Monday 23 February 2009

• Opening remarks
• Orientation – To provide SAC members with an overview of the IASB and IASCF structures so that SAC members are familiar with the context in which the SAC will operate.
• SAC Mandate
• IASB Work Plan
• Financial Statement Presentation

Tuesday 24 February 2009 (morning only)

• Global Financial Crisis
  • Response to G20, FSF and other bodies
  • Report on initial Financial Crisis Advisory Group meetings
• Constitutional Review Part 2

Monday, 23 February 2009

Because this was the first meeting of a reconstituted SAC, with a nearly all-new membership, much of the first day was devoted to discussion of SAC's mandate and method of operations, and of the IASB's work plan.

SAC Mandate and Method of Operations

Among SAC members' comments were the following:

• The SAC chairman noted that SAC is the primary advisory body to the IASB. He proposed that the best time for SAC technical advice to the Board is when the Board is developing a Discussion Paper or similar initial comment document.
• SAC agenda papers should clearly set out specific questions that the SAC is being asked to discuss. SAC should seek, if possible, to commmunicate a consensus view on those questions to the Board (or, if no consensus, communicate the range of views). There should be feedback to SAC on how the views of SAC members have been considered by the Board.
• In developing a 'consensus view' some felt that should SAC take votes on key issues. Others did not see a need for voting since SAC is providing advice rather than setting standards. The SAC chairman summed up the discussion by suggesting there is a clear need to communicate a consensus view or leaning to the Board. While sometimes this may require voting, most often the view will be evident from the discussion.
• The IASB has created several other advisory bodies in addition to SAC, including the Analyst Representative Group, the Global Preparers Forum, and the Financial Crisis Advisory Group. SAC members asked for clarification of the roles of these advisory groups vis a vis the role of the SAC.
• Some SAC members expressed views on how the SAC agenda should be set, including inviting all SAC members to submit written suggestions. This matter is scheduled to be discussed at tomorrow's meeting.
• Some suggested the possibility of using SAC subgroups to discuss issues in advance of the SAC meeting. The subgroup would then present the issues to the SAC and lead the discussion.
• Since SAC members now serve as representatives of organisations and constituencies rather than as individuals, what are the rules regarding confidentiality of SAC agenda papers? In general, SAC members should feel free to solicit views of constituents including sending them agenda papers for comment.
• After receiving the agenda papers for a SAC meeting, SAC members should send written comments on the issues in the agenda papers to the IASB and to their fellow SAC members in advance of the SAC meeting. This could help focus the discussion.
• SAC members asked about the relationship of the IASB to national standard setters (NSS) and the future role of the NSS. The IASB chairman characterised the relationships as 'partnerships' and gave several examples of how this is working.

SAC Members' Comments on the IASB's Work Plan

As might be expected with a group as diverse as the new SAC, SAC members expressed a wide range of views on the IASB's current work plan. Among the points made:

• The work plan calls for approximately 46 'due process documents' to be issued between now and mid-2011. IASB must find ways to help constituents cope.
• The Board's highest priority should be for quality solutions, rather than adopting a large group of standards all at once, even if this means delaying some of the target dates now in the IASB's work plan.
• Projects proposed for the IASB to consider as possible additions to its agenda include accounting standards for an entity that is not a going concern or is insolvent; asset impairments; and when fair value is appropriate (the current Fair Value Measurement project addresses only how to make the measurement, not when), including reconsideration of the fair value option and recognition of value changes for 'own credit risk'.
• As for prioritisation of current agenda projects, SAC members' views varied dramatically. For example:
  • Some members felt that Financial Statement Presentation and Derecognition are critical projects, while other members felt the current standards for these items are not in urgent need of repair.
  • Individual SAC members recommended that the Fair Value Measurement (FVM) project should get a higher priority while lowering the priorities of projects that would depend on fair value measurements, such as Insurance and Pensions, until the FVM project is completed.
  • SAC members from the insurance industry supported high priority for the IASB's Insurance project, particularly now that the FASB has joined to make this a joint project.
  • Several SAC members said that the projects on Pensions, Leases, and Revenue Recognition should be given lower priorities, or even dropped, because the existing standards are working reasonably well now.
  • The Conceptual Framework should be given high priority because it provides guidance for resolving accounting questions that are not clearly addressed in individual standards.
• SAC members questioned the change in the name of the project from IFRS for Private Entities to IFRS for Non-publicly Accountable Entities.

Tuesday, 24 February 2009

IASB's Responses to the Global Financial Crisis

The SAC discussed the current global financial crisis and the IASB's responses to it. The IASB Chairman and the IASB's Director of Capital Markets outlined the activities of the IASB and the staff since the Financial Stability Forum's action plan was issued in April 2008. Among others, the following matters were raised or discussed:

• Regulatory responses tended to mingle (unhelpfully) issues related to financial stability (prudential regulation) and 'dynamic provisioning'. These were separate issues that needed to be addressed separately and not necessarily by accounting standard-setters.
• The recent activities of the US Financial Accounting Standards Board with respect to proposed FAS 133 Implementation Issue C22, Exception Related to Embedded Credit Derivatives, were acknowledged as still under deliberation by the FASB. The IASB staff and SAC members noted that, if issued in the same form as it was exposed, C22 would narrow but not eliminate an IFRS/US GAAP difference. In particular, the March 2009 joint meeting of the IASB and FASB would examine issues related to impairment.
• The FASB/ IASB Financial Crisis Advisory Group was of the view that 'financial stability' was the responsibility of regulators, while the interests of investors (who do not have the statutory access to information usually available to regulators) are best served by transparent financial reporting that reflected the economics of the entity.
• SAC members supported this conclusion, but noted that transparent financial reporting was necessary for regulators to achieve financial stability. While SAC members noted that accounting has an important role to play in market regulation, it should not be driven by the prudential needs of regulators. As one SAC member put it: 'Financial stability is important, but not at the price of playing with the numbers'.
• It was suggested that the IASB had been 'slow out of the blocks' at the beginning of the crisis, with poor communications. Communications had improved but needed to acknowledge that, while accounting did not cause the crisis, it was inextricably involved with it.
• While the use of fair value still has lots of support in principle, there needs to be greater discipline in how it is applied in practice. One SAC member, representing a financial regulator, said that it would be helpful, for example, if all banks applied the same measurement principles to the same instruments.
• While focusing on fair value for all financial instruments as a long term goal, the IASB (and the FASB) might be more successful if they adopted an 'evolutionary' rather than 'revolutionary' approach and allow the financial markets to regain credibility before adopting radical changes to the accounting for financial instruments.
• The Experts Advisory Panel's guidance on applying fair value in illiquid and inactive markets was seen as very useful guidance and was commended.
• Sharing the results of a study of the use of the Reclassification Amendment to IAS 39 approved in October 2008, the SAC was told that about €7.5 billion worth of assets had been reclassified, resulting in about €5.5 billion positive effect on profit and loss. The reclassifications had been done primarily for regulatory capital reasons. The survey had demonstrated a fundamental conflict between investor and supervisory interests.

The IASB Chairman suggested that the IASB had three real alternative approaches to accounting for financial instruments generally:

• (A) Fair value for all financial instruments
• (B) All financial instruments that are 'traded' to be measured at fair value; all others would be measured at amoritsed cost. ('Traded' was not defined but, in context, appeared to mean fair value reliably measurable based on price quotations or transactions in an active market.)
• (C) All financial instruments with contractual terms and conditions that permit the determination of a basis of amortisation would be measured at amortised cost; all others would be measured at fair value.

(It was assumed that certain financial instruments, such as all derivative financial instruments, would be measured at fair value.)

The SAC was asked for their personal views. After some discussion, the SAC added an additional approach (D), under which financial instruments would be measured at amortised cost or fair value based on management intent. This was later re-phrased as 'based on subjective criteria'.

Expressing their views, SAC members were divided as follows: (A) 2 members; (B) or (C) 'objective criteria': 14; (D) 'subjective criteria': 18. Asked whether, if the IASB were to develop a model based on 'objective criteria' alone, they would prefer approach (B) or (C), the SAC preferred approach (B) by a significant margin.

The SAC Chairman noted that the main message from this exercise was that full fair value was not the answer in the near to medium term.

IASC Foundation Constitution Review

The IASC Foundation staff introduced Phase 2 of the Constitution Review and invited comments on four issues:

• Should the Board consider expanding the scope of IFRSs to specifically address not-for-profit and public sector entities?
• Should the constitution enshrine the notion of 'principles-based standards'?
• Should the IASB have a formal policy for 'fast track' issues?
• Should the IASB have a stronger role in translating IFRSs, such as publishing documents in more than one language?

Many SAC members participated in the discussion, with a wide range of views expressed, but the consensus of the meeting appeared to be:

• The IASB should not be asked to address financial reporting standards for not-for-profit entities or entities in the public sector, at least not at this time. In the words of one SAC member, expanding the IASB's mandate to these areas would involve 'not trivial' issues. Another member noted that the International Public Sector Accounting Standards Board was already the well respected accounting standard-setter in this area and should be allowed to continue to be so.
• There was clear consensus that the IASB's financial reporting standards should be principle-based, but there was no consensus about whether this should be embedded in the Constitution.
• There was support for some form of 'fast track' procedure, but subject always to a requirement for some minimum due process that would allow all stakeholders the opportunity to provide meaningful comment.
• The role of the IASC Foundation in translating the IASCF works should be to ensure the consistent high quality of such translations.

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