Monday 15 December 2008 (afternoon only)

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

The Board continued its redeliberations of an IFRS for Private Entities. The objective of this session was to address certain issues previously deferred. The staff introduced this session by highlighting the major topics to be discussed:

• Outstanding issues on financial statement presentation;
• Redeliberation of an approach for impairment of non-financial assets; and
• Redeliberation of an approach for financial instruments.

Outstanding issues on financial statement presentation

The staff presented a proposal that private entities should be required to present a single statement of comprehensive income and not have an option to present, instead, two statements – an income statement and a statement of comprehensive income as currently allowed under IAS 1.

Staff noted that this would be more in line with the underlying concepts, would eliminate an accounting policy choice, and simplify accounting for preparers. It was also noted that private entities generally had few or no items of other comprehensive income. One Board member disagreed with this observation. Another Board member questioned why private entities should be required to present one statement while public entities have an accounting policy choice. After a short debate the Board decided to allow entities a choice of using a single or two statement approach.

A second related issue were the permissible formats of a single statement of comprehensive income. The staff presented four formats. Initially, the staff identified one of the formats as being inconsistent with the proposed requirements, but the previous discussion showed that this format seemed to be also in line with the requirements.

Finally, the staff asked the Board whether the requirement to present a third statement of financial position at the beginning of the earliest comparative period if an entity applied an accounting policy retrospectively, made a retrospective restatement of items or reclassified items should not be applicable to private entities. The Board briefly discussed the issue and, while not agreeing with the rationale presented, agreed not to require this third statement of financial position.

Redeliberation of an approach for impairment of non-financial assets

The staff reminded the Board of the background to this topic. In July 2008, the Board agreed to:

• Modify the general approach for the impairment of non-financial assets to include the 'recoverable amount' and 'value in use' concepts;
• Simplify the requirements for assessing goodwill impairment; and
• Introduce the concept of a cash-generating unit.

The Board agreed with the redraft of the section. However, staff was asked to make sure that fair value was not interpreted as being determined for a distressed situation. Further it was observed that the inability to determine fair value and apply value in use instead seemed contradictory. Some Board members also had further editorial comments to be resolved offline.

Redeliberation of an approach for financial instruments

The staff's final topic for this session was the redraft of the section on financial instruments. The redraft splits the section into (a) Part A on basic financial instruments and (b) Part B on other issues in accounting for financial instruments, reflecting a previous Board decision. At this meeting, only Part A was discussed. The Board had also previously agreed that it should be clarified by way of examples that for many instruments that private entities hold a cost model would be appropriate.

Some Board members were concerned over the use of undefined terms like 'market value' and 'present value' where IAS 39 uses the term 'fair value'. Others had difficulties discussing Part A without Part B. There was general consensus that the final document should clearly identify financial instruments that cannot be carried at (amortised) cost.

Board members questioned the reason why initial measurement of a basic financial asset (liability) was to be made with reference to the fair value of the consideration given rather than the fair value of the financial asset received (given). It was agreed that this paragraphs will be redrafted to make clear that cost will be the fair value of whatever is receivable (for an asset) or payable (for a liability).

Another Board member expressed his concerns over the example on factoring in relation to derecognition. Others were concerned about trying to base derecognition on the notion of transferring 'significant risk and rewards'. It was agreed to revert to the original proposal and allow derecognition only if the entity had no significant continuing involvement with the transferred asset. Some Board members asked why the draft contained a concept of 'linked presentation' (that is, presenting the asset not derecognised linked with the associated liability), something which the Board had not agreed on yet under full IFRS. The staff responded that the proposal is to permit the linked presentation only in limited circumstances as set out in the agenda paper and is based on the requirements for factoring in the current FRSSE standard in the United Kingdom. After discussion, they would reconsider and bring back this issue.

Financial Instruments: Comprehensive Project

The staff informed the Board that this was the first of two sessions at the December meeting. At this first session the following topics were discussed:

• Debrief on the public roundtable meetings on the global financial crisis;
• Assessment of embedded derivatives on reclassification; and
• Impairment of financial assets.

Debrief on the public roundtable meetings on the global financial crisis

Staff presented a summary of the three roundtables held in November and December 2008 in London, Norwalk, and Tokyo. While many issues were raised at the round table with impairment being the most discussed, none of the issues were identified as so urgent as to require changes to be applicable for 2008 reporting periods.

Many participants held the view that any further steps should ensure convergence between IFRS and US GAAP and follow due process (possibly accelerated). It was further noted that a comprehensive review of financial instruments accounting was necessary.

The IASB will publish a summary along with a list of participants in due course as requested by one Board member. Staff stressed that the roundtables had been webcast and recordings are publicly available.

The IAS Plus notes from the three roundtables can be found here:

• 14 November 2008 Roundtable in London
• 25 November 2008 Roundtable in the United States
• 3 December 2008 Roundtable in the Tokyo

Assessment of embedded derivatives on reclassification

The staff introduced the topic by noting that some participants at the round tables highlighted the interaction of IFRIC 9 Reassessment of Embedded Derivatives with the recent Reclassification Amendments to IAS 39/IFRS 7. It was suggested to amend IFRS to make clear that, on reclassification, an entity would be required to assess whether an embedded derivative would have to be separately accounted for under IAS 39.

The staff proposed to amend IFRIC 9 to make clear that reclassifications trigger an assessment of the criteria in IAS 39 on embedded derivatives. The Board agreed strongly, highlighting that nothing else had ever been intended. Further, the staff proposed to require retrospective application. The Board agreed.

The staff continued that the exposure draft for this amendment should be open to comment for 30 days only as this did not come as a surprise for constituents given the publicity about the Board's clear position on the issue. The Board agreed. It was further agreed to propose an effective date for annual periods ending on or after 15 December 2008.

This decision triggered some subsequent issues which the staff presented to the Board. The staff noted that it is not clear whether an assessment of bifurcation of embedded derivatives was to be based on the circumstances that existed on the date of reclassification or at the date of inception. The Board agreed with the staff recommendation to require the analysis being based on the circumstances existing at the date of inception. This decision avoided further subsequent issues.

As a final issue the Board decided to require mandatory classification of the entire contract in the fair value through profit or loss category if a separable embedded derivative cannot be fair valued reliably.

The staff noted that the exposure draft is expected to be issued by next week.

Impairment of financial assets

The staff noted that impairment was by far the most discussed issue at the round tables. Two main themes arose in connection with impairment:

• Different impairment approaches
• The meaning of impairment and effect on earnings

Staff said that impairment will be part of the comprehensive review on financial instruments accounting. At this meeting, only specific aspects were discussed:

• Differentiation between credit-related impairment losses and other fair value changes for AFS debt instruments
• Impairment triggers and reversals of impairment regarding AFS equity instruments

Differentiation between credit-related impairment losses and other fair value changes for AFS debt instruments

Participants at the roundtables highlighted the different measurement approaches for impairments of debt instruments in IAS 39 depending on the classification. Particularly, available-for-sale debt instruments' impairment is based on fair value. It was proposed to split up the total impairment charge into an incurred loss piece (that is, what would have been determined as impairment had the instrument been carried at amortised cost and the impairment provisions for amortised cost instruments had been applied) and a remaining balance. The staff noted that participants, however, were divided on the location of this split. Preparers preferred a split in the performance statement with incurred loss charges being recognised in income, while the remaining balance would be recognised in other comprehensive income. Users preferred disclosing the split in the notes with the total charge being recognised in profit or loss.

The staff asked the Board whether such disaggregation would be useful information. Staff further proposed, if the Board agreed, that this is done by requiring additional disclosures.

The Board had a lengthy discussion on this topic. Particular concerns were expressed over any immediate steps that would be impossible to implement for all entities. Further, it was questioned why assets held at fair value through profit or loss were not included. On this issue it was agreed to ask this question in any resulting exposure draft. Others questioned the urgency of this matter that required something to be done within weeks.

The staff presented the Board with possible approaches to a disclosure requirement. The Board discussed at length possible alterations to improve the proposal.

The staff noted that the FASB would discuss a similar proposal later in the day. The chairman noted that the Board should give its counterpart a clear direction on its views. There seemed to be consensus that any disclosure should make clear the resulting amounts if a fair value measurement impairment and an amortised cost impairment were applied. Again, it was questioned whether entities could generate this information retrospectively.

Impairment triggers and reversals of impairment regarding AFS equity instruments

The Board then continued to discuss impairment-related issues. The staff noted that some participants questioned whether the guidance on triggers for impairment of AFS equity instruments could be improved. There seemed to be no sympathy around the table to address the issue. Staff noted that any impairment trigger for equity instruments would be somewhat arbitrary.

The Board also briefly discussed a staff proposal not to address accounting for reversals of impairments of AFS equity instruments as a matter of urgency. It was decided to discussed with the FASB on these issues and bring them back in January.

Tuesday 16 December 2008

Technical Correction to IFRS 1

The Board agreed, subject to ballot, to amend IFRS 1 (2008) via Technical Correction such that the effective date for the recent Revisions to IFRS is 1 July 2009.

This amendment has been made to avoid unintended consequences related to the adoption of the revised IFRS 3 (2008) and IAS 27 (2008), which are effective 1 July 2009. Constituents had brought to the attention of the IASB that the revised IFRS 1 is effective from 1 January 2009 and supersedes the previous version. However, in paragraphs 36, 37 and 39 of the revised IFRS 1 there are cross-references to the new versions of IFRS 3 and IAS 27, which are not effective until 1 July 2009. Therefore, technically IFRS 1 would provide no guidance on the topics addressed in those amended paragraphs between 1 January and 1 July 2009.

As effective dates are balloted specifically by the Board, the staff that this change could not have been implemented as an editorial correction and, instead, should be balloted. The change will be effective immediately when the written ballots are received.

Liabilities: Amendments to IAS 37

Disclosure – possible obligations

The Board discussed whether specific disclosure requirements were required in the revised version of IAS 37 with respect to possible obligations – those matters that do not meet the definition of a liability (currently called 'contingent liabilities') – and whether the notes to the financial statements should contain details of situations in which it is uncertain that a present obligation exists and the entity has judged that none does.

The staff had suggested that specific requirements could be avoided in IAS 37 because of the operation of IAS 1 paragraphs 122 (disclosure of significant judgements in applying accounting policies) and/ or paragraph 125 (measurement uncertainty).

However, during the discussion they (and several Board members) agreed that neither of those two paragraphs would capture the events intended. The paragraphs in IAS 1 relate to the accounting standards and measurement uncertainties for items recognised in the financial statements. As the items at issue are explicitly not recognised, the disclosures in IAS 1 would not apply.

The Board had an extended discussion, but ultimately agreed that:

• a disclosure requirement should be added to the revised standard; and
• disclosure should be required only if specific indicators that the entity might have a present obligation are met.

The Board discussed what those 'specific indicators' should be. There was general consensus that the indicators should include governmental, legal, and arbitration proceedings (including any such proceedings that are pending or threatened of which the entity is aware). However, there was considerable disagreement about how best to filter the information such that the 'frivolous' items could avoid disclosure.

The Board acknowledged that they were trying to balance the decision-usefulness of information with the inevitably hazardous nature of litigation. Some thought that the general principles of materiality could be used effectively. However, one Board member observed that a frivolous lawsuit for multiples of the entity's book value would always be material, no matter how frivolous the claim was. Another Board member suggested that the only way in which materiality would work to achieve the Board's intention would be to remove all triggers or indicators. If the Board wanted indicators that a possible obligation existed, it could not use materiality as the filter.

Some Board members noted that the Board was using the word 'liability' in different ways to describe where on the spectrum of liability recognition the [potential] obligation was.

The Board seemed to agree that:

• When there was no present obligation, disclosure was not required.
• When there was no present obligation, but there was also uncertainty about whether an obligation might develop, specific disclosures would be required.
• When there was no present obligation, but the outcome (e.g. of a lawsuit) was uncertain, specific disclosures would be required.

The staff agreed that they would return to the Board at a later date with a revised proposal. A Board member suggested that, when they presented these proposals, they should also present an analysis aligning the examples used by the Board to test the recognition principles ('the hamburger', the hospital operation, etc) with the disclosure requirements to ensure that the Board was being consistent.

Conceptual Framework Phase A – Objective and Qualitative Characteristics

Presentation of the staff summary of comments received

The Board was joined by IASB Member Tom Jones and various members of the FASB staff by video and audio link.

The IASB staff presented a preliminary analysis of the major issues raised by respondents to the Exposure Draft of Chapters 1 and 2 of the IASB Framework, which addressed the Objective of Financial Reporting and the Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information. There were some general comments from Board members, but no decisions were asked for. The staff will return with specific issues for decision at subsequent meetings.

Project plan

The Board agreed the following project plan:

The Board also agreed that further public roundtables on Chapters 1 and 2 were not necessary.

General comments

The staff discussed briefly a summary of comments received on the 'preface' to the ED on Chapters 1 and 2 and the Discussion Paper on The Reporting Entity. The staff noted that a number of the issues raised by constituents will feature in future discussions, either at the joint IASB-FASB meeting in March 2009 or other meetings. These include:

• how the Boards intend to finalise the revised Framework (chapter by chapter or all at once),
• the status of the Framework in the IASB and FASB hierarchy, and
• the application of the IASB Framework to not-for-profit entities

Derecognition of Financial Assets

The staff continued its discussions with the Board on open issues arising from the deliberations of the two different approaches to implement the agreed derecognition principle. At this session the Board discussed:

• Practical ability to transfer: impact of puts;
• Change to transferor's perspective: impact on forward examples in flowchart 1; and
• Derecognition of financial liabilities

Practical ability to transfer: impact of puts

The staff reported back on an issue that arose during the October 2008 discussions where it indicated that a transferee who purchased a non-readily obtainable financial asset together with a put option might not have the practical ability to transfer the asset to a third party without attaching a similar option. It thought the transferee was economically constrained transferring the asset without a similar option as the transferring entity would forfeit the benefit of the option.

Some Board members questioned whether this was relevant for flowchart 1 (as presented in the publicly available agenda papers). One Board member noted that he got the impression that people might not like the resulting derecognition while the transferor still retained risks via the written put without this concept of 'economic constraints'. It was also unclear for many at the table what the unit of account was, that is, was the 'asset' the transferred item alone or including the option. Another Board member noted that the concept of economic constraints could lead to recognition of assets that an entity did not control.

Staff confirmed that under flowchart 1 including or excluding the economic constraint test would lead to the same results. It was agreed to remove the references to economic constraints from flowchart 1.

Change to transferor's perspective: impact on forward examples in flowchart 1

Staff reminded the Board about the background to the agenda paper. In November 2008 the staff noted that the derecognition tests in flowchart 1 would return different results if the perspective was changed from that of the transferee to that of the transferor.

Two transactions were analysed by the staff:

• transfer of a non-readily obtainable financial asset with a physically-settled fixed-price forward purchase; and
• transfer of a non-readily obtainable financial asset with a physically-settled total return swap.

While staff admitted that the outcome in the first scenario would not change (as originally concluded), the outcome for the second scenario could change depending on how the asset is defined. The staff presented the Board with three alternative approaches to flowchart 1 as originally proposed (called 1R, 1R² and 1R³). Depending on whether the asset was contractually viewed (that is, what was contracted as the asset) or economically viewed (that is, what was economically transferred) the outcomes could be different for example 2.

The staff noted that it preferred the economic view of the asset, which was equivalent with a component approach. It also recommended adopting flowchart alternative 1R³ (as documented in the agenda paper).

It was noted by Board members that under flowchart 1R³ the first two steps were not required. Staff replied that this was done to keep the same number of steps in the flowcharts. The Board felt uncomfortable with this approach and asked the staff to condense flowchart 1 as appropriate even if this resulted in different-looking flowcharts.

The Board agreed to both the economic view and approach 1R³ subject to changes in the flowchart.

The staff continued with the derecognition of financial liabilities. It was noted that the current model for derecognition of financial liabilities in IAS 39 caused less difficulties in practice. However, a new derecognition approach might establish a principle that could be used for non-financial liabilities and would create increased symmetry between recognition and derecognition of assets and liabilities.

Staff noted that the current model focussed on the entity having a present obligation and that the definition of a liability in the Framework not only encompasses this present obligation, but also an expected outflow of resources embodying economic benefits from the entity. The staff proposed the following economic derecognition principle for financial liabilities:

An entity should derecognise a financial liability or a component thereof when it no longer qualifies as a liability of the entity (that is, when the present obligation is eliminated or the entity is no longer required to transfer economic resources to a third party in respect of the obligation).

Board members noted that the notion of a third party was not necessary and proposed to remove it. Staff and remaining Board members agreed.

The Board had a brief discussion of this definition. Board members were particularly interested in possible different outcomes based on the proposed principle. Staff confirmed that it considered the impact as low.

The Board agreed to pursue the proposed derecognition model for financial liabilities.

At the end of the session, the staff sought confirmation by the Board whether all issues had been properly captured in the list of open issues and all tentative agenda decisions had been appropriately reflected in the agenda papers. While the Board agreed, some Board members were concerned over the way forward, particularly, whether the exposure draft would be, in effect, two exposure drafts proposing both models for financial assets. Furthermore, Board members highlighted that the recent FASB proposals were not aligned to the current proposals of the staff. In the light of constituents urging the boards for converged solutions this might not be a desirable outcome. Staff noted that the vast majority of comment letters received by the FASB on its proposals indicated that constituents indeed asked the FASB to work towards guidance converged with IFRS literature. It also noted that the FASB monitors progress on the IASB's project and decisions.

Finally, staff informed the Board that discussion of this matter will be continued the next day.

Wednesday 17 December 2008 (afternoon only)

Fair Value Measurement

Project plan

Before beginning the first of several sessions this week on aspects of the fair value measurement guidance project, the staff reviewed the proposed project plan. The staff intend to present the following topics at the January 2009 meeting:

• fair value measurement disclosures (taking into consideration the comments received on the exposure draft of improvements to IFRS 7 Financial Instruments: Disclosures);
• an assessment of which fair value measurements in current IFRSs should be included or excluded from the scope of an IFRS on fair value measurement;
• transition; and
• the comment period for the exposure draft.

The staff stated that they had begun drafting an exposure draft of an IFRS on fair value measurement guidance and that they were 'in good shape' to complete the pre-ballot draft shortly after the January 2009 meeting.

Defensive intangible assets acquired in a business combination

The Board held a lengthy debate on the fair value of intangible assets acquired in a business combination that the acquirer does not intend to use directly or intends to use in a way that is different from the way other market participants would use them (referred to as 'defensive intangible assets').

Throughout the discussion, the Board referred to the following staff example:

The Board confirmed its decision in IFRS 3 (revised in 2008) that defensive intangible assets should be recognised and measured at fair value in a business combination. The Board affirmed that it had determined in that IFRS that a defensive intangible asset meets the asset recognition criteria and should not reconsider this decision in the fair value measurement project.

In reaching this decision, the Board did not discuss Situation 1 in any depth, and agreed with the conclusion summarised therein. However, Situations 2 and 3 generated much more comment. Board members and the staff agreed that 'defensive intangible assets' laid bare the tension between several parts of the fair value measurement project-in particular it exacerbated the problems in the notions of market value and entity-specific values that underlay many constituents' concerns.

A Board member noted that there was a fundamental difference between abandoned assets and assets that were 'locked up': an entity could no longer control an abandoned asset and thus it could not be termed to be defensive. For example, a patent might not be renewed, giving others the right to access the patented item.

Whether to provide explicit guidance on measuring defensive intangible assets

The Board decided not provide explicit valuation guidance on measuring the fair value of defensive intangible assets. The Board agreed that the measurement of defensive intangible assets has been developed by practice that has evolved under the current IFRS 3.

In making this decision, the Board agreed with the staff that the fundamental question was whether the ED should propose explicit guidance on how to determine the fair value of a defensive intangible asset (the Board agreed it should not); or include a discussion of the methodologies that might be used, a discussion of the appropriate reference market, etc, similar to the discussion in FAS 157 (the Board agreed that the ED should include such a discussion).

Issues related to IAS 36 and IAS 38

The Board did not agree with a staff recommendation that IAS 36 should be amended to address the impairment testing of defensive intangible assets. Board members were critical of IAS 36 and were of the view that amending it would only make it worse.

The Board did not agree with a staff recommendation that IAS 38 should be amended:

• to provide guidance about determining the useful life of a defensive intangible asset;
• to state that the amortisation period and useful life for defensive research and development intangible assets begins on the date of acquisition because that is the point at which they are available for use (thus avoiding a misinterpretation of paragraph 97, which might be read to suggest that defensive research and development intangible assets are indefinite lived until their completion date); and
• require entities to distinguish in their disclosures the intangible assets acquired in a business combination between those being actively used in the business and those being used defensively, by asset class.
• Restrictions on assets and liabilities

The staff introduced this session by noting the Board's previous decision that a fair value measurement should consider the attributes (or characteristics) of an asset or liability that a market participant would consider when pricing the asset or liability. Implicit in this decision is that a market participant would consider a restriction on an asset or liability only if that restriction would transfer to market participants. The staff noted that FAS 157 addresses restrictions in the context of assets, but not liabilities. There is limited guidance in IFRSs about restrictions on assets and no guidance about restrictions on liabilities. The staff summarised the guidance in FAS 157 and that existing in IFRS. In addition, the staff noted that the IFRIC had referred an issue to the Board about restrictions on financial assets. The issue before the IFRIC turned on the meaning of 'immediate access' in IAS 39.AG71.

With reference to assets, the Board agreed that, if a restriction on the use or sale of an asset that transfers to market participants, the restriction is an attribute of the asset and should be reflected in a fair value measurement. In addition, if restrictions on an asset would not transfer to a market participant buyer, they would not affect the fair value of the asset.

The Board agreed that the ED should clarify that 'the ability to access' in the definition of a 'Level 1' input means that the entity only has to be able to access the market for the asset or liability, not necessarily that the entity must sell the asset on that date (that is, the 'reference market' is the market in which the entity would sell an asset. This conclusion applies even though it could not sell the asset at the reporting date because of restrictions [assuming no forced sale]).

With respect to liabilities, the Board agreed that the fair value of a liability is, almost by definition, an exit value. Restrictions on transfer do not affect the fair value measurement. There was some discussion of the effect on fair value of privileges (as opposed to restrictions) (e.g. prepayment rights) on the determination of fair value. The Board agreed that two loans, identical in all respects except that one may be repaid in full at any time and the other may be repaid only at term, would have different fair values.

Valuation premise

The Board discussed whether a fair value measurement consider whether market participants would maximise the value of an asset principally through its use in combination with other assets as a group (in-use) or on a standalone basis (in-exchange).

Board members thought that the staff had reached the correct conclusions and were prepared to support their recommendations, but that the route by which they reached those conclusions and recommendations was extremely tortuous and not always intuitive. They encouraged the staff to explain very clearly and carefully in the Basis for Conclusions the rationale for the Board's conclusions.

The Board agreed that:

• a fair value measurement considers whether market participants would maximise the value of an asset principally through its use in combination with other assets as a group or on a standalone basis;
• the valuation premise and highest and best use concepts are not relevant for financial assets;
• the valuation premise should not explicitly be reflected in the definition of fair value; and
• the exposure draft should not change or introduce new terminology for the valuation premise.

With respect to liabilities, the Board agreed that the valuation premise and highest and best use concepts are not relevant. This conclusion is consistent with the conclusions in FAS 157, which applies these concepts to assets only.

Derecognition of Financial Assets (continuation from Tuesday)

The staff continued its discussions on derecognition of financial assets and financial liabilities. At this session staff presented the Board with certain fact patterns to analyse the interaction of the derecognition principles for financial assets and financial liabilities. These issues were:

• Collateral arrangements which are not transfers;
• Secured liabilities with recourse; and
• Secured liabilities without recourse.

Collateral arrangements which are not transfers

The first issue was a collateral arrangement, in which the creditor had custody of and permission to sell or lend the securing assets. In this fact pattern, the staff recommended that these transactions must be assessed for derecognition with the exception of brokerage agreements where the transferee acts in an agency capacity. After some clarifications of the transaction, the Board agreed.

Secured liabilities without recourse

The second issue addressed secured liabilities where the lender had recourse, that is, the debtor accepts restrictions on the asset. Staff proposed three possible alternatives for an accounting treatment:

• The debtor could offset the two; that is, report the securing asset net of the obligation;
• The securing asset could be derecognised by the debtor and recognised by the creditor. The secured liability could be derecognised by the debtor, and the receivable derecognised by the creditor; and
• The secured liabilities and securing assets could be accounted for without special treatment, in the same way as unsecured liabilities and unpledged assets.

The staff recommended the third alternative. The Board agreed.

Secured liabilities without recourse

The third issue was split in two. In a general non-recourse situation, a lender can only look at the specified asset(s) in case the debtor defaults, but has no 'control' over what the debtor does with these assets. As the specific second alteration, the repayment of a liability depends on the specific assets the lender has recourse to.

The staff proposed three possible accounting responses:

• Nonrecourse liabilities could be offset against the securing assets. The debtor could offset the two and report the securing asset net of the liability;
• Liabilities secured under nonrecourse agreements and the securing assets could be accounted for in the same way as other secured liabilities and securing assets; and
• Nonrecourse provisions could be considered effectively to be call options, and thus the liability need not be recognised and related securing asset should be derecognised by the debtor.

Staff recommended the third alternative for both subsets of scenarios. The Board asked for further clarifications on the fact patterns and the way the transactions worked. Finally, it agreed with the staff proposal.

To further test the principles, the staff presented, in an Appendix (available in Agenda Paper 10F), further three cases that, while economically considered to be equivalent, could give different accounting answers under the proposed models. While the Board agreed with the first to cases, the third caused more confusion. It was based on a self-liquidating non-recourse fact pattern. The Board discussed further alterations to this fact pattern (including a situation where an entity promises to pay back a loan from future revenues) and had a lengthy debate on the appropriate treatment. This discussion unveiled broader issues of accounting, not part of the project. It was agreed that the issues identified during this discussion that relate to the scope of the project will be brought back.

Thursday 18 December 2008

Fair Value Measurement (continuation from Wednesday)

Highest and best use: Application of a 'change of use option'

The Board noted that it had taken a tentative decision that when an entity measures an asset at fair value and currently uses the asset together with another asset in a use that differs from their highest and best use, the entity may need to split the fair value into two components: (a) the fair value of the asset assuming its current use and (b) a 'change of use option' reflecting the entity's ability to switch the asset to its highest and best use. The issue could arise in either of the following situations:

• when the assets are being measured at fair value in a business combination, or
• when the assets are being re-measured at fair value under the revaluation model in IAS 16 or IAS 40.

The staff proposed that the forthcoming exposure draft should provide explicit guidance for these situations, and noted several approaches that it had seen (either in major accounting firms' IFRS accounting manuals or elsewhere), some of which it could support others that it did not.

At least one Board Member disagreed with the staff recommendation, being fearful of creating 'a monster'. The Board Member noted that any occasion when an entity purchases a bundle of assets, it had to make arbitrary allocations. If the Board was going to provide guidance in the ED for every circumstance in which this was difficult, it would introduce lots of rules affecting relatively marginal, specialised situations that would be understood by relatively few experts.

However, a majority of the Board agreed that the forthcoming ED should provide guidance. A majority of the Board would accept the two approaches, which will be included in the ED for constituents' comments: The approaches used the following example:

Entity A acquired land and a factory building in a business combination. The land is currently zoned for industrial use. Nearby parcels of land are being rezoned to residential use and developers have begun building high-rise condominiums in the area. Entity A determines that the highest and best use of the land is residential use for high-rise condominiums. Therefore, the fair value of the land assumes that the factory is demolished and the land will be made available to build the condominiums. On this basis, the fair value of the site as a whole is CU300,000, net of costs to demolish the factory. The value of the factory, assuming its current use, is CU100,000. The value of the land, assuming its current use, is CU30,000.

The approaches to be included in the ED are:

Approach A: value the land as the difference between the total site in its highest and best use (in this case CU300,000) and the value of the factory in its current use (CU100,000), or CU200,000.

Approach B: This approach would result in Entity A recognising the following: Factory value in current use 100,000; Land value in current use 30,000; and a 'Change of Use Option' that reflects the option to convert land to an alternative use 170,000 (300,000 - 30,000 - 100,000).

Annual Improvements Project (AIP) 2009

IAS 39: Treating loan prepayment penalties as closely related embedded derivatives (2007 AIP issue)

The Board agreed to replace paragraph IAS 39.AG30(g) along the following lines:

(g) A call, put, or prepayment option embedded in a host debt contract or host insurance contract is not closely related to the host contract unless:

(i) the option's exercise price is approximately equal on each exercise date to the amortized cost of the host debt instrument or the carrying amount of the host insurance contract; or

(ii) the exercise price of a prepayment option [is approximately equal to an amount that would]* reimburse the lender for the present value of lost interest for the remaining term of the host debt contract. Lost interest is the excess of the effective interest rate of the original contract and the effective interest rate for a contract with the same terms as the host debt contract.

The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument under IAS 32.

The staff paper used the phrase 'no more than reimburses the lender' in sub-paragraph (g)(ii). Board members thought that this was inconsistent with sib-paragraph (i) and implied a level of precision that the Board probably did not intend. The Board agreed and instructed the staff to make sub-paragraph (g)(ii) consistent with (g)(i).

IAS 1: Classification of the liability component of a convertible instrument (2007 AIP issue)

The Board noted that in the 2007 AIP they had concluded that classifying the liability on the basis of the requirements to transfer cash or other assets rather than on settlement better reflects the liquidity and solvency position of an entity, and it proposed to amend IAS 1 accordingly. However, it acknowledged that the wording proposed in the ED had not reflected the Board's intent.

The Board agreed that IAS 1 paragraph 69 should be amended as follows:

69 An entity shall classify a liability as current when: [...] (d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). The potential settlement of a liability by the issue of equity instruments [when the terms of the liability instrument permits settlement in shares does not affect]* its classification as current.

The staff paper used the phrase 'is not relevant' to the classification. Board members noted that the potential settlement through the issue of equity instruments must be a feature of the instrument and not a matter of management intent.

IAS 17: Classification of leases of land and buildings (2007 AIP issue)

The Board did not agree with a staff recommendation that this issue should be subsumed in the forthcoming Leases Discussion Paper. Board members acknowledged that they had caused the problem when the IASB had amended IAS 17 in 2003 and they had an obligation to constituents to make IAS 17 operational.

After discussion, the Board agreed to amend IAS 17 but revise the amendment proposed in the 2007 Annual Improvements ED to address various consequential amendments identified in the comment letters, to expand the Basis for Conclusions to set out the Board's rationales underlying the change from its previous decision in 2003 and explain why it is imperative to do so at this time outside of the Board's active project on leases. No amendments will be made to IAS 40.

Transitional relief will be made, so that if an entity had a 'previously published fair value' of a lease, it could use that as the transitional fair value rather than attempting a 'with hindsight' exercise.

Next steps: All 2007 AIP issues discussed

The staff will prepare ballot drafts of the three 2007 AIP issues. These issues will be included in the 2008 Annual Improvement Amendments document, rather than as a separate document. The effective date for these amendments will be 1 January 2010.

New issues for 2009 AIP

Guidance inconsistency in Appendix to IAS 18

The Board considered whether paragraph 17 of the Appendix to IAS 18 (dealing with initiation, entrance, and membership fees) was inconsistent with the general principles in IAS 18 and in particular with IAS 18.13, which addresses multiple element transactions.

The Board agreed that the first sentence of paragraph 17 of the Appendix to IAS 18 should not be read in isolation – the paragraph goes on to give examples of situations in which revenue from identifiable components of a single transaction should be identified.

For this, and other reasons highlighted by the staff, the Board did not add this issue to the 2009 AIP.

IAS 40: Transfers from Investment Property (to Inventory (IAS 2) or Held for Sale (IFRS 5))

The Board discussed a potential inconsistency between IAS 40 Investment Property, IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and IAS 2 Inventories in situations when an investment property is now being held for sale.

The staff explained that there was confusion around the operation of IAS 40 paragraphs 56 and 58 regarding reclassifications out of investment property when management determines that it will sell a non-current asset. In addition, there was the anomaly that when an entity transferred an investment property to inventory (IAS 40.57(b)), it ceased to be remeasured at fair value, but reverted to the cost method under IAS 2.

The Board discussed these issues for some time. Several expressed dissatisfaction with the relatively permissive nature of the fair value alternative in IAS 40 and were in favour of keeping investment properties for which the fair value model had been chosen in that model until disposal. The Board noted that the measurement provisions of IFRS 5 do not apply to investment property measured using the IAS 40 fair value model (IFRS 5.5(d).

The Board agreed:

• To amend IAS 40 paragraph 60 to remove the reference to 'inventories' and 'IAS 2' (i.e., IAS 40.60 will address transfers from investment property to owner-occupied property only) [that is, restricting transfers from the fair value model];
• To amend IAS 40 to require investment property accounted for under the fair value model to be analysed between 'investment property' and 'investment property held for sale'; and
• To require disclosures similar to those required for non-current assets held for sale in IFRS 5 whenever investment property is held for sale.

A majority of the Board were in favour of including this issue in the Annual Improvements Project. The staff stated that this decision could be reviewed once the Board had seen the proposed changes.

Customer-related Intangible Assets

The Board noted that in light of the explicit guidance in IFRS 3R, the IFRIC had decided at its November 2008 meeting that the issue of customer-related intangible assets could be best resolved by referring it to the IASB and the FASB with a recommendation to review and amend their respective business combination standards by:

• removing the distinction between 'contractual' and 'non-contractual' customer-related intangible assets recognised in a business combination and focusing on the nature of the relationship rather than how it is established; and
• reviewing the indicators that identify the existence of a customer relationship in paragraph IE28 of IFRS 3 and including them in the standard (IASB only).

Because IFRS 3R is a converged standard, the staff asked if the Board would like to consider this amendment proposal made by the IFRIC as a joint project with the FASB. The Board asked the staff to discuss the extent of such a project with the staff of the FASB and return to the Board with more specific proposals.

Proposed Agenda Item: Rate-regulated Activities

The Board considered a request to add to its technical agenda a project on rate regulated activities. The issue is whether regulated entities could or should recognise a liability (or an asset) as a result of rate regulation by regulatory bodies or governments. The IFRIC had tentatively agreed not to add this item to its agenda at its November meeting, citing the reason that divergence in practice in jurisdictions using IFRSs does not seem to be significant.

The staff noted that, in bringing the Agenda Proposal to the Board, it had restricted the scope of the project to those kinds of regulation with the potential to lead to the recognition of assets and liabilities; this meant that 'price cap' regulation would be excluded because, in the staff's view, this type of regulation would rarely, if ever, have such potential.

Board members agreed with the staff's approach, but several were worried that the analysis of 'price cap' and similar types of regulation would inform and provide the background to the Board's potential conclusions about the accounting effects of other types of regulation.

A Board member spoke in favour of the project and complimented the staff analysis. He noted that the current definitions of an asset and a liability should be able to solve many of the accounting issues, although there will be some nuances around 'control' that must be resolved. He acknowledged that the project risk was how far towards US GAAP would the IASB want to go: too 'principles based' and constituents would want the detail in US GAAP; too much like US GAAP and constituents would complain about excessive rules. He favoured an approach that developed the Framework guidance on assets and liabilities without going into excessive, jurisdictional-specific detail.

The Board agreed that it should develop an IFRS on this topic and that an 'interim or holding' IFRS (similar to IFRS 4 and 6) should not be prepared.

The Board approved the proposed project timetable, which proposes publishing an exposure draft in May 2009, but added that they thought such a timetable was ambitious.

IFRS 2 Share-based Payment – Group Cash-settled Share-based Payment Transactions

In a previous meeting, the Board tentatively confirmed a proposal in the ED to include all forms of group share-based payments in the scope of IFRS 2 Share-based Payment, regardless if they are equity-settled or cash-settled. In addition, to achieve this objective the Board also concurred with the IFRIC's recommendations to amend some of the defined terms in IFRS 2 rather than amend IFRIC 11 IFRS 2-Group and Treasury Share Transactions and to make it clear that:

• (a) the receiving entity accounts for the goods and services received in accordance with IFRS 2; and
• (b) the settling entity accounts for the settlement in accordance with IFRS 2.

At this meeting, the Board considered possible alternatives to measure these group arrangements and the IFRIC's recommended changes from the proposed classification for accounting in the ED.

The Board agreed with the staff's preferred approach but spent much time disagreeing about how they had expressed it in the meeting papers. Ultimately, the Board agreed that the share-based payment expense should be measured in the separate financial statements of the subsidiary as equity-settled when the employees are given the entity's own equity instruments or when the entity has no obligation to settle; in all other circumstances, it is measured as asset-settled. (This has the effect that a share-based payment could be equity-settled in the separate financial statements of a subsidiary but asset-settled in the consolidated financial statements of the parent.)

The Board agreed to this approach, citing the following advantages:

• It always records an IFRS 2 expense on the subsidiary's books. This expense attribution is a definite improvement on the model under IAS 19 for group benefit plans. The IAS 19 model requires the subsidiary to record an expense based only on the amount of cash contribution paid.
• It addresses two concerns raised by respondents to the ED about measuring group cash-settled share-based payment transactions as cash-settled. Respondents did not agree that the subsidiary should:
  • recognise a liability when it has no obligation to settle the payment to the employees, and
  • remeasure the parent's equity contribution based on changes in the value of the parent's liability.
• It provides a reporting basis consistent with the entity perspective in the subsidiary's separate financial statements.
• It provides a broad and consistent principle that all separate entities can apply to group share-based payment transactions. Though not the main goal of this project, this also preserves the existing guidance in IFRIC 11 for group equity-settled share-based payment transactions.

Next steps

The staff will prepare a ballot draft (likely to be circulated in February, given other demands on the Board's time), with any sweep issues discussed at the February or March Board meeting. The staff will also prepare an assessment of whether re-exposure is required. One Board member indicated that he was likely to dissent to the amendment.

Fair Value Measurement

The Board continued its deliberations on a proposed fair value measurement standard. At this session, the staff presented three issues:

• Reference market
• Day one gains or losses
• Control premiums

Reference market

Staff introduced the topic by providing background information including the preliminary view of the Board that fair value should be determined by reference to the principal market. Staff noted that there are at least four approaches to defining the reference market:

• Reaffirm the Board's preliminary view in favour of the principal market approach;
• Pursue a most advantageous market approach;
• Define the reference market as the market in which the entity expects to transact; and
• Be silent about the reference market.

Staff recommended the 'most advantageous market approach'. The Board was informed that transportation cost should be added to the 'most advantageous market approach'. It was also proposed to include words on capacity of the reference market.

Board members discussed both conceptual and practical issues of the approach by the staff in length. Some Board members showed continued sympathy for the principal market approach. Others were deeply concerned over the burdensome search for such an advantageous market, so that in practice entities will often end up with the principal market. Many Board members leaned towards a 'principal market unless the entities proves that a most advantageous market exists' approach.

It was agreed that a redrafted definition will be brought back to reflect the outcome of the discussion.

The staff continued to ask for the Board's input on whether guidance is needed for the reference market determination when there is no observable market. The staff proposed to clarify that in this situation an entity should look at the characteristics of market participants with whom the entity could transact. The Board had some discussion on this issue going into broader issues. The Board seemed to agree to the staff recommendation subject to changing 'could transact' to 'would transact'.

Day one gains or losses

This was a continuation of a discussion at the November 2008 meeting. The staff presented three possible approaches for the accounting treatment of day one gains or losses:

• Prohibit day one gains or losses in all circumstances;
• Require day one gains or losses in some circumstances, such as when the initial fair value measurement is based entirely on observable market inputs (the current approach in IAS 39 Financial Instruments: Recognition and Measurement); and
• Require day one gains or losses even when the initial fair value measurement is derived using unobservable inputs (the approach in FASB Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157)).

Staff recommended adopting the third approach and recognizing day one gains or losses even for level three fair values. The Board had a lengthy discussion on this issue with some Board members expressing their strongly held views. Those Board members were concerned that this would enable entities to generate profits up front that do not exist just because the model calculated a number. Others believed this would be better addressed on a standard level and that this should not be addressed in the fair value standard, but in the standard by standard analysis on use of fair value in IFRSs.

The Board agreed by majority vote to pursue the staff recommendation with amended wording and integrating language that would make clear that the transaction price on day one is presumed to be fair value so that entities must 'prove' that a day one gain or loss exists.

The Board further agreed that the proposed standard would not address subsequent accounting for deferred gains or losses. With regard to transitional requirements it was agreed to bring this issue back at a future meeting.

The Board also agreed to the disclosure requirements proposed by the staff.

Control premiums

The staff presented a agenda paper that had been developed based on the staff's understanding of the tentative decision by the Board not to reflect blockage discounts and other discounts and premiums in fair value measurement at all levels. The staff asked to reconsider its decision on control premiums. The Board, particularly one Board member, responded to the staff that it misunderstood the Board's decision. The Board decided not to reconsider its decisions with regard to discounts and premiums.

Financial Instruments – Comprehensive Project (continuation from Monday)

(FASB staff and members joined by video)

The Board continued its discussions on financial instruments issues.

Impairment disclosures

The first issue discussed were enhanced disclosures on impairments. The FASB staff informed the Board that the FASB has agreed to propose an approach to disclose incurred losses on certain instruments that are fair valued.

Under the FASB proposal disclosure of the following for all investments in debt instruments other than those classified as at fair value through profit or loss would be required:

1. pre-tax profit or loss as though the instruments had been:
   • a. classified as at fair value through profit or loss; and
   • b. accounted for at amortised cost.
2. the following amounts in a way that permits a comparison:
   • a. the carrying amount in the statement of financial position;
   • b. fair value; and
   • c. amortised cost.

This disclosure would have to be provided in tabular format as follows:

The Board discussed certain aspects of the table, the information it was aimed to provide and possible improvements. Some Board members wanted a reconciliation from pro forma to reported profit or loss. The staff responded that they will pick up all proposal by the Board. Some were concerned over the practicability of such a reconciliation and if such a reconciliation was proposed then this question must be asked.

In response to a question by the Board, the FASB staff informed the Board that it planned to issue its exposure draft before Christmas with an effective date of 31 December 2008 with no comparatives to be reported. The Board agreed to adopt this approach.

One Board member asked whether the US proposals to eliminate the guidance on impairment of certain beneficial instruments and transfer it to the general guidance in SFAS 115 would create differences. It was highlighted that, while differences remain, it moves US GAAP closer to IFRS with this 'rationalisation'.

The FASB staff also informed the Board that the plan to issue an exposure draft to clarify the accounting for synthetic CDO instruments, which would also align US GAAP and IFRS.

Fair value option

The staff noted that participants at the roundtables on the global financial crisis asked the Board to review the guidance on the fair value option. Topics of concerns were:

• scope of the FVO;
• eligibility requirements for the FVO; and
• ability to transfer out of the FVO category.

The staff explained that participants wanted to converge the guidance with US GAAP. The staff continued that it had approached constituents that were involved in the development of the revised fair value option. The staff recommended to look at the FVO option as a package, possibly as part of the comprehensive review on financial instruments reporting, as any piecemeal amendments would run the danger of decreasing investors' confidence. The chairman gave an update on the views by the constituents approached, particularly the ECB and the Basel Committee.

The Board agreed.

The staff raised an additional issue by one of the participants that the 'different' definitions of the 'held for trading' category under IFRS and US GAAP would lead to divergence. It was seen as to allow reclassification out of fair value measurement more frequently under US GAAP. The Board was asked whether to provide more guidance. The Board agreed with the staff recommendation not to provide such additional guidance.

Accounting for CDOs

The Board agreed not to address the accounting for embedded derivatives in certain CDOs in the light of the FASB's upcoming proposal which would align the guidance in US GAAP with IFRS.

IFRS 7 Issues

This session aimed to seek Board's input on certain minor issues identified during the discussions on improving IFRS 7 in the light of the financial crisis. Constituents were concerned over some burdensome minimum disclosure requirements and that qualitative and quantitative disclosures are not integrated. The staff proposed a series of minor amendments. As a general amendment the staff proposed to change IFRS 7.32 by adding a statement that qualitative disclosures and quantitative disclosures should be integrated. The Board agreed.

The following list summarises the minor issues, the staff recommendation and the Board's decision:

The staff recommended to the Board to process the agreed changes via the annual improvements process. The Board agreed.

Friday 19 December 2008 (morning only)

Fair Value Measurement – Measurement of Liabilities

The Board continued its deliberations on an exposure draft of a proposed fair value measurement standard.

Measuring the effect of credit standing

The Board discussed whether the forthcoming IASB exposure draft should include two changes from Statement 157 with respect to:

• The credit standing of a liability is an attribute of the liability.
• Regulatory restrictions that require liabilities to meet certain requirements are attributes of the market in which a liability can be transferred. The idea that a market must be 'legally permissible' applies equally to markets for liabilities as for markets for assets.

The Board did not support the staff recommendation. Rather the Board seemed to be of the view that if an entity needed to transfer a liability (rated as BB) and could only do so if it was rated A, the additional 'cost' of upgrading the credit standing of that instrument to A would almost certainly be reflected in a reduced credit standing of other liabilities.

Credit standing

The Board discussed a staff proposal to include in the Invitation to Comment on the forthcoming exposure draft questions about credit standing.

The questions might include the following:

• Does a measurement described as fair value necessarily include the credit standing of a liability, both on initial recognition and in subsequent measurement? If not, what measurement do you support and how is it consistent with your notion of fair value?
• Does a measurement of liabilities that includes the effects of changes in credit standing enhance users' ability to make investment and stewardship decisions? If so, how do users employ the information? If not, what alternative do you propose and how would it provide more useful information?
• Is it possible to isolate and compute the effects of (a) changes in the credit standing of a liability from (b) changes in the credit spread unaccompanied by a change in credit standing from the total change in the fair value of a liability? If so, how would you propose that the computation be made?

The Board agreed that the questions raised by the staff were excellent questions and should be asked of constituents, but not in the ED on fair value measurement. They were properly the subject of a separate document.

The staff undertook to prepare an Invitation to Comment on the topic of Credit Standing to be issued in early 2009. The earliest that a draft of the document could be available for Board review would be February 2009, with publication likely either late in 2009 Q1 or in 2009 Q2.

Fair value of liabilities

The Board had a lengthy discussion about how to measure a liability. The staff stresses that this project did not address whether fair value was the right measurement basis for liabilities. That was a question of 'when to recognise a liability at fair value', something outside the scope of this project. The discussion was intended to decide whether the IASB's ED should provide guidance beyond that in US GAAP.

The Board ultimately agreed that the ED should:

• define the fair value of a liability as:

  The price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date

• provide guidance about how to measure the fair value of a liability when a transfer price is not observable, beyond that contained in FAS 157.

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