Monday 19 January 2009 (afternoon only)
 Derecognition
(FASB staff participated by video link.)
The Board continued its deliberations on the upcoming ED on derecognition of financial instruments. The staff gave the Board a brief update on where it was at the moment and what issues would be discussed at the January meeting. At this meeting the following issues were presented:
- Transfers involving derivatives, hybrid instruments and equity instruments
- Transfer of a component of an asset = different asset after transfer?
- Similar criterion for transfers of groups involving financial assets
- Linked presentation (will be discussed at Thursday's session)
Transfers involving derivatives, hybrid instruments and equity instruments (D/HI/EI)
The staff informed Board members that the Board would have to decide whether components as defined in flowchart 2 of the staff proposals should specifically exclude transferred portions of derivatives, hybrid instruments with separable embedded derivatives, and equity instruments. The staff proposed four alternatives (table below taken from the observer notes):
| Alternatives | Portions of D/HI/EI* that involve specified and/or proportionate cash flows | Portions of D/HI/EI that involve specified and/or proportionate cash flows (including those instruments that could be assets or liabilities)
| Portions of D/HI/EI* that involve specified and/or proportionate cash flows or other future economic benefits (incl those instruments that could be assets or liabilities) |
| 1 | NO | NO | NO |
| 2 | YES | NO | NO |
| 3 | YES | YES | NO |
| 4 | YES | YES | YES |
*D/HI/EI = Derivatives, hybrid instruments with embedded derivatives that require bifurcation or equity instruments.
The Board discussed, as an example, an interest rate swap. It was highlighted that it could be seen as one net stream or two streams (one inflow, one outflow). Board members seemed to come from different opinions on what the asset was and, hence, had different opinions on which alternative was appropriate.
The staff proposed alternative 4, which was a broad definition. However, the Board agreed on alternative 2, which would keep the component definition in IAS 39.16. The Board also agreed that the derecognition tests in flowchart 1 refer to 'cash flows or other future benefits'.
Transfer of a component of an asset = different asset after transfer?
This issue was a follow-on issue resulting from the discussion at the December Board meeting on non-recourse secured borrowings: Does the transfer of a component lead to the original financial asset ceasing to exist. As a consequence, any gain/loss resulting would have to be recognised when the transaction was entered into. It was highlighted that under a full fair value model this would not render any different outcome.
The staff recommended that the components a transferor retains are accounted for as new assets. After brief discussion, the Board agreed.
Similar criterion for transfers of groups involving financial assets
The staff sought the Board's input on whether a similar criterion is necessary for transfers of components of groups of whole financial assets and for transfers of a group of whole financial assets.
The Board agreed with the staff recommendation that, for transfers of groups of whole financial assets, the similar criterion in IAS 39.16 could be deleted. The staff noted that, as a consequence, the 'continuing involvement' step and the 'practical ability to tansfer' test in flowchart 2 would be applied to the group as a whole.
On the issue of components of groups, the staff noted that any decision must be consistent with the Board decision on transfers involving derivatives, hybrid instruments, and equity instruments. The Board was interested in the consequences for certain scenarios and said that the guidance should not lead to confusion amongst constituents what it was aiming at.
The Board, after a short discussion, agreed to strike out 'similar' from the component definition of IAS 39.16 for components of groups, but that the guidance was to make clear that:
- None of those assets can be assets that can, during their life, be an asset or a liability
- None of those assets can be equity instruments that involve future economic benefits other than cash flows (for example, shares)
Finally, the staff gave the Board a brief update on the comment letters received by the FASB on its proposed changes to the US consolidation standards.
Leases
(FASB staff participated by video link.)
The staff informed the Board that the FASB has made the decision that lessor accounting (including subleases) should be further analysed and included as a high level discussion in the upcoming discussion paper (DP) with specific questions, but without changing the scope of the DP.
The staff noted that the FASB has also discussed whether in-substance purchases should be within the scope of the project, but decided no change in scope.
Furthermore, FASB discussed how a right-of-use model as proposed for lessees in the DP could be applied to lessor and decided that its DP should have a high-level discussion of lessor accounting.
The staff asked the Board whether it was willing to defer publication of the DP to include the outcome of the FASB staff analysis.
The Board discussed several aspects of these outcomes of the FASB discussion and the possible impact on the IASB's project, particularly on the timing and possible delays. Staff was asked how long the additional analysis by the FASB on lessor accounting would take. Staff responded that could be a matter of weeks, but possibly a month.
The chairman noted that this would cast doubt over the 2011 completion goal and expressed concerns over the massive changes of the Board membership at that point. He proposed that the IASB should go ahead with the DP as it stands and publish any output from the FASB as a supplementary DP. The IASB DP, to be issued shortly, should highlight that there is more to come.
The Board agreed.
Tuesday 20 January 2009
Conceptual Framework Phase A - Objective and Qualitative Characteristics
The Board commenced its redeliberations of Chapter 2 of the Exposure Draft of Phase A of the Conceptual Framework project: Qualitative Characteristics and Constraints of Financial Reporting. In particular, the Board discussed:
- whether the revised Framework should classify or somehow distinguish the qualitative characteristics, and if so, whether the classifications in the ED continue to be appropriate; and
- whether the term 'reliability' should be replaced by 'faithful representation' as proposed in the ED.
Classifying the qualitative characteristics
Board members agreed that a distinction needed to be made and that the proposal in the ED between 'fundamental' and 'enhancing' was appropriate.
However, the fact that a qualitative characteristic was not labelled as 'fundamental' should not be taken to mean that it was 'not important'. This would need more careful explanation. In addition, the Board agreed that there was no hierarchy implied in the enhancing characteristics. Board members found the proposals a significant improvement over the existing guidance and something that helped to structure their thinking. Several agreed that, for any given issue, the relative importance of the various enhancing characteristics would differ, but that they were all necessary components of relevance and faithful representation in financial reporting.
Reliability vs. Faithful Representation
The Board reaffirmed its desire to use 'faithful representation' in preference to 'reliability' as a qualitative characteristic.
Although some Board members were cautious about losing the term 'reliable' from the general IFRS lexicon, other Board members and IASB senior staff noted that 'reliable' was one of the most problematic terms in that lexicon. Some used it to imply precision; others used it as an excuse to avoid recognising liabilities; others to imply verifiability. The Board concluded that the only way to avoid this misuse and the consequent mis-communication was to focus on what the Framework was trying to communicate was to use a different term. 'Faithful representation' was perhaps not the ideal term, but it was the best they had.
Conceptual Framework Phase C - Measurement
The Board continued its discussions of the chapter of the Framework devoted to measurement. No formal decisions were made, although the Board did give a very strong indication of its views at several points.
Careful communication of what the Board was trying to achieve in the Framework was also a theme in this discussion, particularly as many Board members had misunderstood what the staff had proposed in the agenda paper.
Reducing the number of potential measurement bases
The Board discussed a proposal that some measurement bases previously considered candidates for consideration be eliminated. The staff suggested that reducing the number of measurement bases in the Framework (assuming a mixed-basis measurement model) would simplify and thus improve the Framework. The staff proposed to eliminate the following:
- Actual or estimated past entry prices, and past estimated exit prices;
- Forecast future prices, and forecast future exit prices; and
- Value in use.
Many Board members thought that by eliminating 'past prices', the staff was suggesting eliminating historical cost accounting. The staff explained that this was not their intention. An asset or liability would be recognised initially at a current price. That initial amount might or might not be remeasured. However, trying to determine past prices or future prices was an unnecessary theoretical exercise. With this explanation and clarification, the Board agreed with the staff recommendation.
With respect to value in use, the Board agreed with a suggestion made by the US Financial Accounting Standards Board in an educational session earlier in January, that value in use be considered a present value technique and be subsumed in the other 'non-price based' measurement methods.
The Board agreed that, for the moment, the various candidates could be grouped into two broad categories: 'Actual prices' and 'Non-price amounts'. Actual prices would include actual or estimated current market entry prices and estimated current market exit prices. Non-price amounts would include 'market participant view amounts', such as fair value-based amounts (for example, those used in FAS 123R), and 'entity-specific amounts', such as value in use.
Conceptual Framework Phase D - Reporting Entity
The Board discussed various issues raised by respondents to the Board's Discussion Paper Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity. The decisions made in this session will be accommodated in the next phase of this project, which is an exposure draft due later in 2009.
Definition of the reporting entity
The Board agreed that the reporting entity should be described and defined in the Framework as:
A reporting entity is a circumscribed area of economic activity whose financial information has the potential to be useful to present and potential equity investors, lenders, and other capital providers in making decisions in their capacity as capital providers.
The Board agreed that a reporting entity would usually have 'observable boundaries' that would have legal or contractual rights attached to them. This would permit (not preclude) a branch or segment of a legal entity being a reporting entity.
The Board agreed to clarify that a reporting entity should be determined based on the economic activities the entity is capable of or authorised to conduct and agreed that changes in Phase A (Objectives and Qualitative Characteristics) regarding the primary users of financial reports should be carried over to the definition of a reporting entity.
Implications of the definition
With almost no discussion, the Board agreed the following implications of the definition of the reporting entity:
- A reporting entity need not be a legal entity
- That the ED should clarify that a legal entity likely would (but not necessarily) meet the definition of a reporting entity
- A branch or segment of a legal entity could meet the description of a reporting entity
Group reporting entity
With respect to the group reporting entity, the Board agreed that:
- The ED should acknowledge both the controlling entity model and the common control model, and should include a discussion of when the common control model might be appropriate. (The FASB in an educational session earlier in January 2009 had suggested that the controlling entity model should be used in most cases. The IASB thought this was too prescriptive for a concepts-level document.)
- The ED should not discuss the risks and rewards model as a standalone model but discuss it in the context of complementing the controlling entity model (if appropriate)
- The ED should not discuss models other than the controlling entity model and the common control model.
Consolidated and parent-only financial statements
While agreeing with what the staff were proposing, the Board disagreed with how they had expressed their proposals in the agenda paper, especially a proposal that the 'financial statements of an entity that does not have a subsidiary, affiliate, or venturer's interest in a jointly controlled entity should be considered consolidated financial statements', which they thought was particularly unhelpful.
The Board seemed to agree with a suggestion that emerged during the discussion that the focus should be that the financial statements should present the consolidated results of the controlling entity (that is, the parent) and all subsidiaries (if any). If the parent had no subsidiaries, these 'top level' financial statements would still be IFRS general purpose financial reports and should be within the scope of (for example) the EU IAS Regulation.
The Board also agreed that parent-only financial statements, provided they were presented with the consolidated financial statements, could be described as 'general purpose financial statements.' A majority of the Board seemed to be of the view that, if presented alone, parent-only financial statements were 'special purpose' because (while useful) they were incomplete.
The Board agreed that the ED should not discuss whether or how parent-only financial statements should be presented (this is either a jurisdictional or standards-level issue).
Technical Plan
The IASB staff directors presented the latest version of the IASB's Technical Plan. The staff noted that since the last version of the plan had been discussed, a number of short-term projects had been added to the Board's agenda-primarily in response to the G20's Action Plan to Implement Principles for Reform.
Derecognition had been accelerated, and an ED is expected either late in 1Q2009 or early 2Q2009. An ED of fair value measurement guidance should be issued as planned leter in 1Q2009. Roundtable discussions of both of those projects are likely to be held in late April or May 2009. The locations of these roundtables will be London and other locations to be determined. Meetings outside London especially are likely to be held over two days, to make the best use of Board and participant time.
Certain projects were noted to be 'at risk' (subject to very tight time constraints with little room for slippage). These were revenue recognition and financial statement presentation (already in this category), each with an IFRS expected in June 2011. Added to this category was Leases, for which the Discussion Paper has been delayed by late issues that need to be addressed in January. The staff is concerned that if the DP is not issued by March 2009, an IFRS by June 2011 would be a challenge.
The staff expects some delay in the Phase B of the Framework (elements and recognition). A Discussion Paper for this phase is now scheduled in the middle of 2010 rather than 4Q2009. Other phases of the Framework remain 'on track'.
The IFRS resulting from ED 9 Joint Arrangements is expected late in 2Q2009. The staff wishes to coordinate the release of the consolidation standard arising from ED 10 and that for joint arrangements. Issuing consequential amendments to a standard just issued was thought likely to be more annoying to constituents than delaying the IFRS a month or two.
A revised project plan will be released on the IASB's Website in the very near future.
Annual Improvements 2009: – Analysis of comments on the August 2008 Exposure Draft
The Board received but did not discuss the Staff's 'Summary of preliminary comment letter analysis, deliberation objective and provisional project plan'. Under the project plan, the staff expects to complete all redeliberations, including any sweep issues, by the March 2009 IASB meeting, allowing the Improvements IFRS to be issued in April 2009.
Comment analysis – Minor issues
The Board agreed the staff's proposed disposition of the following proposals. A majority of respondents concurred with the Board's proposals:
- Scope of IFRS 2 and revised IFRS 3 (IFRS 2)
- Disclosures of non-current assets (or disposal groups) classified as held for sale or discontinued operations (IFRS 5)
- Unit of accounting for goodwill impairment (IAS 36)
- Additional consequential amendments arising from revised IFRS 3 (IAS 38)
- Measuring the fair value of an intangible asset acquired in a business combination (IAS 38)
A Board member objected to the staff's proposed amendments to the implementation guidance in IAS 18 with respect to determining whether an entity is acting as a principal or as an agent. The Board member was concerned that the IASB would introduce jurisdictional bias in to its guidance that was neither necessary nor desirable at the level of (non-mandatory) implementation guidance. The Board member would not amend the IG at all. It was unclear whether the Board as a whole concurred with this view.
IAS 7 – Classification of expenditures on unrecognised assets
The Board agreed to modify the amendment to IAS 7 paragraph 16, such that it would state:
16 The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources that are recognised as long-term assets and other investments not included in cash equivalents in the statement of financial position. Examples of cash flows arising from investing activities are:
(a) ...
A proposal to amend IAS 7 paragraph 32 (not included in the ED) was not approved.
Scope of IFRIC 9 and Revised IFRS 3 (new issue)
The Board agreed that an amendment to paragraph 5 of IFRIC 9 Reassessment of Embedded Derivatives was necessary to clarify that the scope of IFRIC 9 excludes contracts with embedded derivatives acquired in a combination between entities under common control or in the formation of a joint venture. With the revised definition of a 'business' in IFRS 3 (2008), the formation of a joint venture was brought within the scope of IFRIC 9, something that the Board had not addressed specifically as it developed IFRS 3 (2008).
The Board agreed that the scope of IFRIC 9 should be amended to read as follows:
5 This interpretation does not apply to the acquisition of contracts with embedded derivatives in:
- a. a business combination;
- b. a combination of entities or businesses under common control as described in paragraphs B1-B4 of IFRS 3 Business Combinations (as revised in 2008); or
- c. the formation of a joint venture as defined in IAS 31 Interests in Joint Ventures
nor their possible reassessment at the date of acquisition.
So this amendment can be in place in time for the effective date of IFRS 3 (2008) – 1 July 2009 – the Board agreed that it should issue an exposure draft of the proposals for a 30-day comment period (the minimum permitted by the IASB's Due Process Handbook). (See also Hedges of a Net Investment, below).
IFRIC Issues
IFRIC Interpretation 16 Hedges of a Net Investment in a Foreign Operation – Amendment to the restriction on the entity that can hold hedging instruments
The Board discussed an issue that had been submitted by a constituent subsequent to the publication of IFRIC 16. The staff had satisfied itself (in consultation with Board members and an IFRIC member) that the constituent's issue was valid and had not been contemplated by the IFRIC when IFRIC 16 was being developed. The concern raised was that in some circumstances, while the total amounts of foreign exchange differences are indeed the same with and without hedge accounting, the split between the amounts included in profit or loss and foreign currency translation reserve would be different. Without hedge accounting, the foreign exchange difference arising from the hedging instrument would be included in profit or loss while the difference arising from the net investment would be included in the foreign currency translation reserve.
The Board agreed to amend IFRIC 16 paragraph 14 by deleting a parenthetical comment: '(except the foreign operation that itself is being hedged)'.
So this amendment can be in place in time to be used for 30 June 2009 interim financial reporting, the Board agreed that it should issue an exposure draft of the proposals for a 30-day comment period (the minimum permitted by the IASB's Due Process Handbook). It was acknowledged that it was unlikely that any amendment could be finalised in time to accommodate first quarter 2009 interim reporting.
Proposed IFRIC Interpretation: Transfers of Assets from Customers – Board vote to ratify
The Board approved, subject to written ballot, IFRIC [18] Transfers of Assets from Customers (see IAS Plus Report of the December 2008 IFRIC Meeting for details).
Wednesday 21 January 2009
IFRS for Private Entities
Title of the Standard
The Board agreed that the title should be 'International Financial Reporting Standard for Non-publicly Accountable Entities' (IFRS for NPAEs).
Rewrite of Section 11A Basic Financial Instruments
Initial Measurement
The Board agreed with the restatement of the initial measurement principle for basic financial instruments as follows:
When a financial asset or financial liability is recognised initially, an entity shall measure it at the transaction price. If payment for the asset is deferred or is financed at a rate of interest that is not a market rate, the entity shall measure the asset or liability at the present value of future payments discounted at a market rate of interest.
However it was agreed that some of statements about discounting were problematic and a review by the staff was required in order to ensure that the wording throughout was consistent with that in Example 3 of 11A.11 of the draft Standard.
Derecognition and Factoring
The Board agreed that the guidance on factoring should be consistent with the general principles on derecognition. It was therefore agreed that the proposed paragraphs of special guidance on factoring should be deleted and replaced with two examples of factoring – one that resulted in derecognition and one that did not – based on general derecognition principles.
The Board also decided that the guidance on loan commitments, as outlined in 11A.12(b) should be moved to Section 11B Additional Financial Instruments Issues.
First Draft of Section 11B Additional Financial Instruments Issues
The Board requested that the wording of 11B.4 be clarified. No other issues raised.
Redeliberation of Issues Relating to Other Sections
The Board redeliberated six issues as follows:
Accounting policy options
The staff had recommended that a number of complex options should not be available to private entities. The Board decided that each option needed to be considered on its own merits rather than an 'all or nothing' approach to allowing options within the IFRS for NPAEs. While no final decisions were reached at the meeting, the board tentatively held the following views in respect of each option:
- Investment property. Measurement should be circumstance-driven rather than allowing NPAEs an accounting policy choice between the cost and fair value methods. The Board decided if the fair value of an item of investment property can be measured reliably without undue cost or effort, the fair value through profit or loss method must be used. Otherwise, the cost-depreciation-impairment method must be used.
- Property, plant and equipment. The revaluation model should not be an option.
- Intangible assets. The revaluation model should not be an option.
- Borrowing costs. All borrowing costs should be charged to expense. The capitalisation model should not be an option.
- Presenting operating cash flows. NPAEs should be permitted to use either the indirect method or the direct method to present operating cash flows in the cash flow statement.
- Development costs. All research and development costs should be charged to expense Capitalisation of development costs should not be an option.
- Financial instruments. An NPAE will have a choice of applying Section 11 of the IFRS for NPAEs or all of the provisions of full IFRSs - the three financial instrument standards (IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures), and related interpretations. Due to the size of the additional material that would need to be incorporated into the IFRS for NPAEs, the option to use full IFRSs will be available by cross-reference. This would be the only cross-reference to full IFRSs.
- Associates. The options proposed in the ED (cost method, equity method, and fair value through profit or loss) should all be allowed.
- Jointly controlled entities. The options in the ED should all be allowed with the exception of proportionate consolidation. Therefore NPAEs could choose the cost method, equity method, or fair value through profit or loss.
Consolidated and Separate Financial Statements
The staff recommended that consolidated financial statements be required only when certain conditions are met. The Board disagreed and concluded that consolidated financial statements should be required for all private entities that are parent entities.
Special Purpose Entities (SIC 12)
The Board agreed with the staff recommendation that the guidance in SIC 12 Special Purpose Entities is appropriate for private entities and agreed with the addition of 3 paragraphs to Section 9 of the draft Standard.
Remove distinction between distributions from pre-acquisition and post-acquisition profits under the cost method in the sections on consolidation, associates, and joint ventures
The Board agreed with the staff recommendation to update the relevant sections of the draft Standard to reflect the May 2008 amendments to IFRS 1 and IAS 27 in respect of cost of an investment in a subsidiary, jointly-controlled entity, and associate. This removes the requirement to separate the retained earnings of the investee into pre-acquisition and post-acquisition components as a method for assessing whether a dividend is a recovery of its associated investment.
Amortisation of goodwill and intangibles
The Board agreed with the staff recommendation that indefinite life intangibles including goodwill should be amortised over their useful life subject to a maximum period of 10 years. As proposed in the ED, there would be a requirement to assess at each reporting date whether there are indicators of impairment. The Board agreed that the Basis of Conclusions should explain that this treatment had been allowed on the basis of a cost-benefit analysis rather than being justified on a conceptual basis.
Fair Value Measurement
FASB staff were present for this session via telephone.
The Board continued redeliberation of issues arising from the Discussion Paper Fair Value Measurements to be included in the forthcoming exposure draft.
Scope assessment
The Board discussed two issues related to the proposed scope of the ED on fair value measurement guidance:
- whether to exclude from the scope of a fair value measurement standard any uses of 'fair value' in IFRSs that have a measurement objective that is inconsistent with the Board's proposed definition of fair value as a current exit price (and the related guidance); and
- whether to place constraints on the use of 'fair value' in particular standards.
The staff noted that the 2006 discussion paper stated that the Board would complete a standard-by-standard review of fair value measurements required in IFRSs to assess whether the IASB or its predecessor intended each fair value measurement basis to be a current exit price. That review was completed and the results presented to the IASB in July 2008.
Entry equals exit price on initial recognition
The staff noted that there was a need to explain carefully what the Board means by 'entry equals exit'. In particular the staff noted that the fair value measurement approach developed by the Board considers two separate transactions (that is, the actual transaction to buy the asset and the hypothetical transaction to sell the asset). For both of those transactions, the focus is the reporting entity's perspective. The Board had a long and disjointed debate about this issue, which served to highlight that the use of a measure called an 'exit price' remains a stumbling block with a couple of Board members.
Applying fair value as an exit price to an entity's own equity instruments
The staff noted that unlike assets and liabilities, an entity cannot 'exit' its rights and obligations associated with its own ownership interests unless those interests cease to exist (for example, if the entity is acquired by another entity). This is because equity instruments represent a residual interest in the entity, irrespective of who holds them. The Board debated how best to address this conundrum, deciding that a practical solution would be to deem the exit price of an equity instrument for the issuer to be the same as the exit price for a holder.
Scope assessment and recommendations
The Board discussed the staff's scope assessment briefly and agreed that the ED should propose that the following be excluded from the scope of the fair value measurement guidance:
- share-based payment transactions;
- reacquired rights in a business combination; and
- financial liabilities with a demand feature (at least one Board member objected to this conclusion).
The staff undertook to revisit whether financial instruments subsequently measured at amortised cost should be within the scope of the proposed IFRS.
The presumption that fair value should be defined as an exit price was confirmed.
Other matters
The staff confirmed that, in the proposed conforming amendments to other IFRS, the ED would propose removing 'how to' guidance on fair value that was inconsistent with the proposed approach (e.g. that in IAS 40).
A review of older Interpretations would be undertaken to ensure that the use and application of fair value was consistent with the ED. The staff was confident (having worked with the IFRIC staff) that the more recent IFRIC Interpretations that used the term were consistent with the ED.
Day One gains-Service contracts
The staff noted that the Board had consistently taken the view that the transaction price is generally the best evidence of the fair value of an asset or liability at initial recognition (with some exceptions, such as related party transactions, distressed transactions, different markets or different units of account). The staff discussed that presumption in the context of a contract to provide services (such as a investment fund management contract, or an insurance contract).
Board members noted that many of the issues that the staff was raising were exactly the same as those addressed in the revenue recognition project, for which a Discussion Paper is currently open for comment. The staff agreed and noted that the staff recommendations were consistent with the Board's Preliminary Views in the DP.
The Board confirmed that for a contract to provide services:
- the only true exit market for the provider is the secondary (wholesale) market with other providers, not the primary (retail) market with customers.
- the exit price for the provider reflects the perspective of the provider, not the perspective of the customer.
- at initial recognition, the exit price for the provider is likely to differ from the transaction price because the provider will typically price the transaction to recover its direct and indirect origination costs and to provide a reasonable return on the origination activity. In contrast, a transferee would not require payment for the origination activity performed by the original provider.
Disclosure
The Board discussed a summary that presented and compared the current disclosure requirements of IFRS 7, the October 2008 ED of proposed improvements to IFRS 7 and FAS 157, with disclosures likely to be proposed in the FVM ED. In addition, the staff had highlighted certain differences between the IASB's proposed disclosures and those required by FAS 157. The Board agreed with the proposed disclosures.
In addition, the Board agreed:
- to require entities to disclose fair value measurement information by class of asset or liability rather than by major category;
- not to differentiate between recurring and non-recurring fair value measurements;
- to require disclosure of purchases, sales, issues and settlements separately for Level 3 assets and liabilities;
- to remove the reference to realised and unrealised gains or losses;
- to amend IAS 34 to require entities to provide updated interim fair value disclosures if, for example, there is a significant change in the business or economic circumstances; and
- to provide the disclosure examples in (non-mandatory) implementation guidance rather than in (mandatory) application guidance.
The disclosures required under the proposed IFRS would replace (and not supplement) those in IFRS 7.
Transition requirements
The Board agreed that the ED should propose that the fair value measurement requirements should be applied prospectively as of the beginning of the annual period in which the IFRS is initially applied, except for financial instruments measured at fair value at initial recognition using the transaction price in accordance with paragraphs AG76 and AG76A of IAS 39. Early adoption would be permitted under the usual rules.
The Board agreed that the difference between the carrying amount and the fair value of a financial instrument that was measured at initial recognition using the transaction price prior to the initial application of the proposed IFRS should be applied retrospectively as an adjustment to retained earnings as of the beginning of the annual period in which the proposed IFRS is initially applied, presented separately. This would take into consideration the practical limitations involved in applying the change in accounting policy in all prior periods. In addition, the Board agreed not to require the disclosure requirements for a change in accounting policy under IAS 8.
In order to achieve comparability in future periods, the Board agreed that all of the disclosures required by the proposed IFRS would be required from the date of first applying the proposed IFRS, and that those disclosures need not be presented in periods prior to the initial application of the proposed IFRS.
Comment period
The Board agreed that the ED should be exposed for comment for 120 days, the normal comment period for a standards-level consultation document.
Financial Instruments with Characteristics of Equity
The Board continued its discussions on developing the proposals for an Exposure Draft on financial instruments with the characteristics of equity. At this meeting the staff sought for the Board's input on classification of puttable and mandatorily redeemable instruments (thereafter 'redeemable instruments') with the characteristics of equity. The staff identified four possible alternatives for the accounting treatment of such instruments:
- All perpetual and some redeemable instruments are classified as equity
- Separate redeemable instruments into equity and non-equity components
- Develop rules on which instruments are to be classified as equity
- Classify all redeemable instruments as liabilities.
Before the actual staff proposals were discussed, one staff member presented an alternative approach to addressing redeemable instruments. It was noted that this approach involves two steps: firstly, identifying what is to be recognised and, as a second step, deciding how the 'things' that qualify for recognition are to be classified.
The staff member noted that the following 'things' would potentially be eligible for recognition in financial statements:
- Rights of other parties to compel an entity to take actions it would otherwise not take for no (additional) compensation
- Ownership or property rights in the entity held by other parties
- Any amounts of assets in excess of what would be required to satisfy the items in the previous two points (this could occur in co-operative, mutual entities, etc.)
On the issue of classification criteria it was noted that the staff member's approach was based only on one factor: subordination. The staff member highlighted that two issues were already identified where this criterion would have to be further developed: consolidation and anti-abuse provisions).
The Board had a lively debate on the approach. One Board member asked whether the staff member would see a puttable instrument as more or less subordinated as a perpetual instrument. It emerged that much of this discussion was depending on the definition of subordination. The Board continued to debate whether a further distinction between what triggers redemption was helpful (that is, does redemption occur during specified period/at a specified date or on occurrence of a specific event). It was noted that puttable instruments (at fair value, a formula or book value) must also be considered in the analysis. One Board member remarked that splitting out the put option might be the only way to come to a satisfying answer.
The Board did not conclude on the approach, but staff was directed to continue developing the approach addressing the issues discussed at this meeting.
The staff then continued to address its main proposals. After short debate the Board decided to defer discussion on the staff proposals until the alternative approach was deliberated as it concluded that further discussions would not make sense at this point.
Thursday 22 January 2009
Financial Instruments Disclosures
The staff introduced this session by reminding the Board members of the two main areas in ED Improving Disclosures about Financial Instruments (proposed amendments to IFRS 7):
- Clarifying disclosures about financial instruments
- Liquidity risk of financial instruments
Clarifying disclosures about financial instruments
The staff turned to the proposal of a tabular disclosure of fair values in accordance with a three level hierarchy (similar to the US requirements). It was noted that respondents linked this hierarchy to the measurement guidance in IAS 39 and were confused if they had interpreted the guidance in IAS 39 as containing a 2, 3, or 5 level hierarchy. Constituents were worried about how to map the IAS 39 fair value levels to the definition of levels under the proposals.
The staff therefore proposed not to go forward with the three level disclosure of fair value, but instead to provide additional information on level 3 disclosures, where some of the inputs in modelling fair value were unobservable. One staff member presented an alternative proposal. This staff member disagreed with the staff proposal and proposed to adopt the approach in the ED and make clear the definitions of the levels are exactly the same as under US GAAP. Also the final amendment was to make clear that there is no link between the IAS 39 measurement hierarchy and the fair value disclosure hierarchy under the proposed amendments.
While a majority of the Board members expressed sympathy for the alternative staff view, some were concerned that the timing for requiring such a fair value hierarchy disclosure would not be acceptable given that this issue would be addressed in a broader context in the fair value measurement project. One Board member noted that this amendment would not only affect financial institutions, but also corporates.
The Board voted in favour of the alternative staff proposal and against the staff recommendation.
The Board also agreed to:
- Replace the notion of 'total unrealised gains or losses' with 'total gains or losses'
- Require disclosure of the effect of changing one or more of the significant unobservable inputs used in the fair value measurement of level 3 financial instruments to another reasonably possible assumption
- Eliminate the requirement to stratify fair value in proposed paragraph 27C
Liquidity risk of financial instruments
The staff then turned to the proposed amendments to the liquidity disclosures. Staff noted that most respondents welcomed the proposed amendments to the liquidity risk disclosures under IFRS 7. In light of comment received, the staff proposed the following changes to the original proposals:
- Require disclosure of separate maturity analyses for derivative and non-derivative financial liabilities based on contractual maturities, but provide relief from disclosing in the maturity analysis contractual maturities for a subset of derivative financial liabilities
- Emphasise the existing requirement to provide summary data about each type of risk arising from financial instruments based on information provided internally to key management personnel of the entity, as required in IFRS 7.34(a). This also clarifies that derivative financial liabilities not included in the maturity analysis based on contractual maturities (under the proposed relief above) should be disclosed in a maturity analysis on the basis of the information provided internally to key management personnel.
- Clarify the following issues:
- the scope of the liquidity risk disclosures regarding derivatives that during their life can change between being financial assets or financial liabilities;
- how amounts are determined when the amount payable is not fixed; and
- how to consider master netting agreements.
- Retain the proposed treatments of
- hybrid contracts; and
- non-derivative trading liabilities.
- Clarify paragraph B11C so that it includes:
- derivative financial liabilities that are recognised in the statement of financial position;
- loan commitments that meet the definition of a derivative irrespective of whether they are recognised in the statement of financial position; and
- issued financial guarantee contracts.
- Strengthen the wording in paragraph B11E to ensure disclosure of a maturity analysis for financial assets used in managing liquidity risk, if that is important to users of financial statements in understanding the liquidity risk of the entity.
- Other drafting clarifications.
While Board members had some questions on the details of the proposed changes to the liquidity risk analysis, they agreed to all changes as proposed by the staff.
Transition
The staff proposed to bring forward the effective date of the amendments to annual periods beginning on or after 1 January 2009, but not to require comparatives. Some Board members were concerned over the backdating in the light of the requirements of IAS 34 for interim reports. Staff informed the Board that this is a broader issue and they plan to bring back a paper on it at the February Board meeting.
The Board agreed with the staff proposals.
Derecognition (continued from Monday)
The staff presented its proposals on linked presentation for inclusion in the upcoming ED. The session was structured as follows:
- Description of linked presentation and appropriateness
- Scope of linked presentation
- Display of linked transactions
- Measurement in case of presenting items linked in the statement of financial position
Description of linked presentation and appropriateness
The staff explained the merits of linked presentation as it would 'ameliorate' the grossing up of the linked items in the statement of financial presentation. The Board was split about the issue and had a lengthy discussion about pros and cons of linked presentation. Many Board members objected to linked presentation in the statement of financial position, but would accept note disclosure of linked items with appropriate narratives. The Board agreed to go forward with linked presentation.
Scope of linked presentation
Staff continued to address the transactions that would be scoped into a linked presentation. The staff proposed to allow only a subset of transactions under flowchart 2. It further proposed to include only transactions where the transferor's exposure is explicitly limited to a fixed and prefunded monetary amount. Board members were concerned over the implications of the proposal and where this could end up. It was decided to discuss the display (that is, face or footnotes) first, to enable the Board to decide on the scope.
Display of linked transactions
The staff identified two alternatives for displaying linked transactions: either present the liability deducted from the asset on the face of the financial statement or in the notes.
It was recommended to use a notes approach for implementing the linked presentation principle. While Board members seemed to agree that note disclosure was appropriate, they were split over the scope issue. After some debate, the Board decided that for flowchart 1 a broader scope was to be adopted while for flowchart 2 in general only non-recourse transactions would qualify for linked presentation.
Leases (continued from Monday)
(FASB staff joined via videolink)
The staff informed the Board that FASB staff saw itself in a position to provide a high-level discussion and issues on lessor accounting. The staff indicated that this analysis would not contain preliminary views. The Board agreed to defer issuing theleases discussion paper if the lessor section could be done within the timeframe indicated. The FASB also committed resources to further develop lessor accounting proposals.
IFRS 7 Amendment – Investments in Debt Instruments ED – Analysis of comments on the December 2008 Exposure Draft
The staff presented its comment letter analysis on the Exposure Draft Investments in Debt Instruments that would require additional disclosures for certain debt instruments. Staff said that the vast majority of respondents disagreed with the proposals, mainly for reasons of failed due process, doubts over usefulness of information, weakening the measurement bases chosen in the primary financial statements, and practical concerns.
Many Board members noted that such disclosures were requested by constituents and wondered why they now rejected them. The staff noted that the US FASB, which has exposed similar proposals, will be presented with a staff recommendation to drop the proposals (with the possible exception of requiring SFAS 157 disclosures for interims).
The Board agreed to abandon the proposals for the time being and to add the issues the ED aimed to address to the project on a comprehensive review of financial instruments accounting.
Friday 23 January 2009 (morning only)
Post-employment Benefits
Project scope and timing
The staff presented papers outlining a proposed scope on the future work that arises from the DP Amendments to IAS 19. Staff proposed to split the project in three parts and prioritise the items in order of importance. Each project section would result in a separate exposure draft. The proposed split was:
- Recognition, presentation and related disclosures
- Contribution-based promises
- Comprehensive review of disclosures
Board members were not convinced that the proposed approach would be appropriate and wanted to know the key risks that led to the proposed schedule. Some Board members preferred a more comprehensive approach.
The Board agreed to reduce the three step approach to a two step approach:
- Recognition, presentation, and related disclosures and minor issues
- Accounting for contribution-based promises
The minor issues encompass:
- Additional guidance on the discount rate
- Multi-employer exemption
- Attribution to periods of service when benefits are back end loaded
- Accounting for plans with risk sharing or conditional indexation features
- Definition of short and long term employee benefits
- Tax relating to pension costs
Presentation of changes in defined benefit obligations and in plan assets
The staff presented its proposals on the following three questions:
- Should the Board specify how the components of pension cost should be disaggregated?
- Should any components of post-employment benefit cost be presented in other comprehensive income rather than profit and loss? If so, which?
- Should the Board require such disaggregated components to be displayed on the face of the performance statements when material?
The Board agreed with the staff recommendation that pension cost should be disaggregated into employment, financing, and remeasurement components.
The Board discussed at length whether all components of pension cost should be recognised in profit or loss. Some Board members acknowledged that this will not be well received by some constituents and that the case for profit or loss recognition was weakened by the fact that the measurement model in IAS 19 was flawed. The chairman took a vote, and the Board agreed that all components should be recognised in profit or loss.
The staff recommended to the Board not to mandate disaggregation of the changes in the pensions obligation in the performance statements. The Board decided, however, to require this disaggregation. The agenda papers contained an example on how such disaggregation might be presented. It was found that the proposed presentation would require amendments to IAS 1. The staff was directed to consider the example again and bring back a new example at a future Board meeting.
Proposed amendment to IFRIC 14
The staff presented a proposed amendment to IFRIC 14 to clarify the accounting where an entity makes voluntary prepaid contributions and there is a minimum funding requirement. The staff recommended an approach that would treat the prepayment as partially recoverable. However, many Board members felt that the whole of the prepayment is recoverable and, hence, full recognition of the prepayment was appropriate. The chairman took the vote and the Board agreed. The amendment is to be exposed in due course.
Sweep Issues
Income Taxes
The staff brought back an issue that arose during the balloting phase of the upcoming ED on income taxes. The ballot draft proposed that current tax should be discounted. The staff asked the Board whether the ED should contain guidance on discounting. The Board debated different aspects of discounting current tax, including discount rate and IAS 20 implications.
There seemed to be agreement, where the deferral of payment is allowed by law, discounting was not appropriate. However, if an entity specifically negotiates a payment schedule for its tax liability, discounting would be applicable if material. However, Board members pointed out that this is more akin to settlement of a tax liability, and not in itself a tax issue. It was decided not to address discounting of current tax in the ED.
Fair Value Meausrement and IAS 39
The staff raised an issue that emerged during the deliberations on fair value measurement. Under IAS 39 Financial Instruments: Recognition and Measurement, the amount initially recognised for items that are not remeasured at fair value is not fair value as it would be defined in the fair value measurement project. The staff proposed words that could address this issue. The Board agreed to the staff approach, but asked the staff to develop words with a positive and not a negative notion.
Proposed IFRIC Interpretation: Transfers of Assets from Customers – Effective date and transition
The staff proposed that IFRIC 18 Transfers of Assets from Customers should have an effective date of 1 July 2009 instead 1 May 2009. Because earlier application is permitted, an effective date of 1 July 2009 would prevent entities from using hindsight to determine fair values. Staff also proposed to include words that would require that transfers of assets from customers be measured using information that existed and was known at the time the transfers have occurred.
The Board agreed.
This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.
| 
Print
