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Location: London
The Boards reviewed the current joint project timetable, progress made since the last joint meeting, and projects that have been assessed as 'at risk' for not meeting project deadlines.
The project directors of both the FASB and IASB reviewed the current joint project timetable, progress made since the last joint meeting, and projects that have been assessed as 'at risk' for not meeting project deadlines.
A latent issue was identified by a Board member that was not explicitly addressed by the staff, which was the need to identify cross-cutting issues that affect the 'at risk' projects.
Some members of both boards seemed willing to accept that meeting the deadlines in the Memorandum of Understanding might mean having accounting treatments that were consistent across all issues (for example, accounting for performance obligations – something that affects several projects in which the current direction would result in inconsistent treatments). Other Board members put a premium on having consistent answers to similar problems and thought that constituents would be better served by 'getting it right the first time' rather than constantly revisiting issues. These exchanges were sharpest among the IASB members.
No decisions were asked or expected, but it was obvious that there is still a lot of stress in the two boards' agendas and agenda priorities, and that this stress is a source of frustration for both the Board members and the staff.
The boards reviewed the field test on the presentation model proposed in the October 2008 Discussion Paper, as well as the project plan.
The FASB staff assigned to this project reviewed with the boards the field test on the presentation model proposed in the October 2008 Discussion Paper (DP), as well as the project plan.
The boards are conducting a field test of the DP proposals to:
The field test involves an expected 35 publicly-listed entities distributed across North America, Europe, India, Japan, Australia, and New Zealand. Industry sectors include conglomerates, manufacturing, retail, insurance, banks, and other services.
The staff explained that the field test has three parts:
Preliminary results
The staff reviewed some high-level results based on the data they have received so far. Preparers, by a large majority, appear to like the management approach and the cohesiveness principle. It was thought that the approach helped them to identify their core operations and to explain their activities. Most unpopular were the reconciliation schedules and the direct method cash flow. With respect to the cash flow statement, none of the field test participants thought that they had financial systems in place to capture the data in sufficient detail to comply with the DP's proposals. In recasting their financial statements, most used a 'derived direct' method.
Board members discussed the preliminary results, trying to tease out some of the underlying reasons for the preparers' responses. In some cases, the staff were not in a position to answer because they were still analysing the data; in other situations the questions posed by the Board members had not been included in the questions posed to preparers.
The staff also outlined the approach for the analysts' phase of the field test. This will involve analysts reviewing 'masked' preparer data under original and recast versions and responding to a series of questions. It is hoped that each preparer set of data will be reviewed by five analysts. Again, Board members asked questions about the design of the survey.
The FASB staff also noted the work being conducted under the auspices of the FASB's Financial Accounting Standards Research Initiative (FASRI) that is conducting an experiment designed to examine how changes proposed in the Discussion Paper affect user judgments and decisions.
The staff hope that at the next joint meeting they will be able to discuss with the boards:
The Board discussed the strategic options available to the boards in meeting the MoU commitments relating to consolidation and derecognition.
The purpose of the session was to discuss the strategic options available to the boards in meeting the MoU commitments relating to consolidation and derecognition. Staff presented the current state of play on these topics at both boards. They noted that the financial crisis lead to significant pressure to get the projects accelerated. Staff highlighted that the ideal would be both boards develop common requirements, but they concluded this was not achievable at present.
The staff presented both boards with two strategic options:
Board members asked the staff about differences between the current FASB proposals and the direction the IASB is taking in the two areas. They discussed possible approaches that could result in converged guidance in the longer term while allowing for the current pressure on both boards to produce overhauled guidance in the short-term. This could avoid significantly changing the same guidance again within a short time frame. Staff confirmed that both sides are monitoring progress and trying to identify differences between the current thinking of the boards on these issues as early as feasible, but this process takes time and ressources.
The boards finally agreed to pursue an approach where the FASB finalises its current proposals and then exposes the IASB documents, once finalised, as exposure drafts (FASB would already allocate resources during the redeliberation and finalisation phase of the IASB documents). If any issues were identified during the FASB redeliberations, they could be addressed via the two-year post-implementation review that is part of the IASB's due process.
The staff reviewed with the boards the decisions reached by the IASB in the development of their fair value measurement exposure draft that differ from those reached by the FASB in FAS 157.
The staff reviewed with the boards the decisions reached by the IASB in the development of their fair value measurement exposure draft that differ from those reached by the FASB in FAS 157.
The only item that was discussed in any real detail was the IASB's conclusions on the fair value of a liability.
A FASB member noted that the FASB was developing a FSP FAS 157-c Measuring Liabilities under FASB Statement No. 157, which would address many of the same issues. IASB members stated that the IASB's conclusions were based on the assumption that fair value remained the measurement objective. They did agree with the FASB's conclusions that in almost all instances in which it was suggested that this presumption was not valid could be disproved because the attributes which affected the measurement of the liability (for example, credit enhancement) were particular to the holder or issuer of the liability and not the instrument. But without hard data, they were uncomfortable with being unequivocal about that conclusion. A question would be raised in the Invitation to Comment asking whether there were any instances in which this presumption could be disproved.
There was a brief general discussion of various aspects of the project, but no new issues or positions were advanced.
In addition, the staff highlighted disclosures additional to those required by FAS 157 that the IASB would propose in the IASB's exposure draft. These were noted by both Boards without discussion.
The staff noted that the IASB expected to publish an exposure draft of the proposed IFRS on fair value measurement in 2Q 2009.
The staff also advised the FASB that the IASB had released a 'Request for Views' on 20 March 2009, containing the proposed FASB Staff Position FAS 157-e Determining Whether a Market Is Not Active and a Transaction Is Not Distressed and proposed FSP FAS 115-a FAS 124-a and EITF 99-20-b Recognition and Presentation of Other-Than-Temporary Impairments together with questions for IASB constituents. Comments were requested by 20 April 2009.
Other activities related to FAS 157 currently being undertaken by the FASB were noted.
The Board discussed the goal of the financial instrumentsproject: 'to improve the decision usefulness of financial reporting for financial instruments for users.'
The staff introduced the topic by noting that the ultimate outcome of project was to have a consistent standard under both IFRS and US GAAP. It presented the Board with its recommendation on the project scope: 'To improve the decision usefulness of financial reporting for financial instruments for users.'
One IASB Board member noted this was an objective hard to object to. He continued that the staff has to identify the target staff is aiming at. Another Board member wanted to clarify that all aspects of the framework and its definition of decision usefulness is applied in assessing any proposals. It was further noted that the any improvement would have to result in simplification - some thought this would almost happen automatically.
The IASB chairman reminded participants that both boards made the commitment to develop improved guidance in months, not years. One IASB Board member noted that this meant the starting point was not a blank sheet of paper.
One of the project managers highlighted that the objective was to make the reporting of financial instruments more understandable for users.
Staff then turned to the criteria that would determine the appropriate measurement attribute. There seemed to be consensus around the table that at least two categories for measurement purposes were required: fair value (starting point) and 'something else' (obviously, amortised cost or a current measurement not based on an exit notion).
Board members emphasised that the dividing line between the categories was important and must be understandable.
Three possible approaches for categorisation were identified:
A majority of board members agreed that certain instruments, particularly derivatives, must continue to be carried at fair value.
The staff then presented its project design:
One IASB Board member remarked that the selection of any measurement attribute should also be assessed based on the presentation of the changes in value. He emphasised that some topics in the list are interrelated. A FASB Board member asked whether the staff intended to propose any form recognition of changes in values directly in other comprehensive income. The staff responded that it had no intentions at this point.
The IASB chairman then summarised the session:
The Board discussed comments received on the release and effective dates of the Framework chapters.
The staff introduced the session by noting that most respondents to the exposure draft on the Objective and Qualitative Characteristics and the discussion paper on the Reporting Entity expressed concern that the Boards proposed to make each chapter of the Framework effective as it was balloted and published. These respondents urged the Boards to publish a single exposure draft after all chapters of the conceptual Framework are published (but not yet made effective) so that constituents can review and comment on the new Framework as a whole. The Board discussed these issues and the related staff recommendations.
The IASB agreed that it would amend IAS 8 paragraph 10 when the final chapter on Qualitative Characteristics is issued. The amendment would be treated as a separate project.
The FASB agreed in principle that, other than replacing CON 1 and CON 2, it would not make consequential amendments to other Concept Statements and would not make consequential amendments to other Statements.
The IASB confirmed its intention that the new framework would be effective for constituents a year from publication. There was some discussion about how to make this operational, but the intention was clear.
The IASB agreed that it would not make consequential changes to the rest of the existing Framework as a consequence of publishing the new chapters, except for the consequential amendments proposed in the Objective ED. The Boards also discussed whether, given that the Reporting Entity phase deals with several issues, some of which relate to the Objective Chapter (for example, what is a reporting entity or group reporting entity to which the objectives of financial reporting apply), it would be best to finalise the Objective Chapter and the Reporting Entity Chapter at the same time, possibly as an integrated chapter.
After discussion, the Boards agreed that the issues discussed in the Reporting Entity phase should be drafted as an independent Chapter and that the effective date for the Objective and Qualitative Characteristics chapters should be independent of the effective date of the Reporting Entity Chapter.
The IASB agreed that the purpose and status of the Framework, as expressed in IASB standards, was appropriate for it and did not wish to amend where in its hierarchy it was placed.
The FASB agreed that, while it might wish to conform the US GAAP hierarchy with respect to the Framework to the position adopted by the IASB, it would wait until the project was completed. FASB members noted that the US GAAP hierarchy had only recently been amended and they did not wish to inflict two changes on their constituents in short order.
After a short discussion, the Boards agreed that they would defer consideration of not-for-profit entities and government business entities until the first four phases of the Framework project are completed.
The Board discussed loan loss accounting and whether this topic should constitute a separate work stream in the financial instruments project.
The staff informed the Board that the purpose of this session was to have a general discussion on the topic of loan loss accounting and whether this topic should constitute a separate work stream in the financial instruments project.
The staff noted that to understand the models proposed for possibly replacing the IAS 39 incurred loss model, further meetings with constituents were necessary, particularly with the Spanish Central Bank as their model is considered by some constituents as a possible starting point for improving the guidance on loan loss provisioning. It was also emphasised that 'through the cycle' provisioning would require recognising impairments above an expected loss due to the duration of an economic cycle (10-15 years) compared to an average loan maturity.
The staff further noted that the term 'dynamic provision' is not well defined and different people think of different models when talking about dynamic provisioning.
Board members asked why the expected loss on day one would not be factored into the transaction price. Staff confirmed that theoretically all loss expected on the date of transaction should be factored into the transaction price. The staff said that if impairments are higher, the unwinding of them lead to a higher effective interest rate in the future, which under certain scenarios could lead to a pro-cyclical effect. It was noted that under the current IAS 39 model the effective interest rate is kept constant and the cash flows are adjusted.
Board members had some discussions on what impairment represents, technical considerations, and whether an expected loss model is closer to fair value. None of those discussions were conclusive.
In the end the boards decided that the issue of impairment was important enough to justify it being established as a separate work stream in the financial instruments project.