Staff Position FSP FAS 157-3 issued on 10 October in the final IASB document that will be released later in October 2008.

The final staff guidance may be incorporated in future amendments to IFRS 7, but in the meantime it will have the status of a staff/educational document (IAS Plus comment: This statement would imply that it would be considered comparable to non-mandatory guidance (IAS 8.9)).

A Board member noted that the FASB staff had used, and been grateful for the work that the IASB's Expert Advisory panel had done and had taken comfort from the guidance that it had prepared when developing their own. In addition, he noted that the FASB staff had been impressed with the cooperation they had received from their IASB counterparts.

Board members asked the IASB staff to consider the responses to both the EAP's document and the FASB's Draft FSP 157-3 when developing the final IASB staff document. In particular, the comments from the CFA Institute that an orderly transaction in a stressed market was not a distressed sale should be reflected in the final guidance. If the seller has been able to attract bids from others, such a sale is an orderly sale. Transactions in a market might be infrequent, but if they are occurring, such transactions provide some evidence of current value. Board members noted that there would be areas in which the exercise of judgement was critical.

The staff noted that users of the document (preparers and auditors) were concerned about the status of the document. This will be addressed explicitly in the final document.

A Board member noted that recent communications from the Board had the potential to confuse rather than inform constituents. The press release on 14 October and that of 15 October accompanying the release of the Exposure Draft of proposed amendments to IFRS 7 seemed to be operating in parallel. The Director of Capital Markets agreed and acknowledged that there was a need to link the final staff document to the work on IFRS 7 and other matters.

Fair Value Measurements

This session's purpose was to address the use of mid-prices or other pricing conventions, as a practical expedient for fair value measurements within a bid-ask spread. While the Board decided already in June 2008 that an entity should use the price within a bid-ask spread that is most representative for fair value, the detailed measurement issues were left open. The Board also discussed whether the bid-ask guidance should apply to all levels of the fair value hierarchy, not only when bid and ask prices are observable in a market.

Some commentators to the discussion paper on fair value measurements favoured establishing a single pricing convention to increase consistency and comparability. Others highlighted the difficulties in applying such guidance in hypothetical or inactive markets.

The Board had a more general discussion on what is and what is not part of the bid-ask spread. One Board member suggested using the mid-market price as a rebuttable presumption. It was noted, however, that this would lead to a default method which might undermine the objective of fair value measurement.

In the end, the Board agreed to the staff recommendation that the ED should state that an entity could adopt a policy of using a mid-range price or other pricing convention as a practical expedient.

The Board was split on whether to apply the bid-ask spread guidance in levels 2 and 3 of the proposed fair value hierarchy. Some Board members did not believe that a bid-ask spread exists in those levels and that entities might simply use the guidance as a means of applying conservatism in valuation. The staff recommendation was to state in the ED that the bid-ask pricing guidance should apply at all levels of the hierarchy. The Chairman suggested including cautionary words highlighting the objective of fair value measurement. The Board's vote was split 6-6, but the Chairman exercised its casting vote in favour of the staff recommendation.

The Board also confirmed that it is not necessary to address offsetting positions on the ED.

IFRS for Private Entities

The Board continued its redeliberations on the exposure draft of an IFRS for Private Entities. Staff informed the Board that they did not want to discuss major issues today. Those would be brought back at the November meeting.

Temporary control exemption from consolidation

Due to the Board's decision at the September 2008 meeting to eliminate the 'held for sale' classification, the Board considered whether there should be an exemption from consolidation for a subsidiary that was acquired with an intent to dispose in the near future. Effectively, such an exemption currently exists under full IFRSs. The Board decided that a similar exemption from consolidation should be added for subsidiaries where on acquisition there is evidence that control is intended to be temporary (that is, there is an intention to dispose of the subsidiary within twelve months and management is actively seeking a buyer). The use of such this exemption would trigger additional disclosures by the investing entity.

Purchaed options as hedging instruments

The Board discussed whether purchased options should be permitted as hedging instruments for hedge accounting purposes. The staff explained that these instruments are rarely used by private entities and recommended not allowing them to reduce complexity. The staff also noted that an entity would not be prohibited to provide additional disclosures about this fact.

One Board member objected to this observation stating that from own experience he believed these are frequently used by private entities. Others believed except for some measurement challenges options would, from an accounting perspective, not be different than forwards or swaps. It was noted that this could impair neutrality of accounting as entity might refrain from using option because of the accounting consequences. One Board member responded that an entity is free to apply full IFRS and apply the guidance in IAS 39.

The Board decided not to permit purchased options in the IFRS for Private Entities.

Operating leases

Staff presented a revised proposal to modify the application of the straight-line method by lessees for operating leases if minimum lease payments are structured to increase to compensate the lessor for expected inflation. The Board supported the staff proposal but noted that it must be clarified that 'expected inflation' means changes in general purchasing power based on published statistics, rather than a general estimate of the lessor's future cost increases. The staff also informed the Board that it would bring back a proposal to add guidance on contingent rentals for operating leases.

Classification of equity/liability

The Board considered whether the February 2008 amendment to IAS 32 on puttable instruments and obligations arising on liquidation should be incorporated in the IFRS for Private Entities. The staff proposed to simplify the wording used in the original pronouncement. The Board agreed that the amendment should be incorporated but rejected the wording simplifications, noting that the words were carefully drafted to meet the objective and that any changes could potentially alter the content. Instead the Board decided that the amendment will be incorporated without revision in the IFRS for Private Entities.

Definition of government grant

The staff withdrew their recommendation to remove the phrase 'in return for past or future compliance with certain conditions relating to the operating activities of the entity' from the definition of a government grant.

Way forward

The Board will discuss outstanding issues in November and December. Some of the main outstanding issues relate to restructuring the financial instruments section, possible replacement of the term 'fair value', concepts and pervasive principles, measurement of equity-settled share-based payments, accounting for defined benefit plans, income taxes, and impairment of goodwill. The staff also indicated that it will propose that the Board revisit several of the tentative decisions made during redeliberations, including the name of the standard, consolidation, amortisation of indefinite-life intangibles, and recognition of actuarial gains and losses.

Annual Improvements 2009: IAS 39 – Application of the Effective Interest Rate Method

The staff presented the Board with a proposal to amend the Application Guidance in IAS 39.AG6-8 regarding the application of the effective interest rate method. The issue was originally raised with the IFRIC, but it decided not to add the issue to the agenda and refer it to the Board for clarification. Two questions arise in this context:

• What is a floating rate instrument?
• How is the effective interest rate calculated for such instruments?

What is a floating rate instrument?

The guidance in IFRS is not sufficiently clear on what a floating rate is - is it market interest rate only or could it be other market factors or possibly entity-specific factors? The staff agreed that the guidance is not clear and proposed three alternatives:

• Alternative 1: Provide no clarification
• Alternative 2: Define floating rate instruments as any instruments with contractual variable cash flows amounts arising from changes in market variables
• Alternative 3: Define floating rate instruments some other way

The Board agreed with this proposal adding the word 'observable'.

How is the effective interest rate calculated for such instruments?

The issue regarding calculation is whether to include expectations about future cash flows when determining the EIR? The staff proposed to clarify IAS 39 that expectations should not be considered when determining the EIR of a floating rate instruments as defined above, that is apply IAS 39.AG7.

The Board agreed

Way Forward

The staff then asked the Board whether the amendments should be proposed via the annual improvements project.

The Board agreed.

IAS 39 – Definition of a Derivative

The purpose of this session was to ask the Board how to progress with the proposed amendment to the definition of a derivative in IAS 39 in the annual improvements 2007. The Board had decided to defer the issue to allow for further research.

The original submission was raised with IFRIC asking whether 'provided in the case of a non-financial variable that the variable is not specific to the party to the contract' relates only to insurance contracts.

The staff noted that the majority of the comment letters submitted on the annual improvement 2007 proposals objected to the change in the definition of a derivative as this would broaden the scope of IAS 39 to many situations.

The staff highlighted that originally IAS 39 did not contain the words proposed to delete, but that IFRS 4 consequentially amended IAS 39. One Board member remembered that this change was originally made to scope out insurance contracts from the definition of a derivative. The IFRIC coordinator expressed concerns over the deletion as this would lead to many submissions to the IFRIC on the meaning of 'other variable'.

The staff recommended not to pursue the proposed amendment and to include the considerations in the comprehensive financial instrument account review project. One Board member noted that this project is not on the IASB's active agenda yet. The Board agreed not to proceed with the proposed amendment, but asked the staff to come back with proposals on how to proceed with the issue.

Derecognition

(FASB staff and one Board member joined via video link)

The staff presented the Board with two possible derecognition models and asked the Board for possible improvements to the model and approaches presented to them and an indication on the way forward.

The staff briefly revisited the reasons for adding the project to the IASB's agenda, highlighting the complexity in this area under IAS 39 and the opportunity to converge IFRS and US GAAP. Staff also noted the diversity of views amongst Board members, particularly where an entity has continuing involvement. It was noted that analysts would prefer to keep assets on the books where an entity initially had them and retained a continuing involvement.

The core principle of the staff was that an asset is to be derecognised only when an entity no longer controls the economic benefits (cash flows) of a financial asset or component thereof. This would be consistent with the definition of an asset. Control would cease when the entity had no longer the ability to obtain the underlying economic benefits for its own benefit. In case of no continuing involvement the core principle would be easily applicable, the staff acknowledged, but it would be more challenging once the entity stays involved in some way.

The staff noted that there should be symmetry in accounting. If a transferor derecognised an asset it should be recognised by the transferee - and vice versa.

The Board had a lengthy discussion about the core principle and its practical implications. Some Board members expressed concerns whether this could be operationalised. Some where also confused whether staff was addressing the asset or the right to the asset when the staff paper states 'it'. Others were concerned over the transferee focus when deciding whether to derecognise. The core principle is a transferor focus – the transferor's continuing involvement – but under the staff proposal implementing that prinicple would often involve the rights and obligations of the transferee such as ability to sell the asset.

The staff highlighted that any transfer where the counterparty has the practical ability to sell the asset would trigger derecognition. The issue was when this practical ability is missing. Then the staff suggested two approaches:

• Assess whether the transferee can obtain the underlying cash flows by means other than a transfer (approach one)
• No ability to transfer = no control = no derecognition. Therefore recognise a liability, linked presentation could be considered (approach two)

The staff recommended approach two, although it admitted that approach one is the conceptually right, based on users' and others requests for high derecognition hurdles in the light of current circumstances.

The Board continued its lengthy discussion. One Board member expressed a strong view that the approach preferred by the staff would be inconsistent with the IFRS Framework and asked whether this was not one of the decision criteria presented by the staff. Staff replied that this was not an exhaustive list.

The Chairman took an indicative vote on whether to pursue approach one or approach two. The vote was 5 in favour of approach one and 8 in favour of approach two.

The FASB staff briefly updated the Board on their proposed changes to the consolidation model. It was highlighted that the US proposals would define components of assets and would not allow linked presentation. One Board member asked whether the proposals are in line with the Framework. The staff responded that this was not the case.

The staff presented its timeframe for issuing an ED in March 2009. The Board agreed. One Board member asked the staff to prepare real world examples including disclosures to test whether this information would be useful.

Thursday 16 October 2008

Consolidation – Staff draft of ED

The Board discussed an updated Staff Draft of the forthcoming Consolidation exposure draft. The draft incorporates comments received at the Board meeting of 2 October as well as other comments received. The staff noted the following changes in particular:

• references to 'beneficial interests' had been removed;
• the 'power and benefits' discussion were moved from the application guidance to the main body of the draft IFRS, and integrated with the characteristics of control;
• the section on structured entities had been rewritten;
• disclosure requirements had been added.

Several Board members were sympathetic to what the staff was trying to achieve, but remained unconvinced that the proposed approach was operational. In particular, the drafting was seen as very subjective. In addition, some thought that the section addressing structured investment vehicles (in particular paragraph 43) might result an entity being able to derecognise assets but, because there was a financing relationship with the entity because the entity continued to sell receivables to the structured entity, the structured entity would continue to be consolidated (that is, through the sale of receivables the structured entity provides 'a source of long-term financing' to the entity).

The discussion of 'benefits' (paragraphs 23-27) also attracted comment. In particular, the staff noted that the IASB draft uses 'benefit' to imply both positive and negative returns. Several Board members noted that many readers would not expect that result; 'benefits' is usually used to describe positive returns only (and US GAAP uses 'benefit' in this way). In addition, 'risk' is used to imply negative returns. Professor Barth noted that academics see 'risk' as addressing both positive and negative returns: risk is both variance and outcomes above and below the mean. However, the Board agreed that the drafting should be amended such that it did not suggest that the IASB was unaware of finance literature and research, as well as avoiding creating unintended differences between IFRS and US GAAP. The Board asked the staff to re-order the discussion in paragraphs 23-27 and search for a word or phrase that could be used instead of 'benefits'.

The Board also suggested that the general principle of control ('A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity for the benefit of the reporting entity') needed re-wording (or perhaps a footnote) to explain that it encompassed the reporting entity, it agents or related parties.

The Board discussed the characteristics of control, in particular the concept that control must be current for consolidation to be required (paragraphs 10-14). Some were concerned that the discussion of predetermination was not sufficient to capture the Board's intent with respect to structured entities. Another issue in this section was the effect of options. A Board member expressed his view that in-the-money options can create control, but acknowledges that this creates an inconsistency between 'ordinary' inter-corporate investments and structured entities.

The Board debated this issue for a while. Most of the debate centred on whether holding such an option established a presumption of control, triggering consolidation. However, late in the debate a Board member asked whether an entity writing a put option for the whole of its holding in a subsidiary would trigger a loss of control and thus cessation of consolidation? Board members thought this was a very good question.

The Chairman closed this part of the debate by reminding his colleagues that the staff needed direction from the Board on this issue. The Board was asked whether the exposure draft should state that in assessing whether an entity controls another at the reporting date options that represent a current legal right and that the holder can exercise should be considered in that assessment. The Board agreed (one dissent) that such options should be assessed.

Board members and the project staff discussed how best to structure the exposure draft such that the Board's intent that the assessment of whether control exists should be an holistic assessment, rather than a linear assessment or checklist. One suggestion was to re-cast the general principle such that 'control should be current, not shared and continuous' and then elaborate on that principle in the supporting paragraphs. The staff will work on this out of session.

The Board discussed paragraph 53(c), which proposes disclosure of 'the nature of and risks associated with its involvement with structured entities that it does not control'. One Board member was particularly concerned that users should know the 'leverage' of the first loss in a structured entity and asked how this could be articulated in the disclosure requirements. The Chairman asked the staff to review the guidance in IAS 27 and SIC-12 to ensure that nothing the Board intends to retain had been omitted from the exposure draft.

In addition, a Board member suggested that the project staff should review the structured entity examples in the proposed FASB Interpretation 46(R) and provide their view on whether the consolidation conclusions were consistent with the US answers. The staff noted that this work had been started and was progressing as quickly as possible. The Board member suggested that this analysis should be included in the exposure draft as an appendix as constituents would expect to see it.

Technical Plan

The IASB held a brief discussion of the technical plan. The plan will be discussed at the joint session of the IASB and FASB on 21/22 October 2008 after which the plan will be issued via the IASB's Website.

The staff noted that two due process documents had been issued in the current week: the exposure draft of enhanced disclosures in IFRS 7 and the discussion paper on financial statement presentation. With respect to amendments to IFRS 7, the staff hopes to complete this project and issue a revised IFRS 7 in the first quarter 2009. The staff also noted that the discussion paper on the measurement chapter of the Framework is now expected in the second half of 2009 (as opposed to 2Q09).

A Board member asked whether there were any projects for which the staff were concerned that the schedule was aggressive or tight. It was noted that revenue recognition and financial statement presentation had very tight timetables, but the staff were currently confident that the scheduling could be achieved.

Financial Instruments with Characteristics of Equity

The staff noted that this session aimed to prepare Board members for and to facilitate the discussion to be held at the joint meeting of the Board and the FASB on 20-21 October 2008. No decisions were requested.

The staff noted that in order to complete the project by 2011, as contemplated by the project plan discussed by the IASB and the FASB in June, a decision was required at the joint IASB/FASB meeting regarding which approach the boards want to pursue. The staff explained that of the approaches outlined in the IASB's Discussion Paper Financial Instruments with the Characteristics of Equity, as well as others suggested by constituents (including the PAAinE 'loss absorption approach'), the staff preferred what had been labelled the 'Perpetual approach'. The Perpetual approach would classify an instrument as equity if it (a) lacks a settlement requirement and (b) entitles the holder to a share of the entity's net assets in liquidation. The staff explained that this approach was similar to the classification approach in IAS 32 except that derivatives over an entity's own equity would not be classified by the issuer as equity. The FASB had discussed the paper presented in a public education session and none of the FASB members had expressed opposition to the approach at that meeting.

One Board member expressed concern that the loss absorption approach seemed to be dismissed somewhat summarily in the staff paper. However, another Board member noted that the Board had held two sessions dedicated to the model and most Board members remained unconvinced that something that looks like commercial paper should be classified as equity.

Most Board members expressed support for the staff recommendation. A common thread in the discussion was that the perpetual approach was superior to the basic ownership approach advocated in the Discussion Paper, although inconsistencies between IAS 32 and the IASB Framework and FAS 150 and the FASB's Concept Statements were acknowledged.

Some Board members noted that they would not support any approach that permitted an entity to write a put on its own equity and treat that equity as treasury or repurchased shares. In their view, the equity was still in issue and the entity had written a derivative which should be subject to normal derivative accounting.

Some Board members retained a preference for the basic ownership approach, because it provides a cleaner answer when compared with that in the perpetual approach for such instruments as puttable shares and instruments subject to 'economic compulsion'. Some Board members acknowledged these difficulties and suggested that the superior answer to the puttable share debate was to treat the shares as equity and account for the put separately as a derivative.

Another common thread in the discussion was that Board members were unwilling to develop an approach knowing at the outset that they would have to provide exceptions from the basic principles. They saw the perpetual approach as the best opportunity to avoid such exceptions.

Friday 17 October 2008

Proposed Amendments to IFRS 2 and IFRIC 11 - Group cash-settled share-based payment transactions

The purpose of this session was for the staff to summarise the IFRIC discussions and recommendations to the Board from the May and July 2008 meetings, along with the rationales underlying the recommended changes from the proposals in the ED. The staff agenda was to discuss first the issue of scope and then to agree on measurement. The Board discussed how group cash-settled share-based payment transactions should be treated in the separate financial statements of the subsidiary. There was a divergence of views as to whether these transactions were actually in the scope of IFRS 2 or should be considered under IAS 19 or IAS 39. It was agreed that if services were provided by employees, then (at least part of) the debit was within the scope of IFRS 2 or IAS 19. No further conclusions were reached.

'Sweep Issue': Reclassification of Financial Instruments Under IAS 39 – Whether to eliminate differences with US GAAP

The staff raised an issue in respect of the transition rules of the October 2008 Amendment to IAS 39. IAS 39.103G states that 'any reclassification of a financial asset made in periods beginning on or after 1 November 2008 shall take effect only from the date when the reclassification is made'. In some countries entities will not be able to adopt this amendment until is has been approved by local law and in some cases this will be later than 1 November 2008. The staff raised the question whether, after 1 November 2008, such entities should be able to apply some form of retrospective reclassification linked to endorsement by local law.

The Board did not agree with this approach. The Board hopes that local jurisdictions will move quickly to endorse this amendment. Entities should decide prior to 1 November 2008 whether or not they intend to reclassify, subject to the requirements of local law, and calculate what the impact would be. Where endorsement occurs at a later date, it would not be acceptable for entities to postpone making a decision with respect to this amendment and subsequently adopt it retrospectively.

20-21 October 2008, Norwalk, Connecticut USA

Monday 20 October 2008

Conceptual Framework - Elements

The Boards' discussions focused on the following proposed definitions of an asset and liability, to determine if (1) the definitions follow a parallel structure and (2) the term 'economic resource' within the asset definition and referenced within the description of an 'economic obligation' in the definition of a liability is appropriately defined.

Asset: An asset of an entity is a present economic resource to which the entity has either a right or other access that others do not have.

Liability: A liability of an entity is a present economic obligation for which the entity is the obligor.

The discussion also focused on the the term 'economic resource' in the definition of an asset and referenced within the 'economic obligation' component of the liability definition. The Boards discussed whether an economic resource needs to be scarce to meet the definition of an asset. Additionally, the Boards discussed whether the definition of an economic obligation clarify that, when determining if the item forgone is an economic resource, that determination should be from the perspective of the recipient and not the entity. For example, if an entity settles a forward contract with the issuance of shares, the shares would not necessarily be considered an economic resource of the entity, but when given to a recipient, they would be considered an economic resource to the recipient; therefore, the contract could be considered a liability by the entity.

The Boards also discussed the difference between economic compulsion and constructive obligations. The staff indicated that the definition of a liability does not include the concept of economic compulsion.

Consolidation

The staff provided a brief update on FASB's Exposure Draft (ED) to amend FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities and the IASB's draft of an ED to amend IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidations - Special Purpose Entities. The FASB released its ED on 15 September 2008, and comments are due by 14 November 2008. The FASB is holding a public roundtable to discuss the proposed amendments to Interpretation No. 46(R) and Statement No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities on 6 November 2008. The IASB staff indicated that the IASB expects to issue its ED for public comment in November 2008, with a likely comment period of 120 days.

After a brief discussion of the two consolidation models proposed by the FASB and the IASB and an acknowledgement that there are differences in the models (such as scope), a staff member suggested that the Boards consider the best path forward in developing a converged model. Given the current status of each project, the staff suggested the following three alternative approaches be considered by the Boards on how to proceed with a joint project:

• Either the FASB or the IASB drop its consolidation model and move forward with the other Board's model.
• Compare the FASB and IASB consolidation models to identify significant differences and converge into a single consolidation model.
• Leave the consolidation models as currently proposed but apply each model to different example sets to determine if the models produce similar results. If similar consolidation conclusions are reached, the FASB and IASB can retain their respective model knowing that the models (while different) achieve the same ultimate conclusion.

After a significant amount of discussion, the Boards agreed on a hybrid of the second and third alternatives above. At the direction of the Boards, the FASB and IASB staff will discuss the two consolidation models and identify any potential significant differences. The staffs will apply each model to the nine examples in the FASB's ED and the five examples developed by the IASB to determine if the consolidation conclusions reached under each model are the same.

One primary reason why the FASB rejected the first alternative is the potential timing of the IASB's ED. Several FASB members pointed out that the currently proposed amendments to Interpretation 46(R) are the result of a mandate by the SEC that must be effective by 2010. These Board members expressed concern that a joint project on consolidation likely will not be effective until at best 2011 which does not satisfy the SEC's mandate. As a result, the FASB plans to proceed with its current project to amend Interpretation 46(R) but also to work with the IASB staff to ensure that any significant differences in the models are identified and resolved.

One potential significant difference that was discussed in detail relates to the concept of current control. An IASB staff member mentioned that the IASB appeared to be of the view that control should be based on the concept of current control and that potential voting rights should not be considered. While this is the view expressed in several past IASB staff drafts of the ED, the staff member acknowledged that this view was challenged at the 16 October 2008 IASB Board meeting when several IASB Board members stated that they believe potential voting rights should be considered in determining whether control exists. As support for this conclusion, those Board members pointed out that an investor that holds 60 percent of the voting interest of a particular entity would be deemed to control that entity irrespective of whether it currently exercises its voting rights. Those Board members suggest that consideration of control in this context is not consistent with ignoring potential voting rights solely because the investor has not exercised its right to obtain those voting rights. The IASB staff stated that it believes the IASB is now reconsidering its position on potential voting rights in the control assessment. However, certain IASB members stated that it did not believe the IASB is reconsidering its position on potential voting rights. The IASB will consider this issue further at a future IASB meeting. An FASB member pointed out that the discussion of current control in the context of potential voting rights is similar to the FASB's discussion of kick-out rights and that the application of current control must be consistent between both.

Derecognition

The IASB staff provided a brief overview of its proposed derecognition principle and how that principle links back to the definition of an asset: A transferor should derecognise a financial asset when the financial asset ceases to qualify as an asset of the entity. A financial asset ceases to be an asset of the entity if (1) the economic benefits of the asset no longer exist (that is, the asset matures) or (2) the entity no longer controls the underlying economic benefits of the asset (that is, the contractual rights to the asset are transferred to a third party). An entity no longer controls the economic benefits underlying a financial asset if the entity no longer has the ability to (a) obtain the future economic benefits inherent in the asset and (b) restrict others' access to those benefits.

In determining whether a transferor no longer controls the economic benefits underlying a financial asset, the IASB staff suggested that it is easiest to consider whether the transferee of the financial asset obtains control over the economic benefits underlying the asset as a result of a transfer. If the transferee obtains control of the economic benefits underlying the asset, the transferor would no longer control the asset, and derecognition would be appropriate. The IASB staff proposed that determining whether the transferee obtains control of the economic benefits underlying an asset can be achieved in either of the following two ways: (1) the transferor has no continuing involvement in the transferred assets or (2) the transferee has the practical ability to transfer the asset in its entirety to a third party and is able to exercise that right unilaterally and without needing to impose additional restrictions on the asset.

The IASB staff then presented two different approaches that it is considering when dealing with a scenario where the transferee does not have the practical ability to transfer the financial asset.

• Approach 1 would require further consideration of whether the transferee presently has other abilities to obtain all of the cash flows of the asset for its own benefit. If the transferee can obtain all the cash flows of an asset for its own benefit through other rights, than derecognition would be appropriate. Otherwise, a sale would not occur.
• Approach 2 would not allow for derecognition of the asset if the transferee does not have the practical ability to transfer the asset regardless if the transferee can obtain all the cash flows of the asset for its own benefit through other rights. However, if certain conditions not yet discussed are met, the transferor would be allowed to present the asset and associated liability as linked on the left hand side of the statement of financial position (a linked presentation).

The staff stated that it recommends that the Boards accept Approach 2.

In response to questions from Board members, the IASB staff provided its views on how its proposal would apply to various common types of financial asset transfers. Several Board members also questioned whether Approach 2 is consistent with the definition of an asset in the conceptual framework. The IASB staff acknowledged that Approach 2 is not consistent with the conceptual definition of an asset but that it is the more workable of the two approaches and clearly distinguishes between transfers that qualify for derecognition and transfers that are 'failed sales'.

After discussion of Approach 2, the staff then asked the Boards to vote on which approach they support for further development. By votes of 7-6 (IASB) and 4-1 (FASB), the Boards supported the staff's recommendation to further develop Approach 2. The staff acknowledged that it will likely include both approaches in the pending ED.

Finally, the IASB staff discussed the project timeline and asked whether the Boards will allot additional resources to further develop the IASB staff's derecognition principle and other considerations (including measurement and presentation). The Boards agreed that the project is urgent but stated that they would discuss resource allotment at a future date.

Fair Value Measurements

This session's purpose was to update the two Boards on the:

• Activities of the IASB Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets (the EAP), and
• Status of the IASB's Fair Value Measurements project.

Activities of the IASB Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets

To begin the discussion, the staff referred the Boards to the draft report of the EAP that was posted for comment in September 2008. The staff stated that, in general, the comments received were supportive of issuing this document in final form. However, some commenting parties were confused as to its status, for instance, whether the guidance in the document is mandatory. The staff explained that the document was being updated to make it clear that it is intended to be educational and is not required to be used unless the guidance in the document is already required in existing IFRSs.

The staff summarised the comments received on the EAP's draft report and separated those comments into two broad categories, measurement and disclosure. Regarding measurement, the staff addressed several comments received including:

• Clarifying that the draft document was consistent with the joint release from the SEC and FASB on September 30, 2008 as well as FASB Staff Position FAS 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.
• Clarifying that 'fundamental value' is not equivalent to fair value. The reference to fundamental value in the draft document was deleted and replaced with an entity-specific determination of value, which is also clearly stated as not a fair value measurement.
• Adding more information to the description of a forced transaction.
• Adding the example from FSP FAS 157-3 to the document to help clarify how a model can be used in the place of irrelevant observed transaction data.

Regarding disclosure, the staff received comments about whether regulators and auditors would require the disclosures in the EAP's document and whether the document should suggest where the disclosure should be located (for example, management's discussion and analysis). The staff decided not to address these concerns but reiterated that the disclosures in the document are not required unless they are required pursuant to existing IFRSs. It also stated that the location of disclosure will depend on an entity's policies and circumstances.

Some of the feedback received that was not addressed by the staff because it was out of the scope of this project included:

• Changes to the reclassification rules in IAS 39 (this issue was addressed by the IASB in its recent reclassification project).
• Changes to the tainting rules for held-to-maturity financial instruments.
• Changes to the impairment rules for available for sale financial instruments.
• Suspension of fair value accounting.
• Exclusion of an entity's own credit risk from the fair value measurement of liabilities.
• How the US Government's asset purchase program will affect fair value measurement.

Lastly, the staff stated that the final EAP document will be posted to the IASB's website in late October 2008.

Status of the IASB's Fair Value Measurements project

The IASB staff updated the Boards as to the status of its work on a comprehensive fair value measurement standard. In general, the principles of the IASB's project are consistent with the principles of Statement 157; however, the words may differ. The staff and several Board members acknowledged that the wording between a final IFRS standard and Statement 157 should be consistent and the two Boards/staffs should work together to ensure wording is consistent wherever possible.

The staff's summary of the project status included any potential difference between the IASB's decisions to date and Statement 157 and potential opportunities to enhance the guidance in Statement 157.

First, the staff informed the Boards that the IASB has made a tentative decision to use 'exit price' in the definition of fair value. This is consistent with Statement 157. However, the definition will also include some wording that reflects that the exit price considers a market participant's ability to generate economic benefit by using the asset or by selling it to a third party. Further, the IASB is still considering whether the 'in use' concept could be applied to financial assets. Currently, Statement 157 is not prescriptive as to whether that concept is applicable to nonfinancial assets.

Second, the IASB staff discussed the highest and best use concept and stated that the concept is generally the same as in FAS 157. The staff discussed whether an entity must allocate value to the individual units of account using the highest and best use valuation amount if the current use by the entity is something other than the highest and best use. Currently, FAS 157 is silent as to how an entity should perform this allocation.

The third issue presented by the staff related to blockage factors. Currently, FAS 157 disallows the use of blockage factors in a Level 1 fair value measurement. The IASB has tentatively decided that blockage factors (and control premiums) should not be used in any fair value measurement. The staff stated that it may revisit the control premium tentative decision based on additional information that it has received to date.

The staff also stated that the IASB has not deliberated the following issues:

• Bid-ask spreads and whether the use of mid-market pricing as a practical expedient is acceptable
• Defensive value
• Reference market
• Valuation premise
• Day one gains and losses
• Disclosures (other than the current IFRS 7 project)
• Fair value measurement of liabilities (settlement vs. transfer)
• Restrictions (will be included in the discussion on the fair value measurement of liabilities - transfer restrictions)
• Non-performance risk

These issues will be deliberated in future IASB meetings from October 2008 through December 2008.

Lastly, the staff noted some potential improvements for Statement 157 based on feedback from the comment letters on the Fair Value Measurements discussion paper and observations by the Valuation Resource Group (the VRG). These included additional guidance on (1) the use of unobservable (Level 3) inputs and the efforts necessary to ensure that these inputs are based on market participant assumptions and (2) the in-use valuation premise and how to apply that concept in practice.

Tuesday 21 October 2008

Financial Instruments with Characteristics of Equity

The purpose of this session was to discuss which approach, if any, provides the best starting point for future deliberations. The staff anticipated that during the discussions, the Boards would be able to tentatively reject some of the approaches and focus on the approaches that they believed should be considered for further development. The FASB Preliminary Views Financial Instruments with Characteristics of Equity presented three approaches:

• Basic ownership approach – in which an instrument would be classified as equity if it (1) is the most subordinated claim and (2) entitles the holder to a share of the entity's net assets. The holders of this class of instruments are viewed as the owners of the entity
• Ownership-settlement approach – an entity would classify instruments based on the nature of their return and their settlement requirements or that represent (or lack thereof). Instruments that lack settlement requirements or that represent (or upon settlement will present) the most residual claims are classified as equity. The following three types of instruments would be classified as equity:
  • Basic ownership instruments
  • Other perpetual instruments
  • Indirect ownership instruments settled by issuing related basic ownership instruments
• Reassessed expected outcomes (REO) approach – all basic ownership instruments are classified as equity. Additionally, instruments (and components of instruments) whose fair value changes in the same direction as, or the opposite direction to, the fair value of a basic ownership instrument are classified as equity or contra-equity.

In addition, the staff presented the following five alternative approaches developed by interested parties:

• Loss absorption approach: Participation in losses is the decisive factor for distinguishing equity from liabilities. Capital is classified as equity if the amount of its claim on the entity's net assets is reduced if the entity incurs a loss.
• Perpetual approach: An instrument is classified as equity if it (1) lacks a settlement requirement and (2) entitles the holder to a share of the entity's net assets in liquidation.
• Participation approach: An instrument (or component) is classified as equity if it would participate without an upward limit in the proceeds of a disposal of the reporting entity (or a business within that entity).
• IAS 32 (without modification): This approach would require the FASB to adopt IAS 32, Financial Instruments: Presentation, without any modifications. Generally, IAS 32 would classify an instrument as equity if (1) It includes no contractual obligation to delivery cash or another financial asset (or to exchange financial assets or financial liabilities under conditions that are potentially unfavorable) or (2) it will be settled by delivering a fixed number of the issuer's own equity instruments or by exchanging a fixed number of the issuer's own equity instruments for a fixed amount of cash or another financial asset).
• Modified IAS 32: This approach would require the boards to develop a converged standard based on IAS 32. Amendments would be made to the standard to address criticisms identified by constituents.

The staff proposed the elimination of all the above approaches except the Basic Ownership approach and the Perpetual approach. The staff noted that these two approaches would be further developed. The staff may recommend to that the Boards consider incorporating some features of the approaches into the selected approach. The Boards discussed the matter at length, but did not vote on a specific approach. The majority of the Board members supported the elimination of six approaches and the further development of the perpetual approach and the basic ownership approach as a starting point. The Boards agreed to reconvene in November to further discuss the development of a single approach.

Financial Instruments: Complexity (Comprehensive Project)

This session's purpose was to update the two Boards on the status of the comment letters received on the IASB's Discussion Paper (DP) on Reducing Complexity in Reporting Financial Instruments. As of the beginning of October 2008, the Boards received over 150 comment letters from various constituents groups including users, preparers, and auditors. The staff also used this session to update both Boards on the comment letters received on the FASB's Exposure Draft (ED) on Accounting for Hedging Activities. As of the beginning of October 2008, the FASB received approximately 130 comment letters from various constituent groups including users, preparers, and auditors.

At the start of the session, the staff referred to a joint release issued by the IASB and FASB on 20 October 2008 regarding the Boards' commitment to a global approach to dealing with reporting issues arising from the global financial crisis. The staff premised the remaining discussion on the complexity project and the hedge accounting project by stating that whatever is decided during the joint approach to dealing with reporting issues from the global financial crisis will need to be considered in the longer term complexity and hedge accounting projects.

Overall, the staff explained that the responses received to both documents (DP and ED) had significant divisions between users and preparers/auditors, and the remaining discussion would focus on a comparison of the comments received from users to the comments received from preparers and auditors.

Reducing Complexity DP

The staff explained that overall all constituent groups agreed that there is significant complexity in the reporting for financial instruments and there is a need to reduce that complexity. Views differed on how to do that. The staff organised the discussion based on the four approaches described in the DP:

• Long-term approach, report all financial instruments at fair value
• Intermediate approach 1, reduce the number of measurement attributes or certain categories of financial instruments
• Intermediate approach 2, replace existing measurement attributes with fair value with certain optional exceptions, and
• Intermediate approach 3, simplify the accounting for hedging activities.

Regarding the long-term approach, most users were supportive of moving to a full fair value approach for all financial instruments. However, preparers and auditors did not appear to support a full fair value approach. The majority of respondents were not supportive of intermediate approaches 1 and 2, but some were supportive of a combination of those approaches. Regarding the intermediate approach 3, users were generally supportive of eliminating hedge accounting while preparers and auditors were not. Further, most users were supportive of the FASB's ED on hedge accounting while most preparers and auditors were not. Regarding other issues/concerns, constituents were consistent in their views that a prerequisite to proceeding with the Reducing Complexity project was to deal with certain presentation issues in the current Financial Statement Presentation project, specifically how gains and losses would be presented. Certain users also added that a comprehensive disclosure framework and fair value measurement framework are also required before proceeding with this project.

Hedging ED

The staff divided the views expressed into five broad categories:

1. joint project,
2. qualitative effectiveness assessments,
3. reasonably effective threshold,
4. elimination of bifurcation-by-risk, and
5. hedging of an entity's own debt.

Users, preparers, and auditors were generally unified in their views that any project should be a joint project between the IASB and FASB. The concerns raised were that preparers would have to change their hedge accounting models twice over the coming years. Once to move to the FASB's model and then a second time upon international convergence (assuming the IASB had not adopted the FASB's model by the time international convergence occurs).

Regarding all of the other categories of views expressed, users and preparers/auditors were divided. Users generally disagreed with the loosening of hedge assessment requirements to a qualitative approach and the lowering of the hedge effectiveness threshold to reasonably effective. The staff stated that the preparers and auditors were generally supportive of the ED regarding its suggested changes. The staff also stated that users generally supported the elimination of the bifurcation-by-risk hedging model that currently exists while preparers and auditors did not support it. Preparers and auditors believed that such elimination would result in accounting consequences that do not match an entity's risk management strategies. They also cited the fact that an entity's own credit would be included in the evaluation and recording of hedge ineffectiveness.

The Boards asked the staff to further discuss with preparers what was meant by the comments on credit risk. They also asked the staff to further examine how to deal with these concerns through the Financial Statement Presentation project and through disclosure. Some Board members also asked the staff to reach out to additional user groups to further understand their concerns with hedge accounting. Specifically, users wanted to eliminate hedge accounting or at the least, eliminate bifurcation-by-risk, but stated that doing so was just as important as presenting and disclosing the effects of an entity's risk management strategies.

Lastly, the staff indicated that users generally did not support the exception to allow bifurcation-by-risk on the hedging of an entity's own debt. Users believed this would result in the underreporting of other risk exposures, such as counterparty risk. Preparers generally agreed with the exception and thought the exception should be extended to include situations other than hedges placed at the inception of the debt. The staff also stated that preparers cited concerns similar to those raised in the elimination of bifurcation-by-risk regarding the inclusion of credit risk.

The staff wrapped up the meeting by stating that the hedging project has not been removed from the FASB's agenda, as some reports had indicated. The staff stated that the project was put on hold until the Boards could decide how to proceed with the broader project on reducing complexity in the reporting of financial instruments. Several board members cited support for the FASB staff's efforts on the hedging ED and said they would consider it during the upcoming agenda setting process. Those decisions are expected in the next couple of months.

Emission Trading

At this session, the Boards began considering the main accounting issues associated with the inception of 'cap and trade' and 'baseline and credit' schemes. The staff used this session to educate the Boards and did not ask the Boards to make any decisions. The staff stated that they believed the inception accounting issues to be the most contentious accounting issues. The staff began the discussion by providing background on each of the two schemes.

• Cap and trade (most prominent in the European Union). This scheme includes a 'scheme administrator' (usually a governing body) which sets an overall cap on the amount of emissions that are allowed to be released during a specified period (the compliance period). Under this scheme, the allowances are allocated before or during the compliance period and must be remitted to the scheme administrator after the compliance period has passed. This allows participants in the scheme to freely trade the allowances for an extended period of time.

• Baseline and credit. These schemes are similar to cap and trade in that they have a scheme administrator and allowance or credit certificates. However, they differ in one important respect. Instead of issuing allowances before or during the compliance period, the scheme administrator assigns a baseline to each participant which establishes a limit for the compliance period. After the compliance period has passed, each participant's output is measured and compared to the baseline. After such measurement, the participant either receives allowances or has to seek allowances in the open market (equal to the difference between the baseline and actual output). The receipt of allowances usually occurs a few months before those allowances must be remitted to the scheme administrator. This allows the receiving participants to freely trade those allowances to participants that have exceeded their baseline.

The first set of questions the staff asked the Boards to consider was whether credits and emission allowances are assets that should be recognised. The Board members' views varied, and no decisions were made.

The second set of questions the Board considered was whether a baseline is an asset that should be recognised. The staff separated the discussion into two views. The first view was that baseline meets the definition of an asset. The second view was that recognition of an asset depended on the type of baseline scheme (that is, does the baseline preclude use or limit the use of economic resource/emitting by other?). Supporters of this view believe that in an open scheme (access is not precluded) no asset is recognised while in a closed scheme (access is precluded) an asset is recognised. The staff explained that the open scheme was more prevalent in the EU while the closed scheme was seen in the US (for example, acid rain program). The Board members' views varied on this question as well, and no formal decisions were reached. The staff also asked whether under a baseline scheme an entity should recognise a separate asset or include the value of the baseline in the value of the emitting source (for example, include in the value of a power plant).

The third set of questions the Boards considered was whether an entity incurs an obligation in the schemes and if so, how the entity should recognise the baseline or emission allowance obligation. The staff suggested different views on recognition of the obligation. The views on the baseline scheme were premised by the assumption that an asset is not recognised. Board members' views varied, and no decisions were made. Some Board members also suggested alternative views including following the IAS 20 government grant model or an IAS 37 approach (provisions approach).

Lastly, the staff posed a question to the Boards asking whether the schemes required consistent accounting approaches. Some Board members stated that different schemes should only have consistent accounting approaches if they require participants to have the same rights and obligations. If schemes do not have similar rights and obligations, the accounting approaches do not necessarily have to be same.

At the end of the session, one of the Board members suggested that the staff not focus on particular schemes, but rather it should focus on the broader concept of whether an emission allowance is an asset and when a liability is incurred. This Board member believed that the objective of the project is to develop an accounting model that could be applied broadly as opposed to only selected schemes. The staff said it was currently working on broadening the application of the views and was only using this session to educate the Boards on the more contentious accounting issues related to emission allowances.

Liabilities

The purpose of this session was to explore the appropriate measurement techniques for liabilities with uncertain outcomes – specifically the use of the expected cash flow method. The staff believed this discussion was necessary because the Boards have recently reached different conclusions about the use of expected cash flows in accounting for liabilities with uncertain outcomes. For example, the accounting for uncertain tax positions under FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes is a different approach as compared to the approach discussed by the IASB. Also, the FASB's preliminary view on calculating the lease term based on a best estimate is a different approach as compared to the approach discussed by the IASB.

The IASB staff did not ask for and the Boards did not make any decisions at this meeting. The ultimate goal is to develop a common approach to dealing with uncertainty in recognition and measurement.

The IASB staff began the discussion with a brief history and discussion of the expected cash flow method, or more broadly, the use of an expected outcomes method. Further they discussed the objective of measurement ('predictive' as demonstrated in FASB Statement No. 5 Accounting for Contingencies vs. 'current state' as demonstrated in IAS 37) and whether that objective would be constrained by other factors (such as decisions taken in other standards or restrictions to limit abuse). The staff recognised that while both Boards incorporate the use of expected cash flows in accounting measurements (FASB Concepts Statement No. 7 Using Cash Flow Information and Present Value in Accounting Measurements and IAS 37) the Boards have reached different conclusions regarding the use of this method when measuring liabilities with uncertain outcomes.

The IASB staff presented three questions on the topic and their related recommendations:

• 1. Should we incorporate expected outcomes into recognition decisions and measurements, or should the technique be reserved for measurement?

  Staff Recommendation – Expected outcome approaches are a measurement tool to be used after the decisions about recognition.

• 2. Should we strive for measurement that is consistent with recognition criteria?

  Staff Recommendation – Decisions on measurement should be independent of decisions about recognition.

• 3. Are expected outcome approaches limited to applications of fair value?

  Staff Recommendation – Measurements under conditions of uncertainty should always take account of the range of possible outcomes and their relative probabilities. That is, the measurements should always incorporate expected outcome techniques.

Members of both Boards praised the work laid out in the agenda paper on the topic of measurement and felt that the recommendations were a good theoretical starting point. However, the FASB members had reservations regarding the recommendation that measurements of uncertainty should always take into account the range of possible outcomes and their relative probabilities. They noted that there are often instances of impracticability in the application of an expected outcomes method, whether related to lack of information or US-specific institutional limitations (for example, the legal profession).

Further, certain FASB members were reluctant to adjust measurement for an unlikely possibility on one extreme end of a range of possible outcomes. One area that both Boards agreed on was the need for adequate and transparent disclosures to ensure that users could understand the methodology and assumptions utilized to determine amounts recorded for liabilities with uncertain outcomes.

The IASB plans to discuss at a future meeting questions related to measurement including focusing on what should be done when there are outliers in a range of possibilities.

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