Monday 16 March 2009
 Annual Improvements
The staff introduced this session by providing a brief update on the status of the annual improvements process. Staff noted that the outstanding issues from the process were:
The objective of this session was to resolve the outstanding issue from the 2006-2008 cycle, one issue from the 2008-2009 cycle, and the proposals of ED/2009/1.
Statement of compliance with IFRS
Under the proposals an entity would be required to make disclosures when it did not include the explicit and unreserved statement of compliance with IFRS as required by IAS 1 Presentation of Financial Statements.
The staff proposed not to finalise the proposals. The Board agreed.
ED/2009/1: Scope of IFRIC 9 and IFRS 3
The staff noted that the proposals would exclude from the scope of IFRIC 9 Reassessment of Embedded Derivatives contracts with embedded derivatives acquired in a combination of entities or businesses under common control or the formation of a joint venture. The amendment became necessary because the definition of a business combination changed under IFRS 3 as revised in 2008.
Staff further highlighted that the vast majority agreed with the proposals and that only one comment letter wanted the exemption to be extended to investments in associates. The staff recommended not extending the scope exemption because obtaining significant influence is not the same as obtaining control.
The Board agreed to proceed with the proposals subject to drafting changes.
ED/2009/1: Removal of restriction of hedging instruments in IFRIC 16
The proposals would remove the restriction currently in IFRIC 16 Hedges of a Net Investment in a Foreign Operation to designate as a hedging instrument in a hedge of a net investment in a foreign operation a financial instrument that is being held by the hedged entity.
The staff noted that most respondents agreed with this proposal. However, many constituents were concerned about the proposed effective date of 1 October 2008 as this would imply the possibility of backdating without having the appropriate (and required) hedge documentation in place at that date.
After brief discussion the Board agreed on an effective date of 1 July 2009, with earlier application permitted. It was further agreed that the Basis for Conclusions would make clear that the amendment did not introduce the possibility of backdating hedging relationships.
IAS 39.2(g) - Scope exemption for business combinations contracts
The staff introduced this topic by highlighting that nearly all respondents to the Annual Improvements 2008 ED commented on this issue. The proposals would make clear that only forward contracts entered into during a business combination would qualify for the scope exemption. Most respondents agreed to exclude forward contracts.
Many respondents asked to extend the exemption to optional contracts. The staff noted that option contracts are not binding and, hence, staff believe it is not appropriate to exclude option contracts.
Furthermore, the staff did not recommend extending the exemption to contracts that are synthetic forwards (that is a combination of a put and a call option with same volume, maturities, and strike prices). The rationale for this was that while such a combination in theory is equivalent to a forward, there are many other business considerations that might result in one party not exercising.
The staff informed the Board that it changed the drafting to clarify that a forward contract would have to mature within a 'normal timeframe' to qualify for the exemption.
Finally, the staff recommended not adopting proposals from constituents to extend the exemption to joint ventures and investments in associates, as they would not represent business combinations.
The Board agreed with all staff recommendations.
IFRIC Update
The IFRIC Coordinator presented a brief update on IFRIC activities, noting that the IFRIC recently finalised several tentative agenda decisions and issue several new ones.
The revised versions of IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements issued in January 2008 have created some confusion amongst constituents on the application of IAS 28 Investments in Associates. The IFRIC Coordinator noted that these IAS 28 application issues will be brought back at a future meeting as a package.
The Board was further informed that the IFRIC does not have any new Interpretations on its agenda at the moment.
Tuesday 17 March 2009
Financial Instruments Update
(FASB staff participated by video link.)
The objective of this session was to update Board members on recent developments in financial instruments accounting under US GAAP.
At its Monday 16 March 2009 the FASB discussed and decided on two issues:
- Additional fair value measurement guidance
- Changes to the impairment model for some financial instruments (securities)
The Board was informed that both issues would be issued as proposed FASB Staff Positions (FSPs) shortly.
Additional fair value measurement guidance
FASB staff introduced the new proposed guidance on additional guidance how to determine fair value. The proposals would introduce a two-step process:
- 1. Determine whether a market is active or inactive
- 2. If inactive, assume that quoted prices (including broker prices) are associated with distressed transaction unless:
- There was a marketing period prior to the measurement date
- There were multiple bidders for the asset
FASB staff noted that this should increase the use of level-3 fair values (measurement model) under SFAS 157 Fair Value Measurements. One Board member concluded that private equity instrument transactions are always level-3 measurements as there are rarely multiple bidders for the assets.
Other Board members interpreted the proposals as a requirement to ignore information. FASB staff explained that FSP 157-3, issued late in October 2008, was aimed at bringing more measurements into level 3 but did not do so.
It was also noted without more specific background information that the liquidity premiums on certain assets caused concerns – a level-3 measurement would ameliorate those concerns.
One Board member noted that this guidance would contradict the guidance issued in the final document of the IASB's Expert Advisory Panel (EAP), where it is specifically stated that even in inactive markets transaction prices should not be ignored.
Board members were informed that the members of the panel were already asked to provide their input on possible changes to the EAP document.
Another Board member asked how many of the criteria in the proposed FSP for determining whether a market is inactive or not would have to be met to reach this conclusion. FASB staff responded that it would be a result of applying judgement considering all the factors mentioned plus others if necessary (that is, the list of factors is not exhaustive).
Changes to the impairment model for some financial instruments (securities)
The FASB staff continued to present the proposals on impairment of debt and equity securities. The FASB has agreed to expose for comment a model that would change the way other-than-temporary impairments are determined to exist and recognised.
Under the proposed model, the entity would be required to assess whether it intends to sell the security or whether it is more likely than not that it will be required to sell the securities prior to the recovery of the cost basis.
Only credit-related losses would be recognised in profit or loss. The staff explained that as a first step all changes in fair value would be recorded in profit or loss, but the non-credit loss related piece would be transferred into other comprehensive income via a contra account in profit or loss.
Additional credit losses would have to be recorded in profit or loss. Further, if the intent to sell changes or a requirement to sell becomes more likely than not, the OCI portion would have to be recognised in profit or loss.
Many Board members had specific questions about the logic behind this model and how this would be applied in practice. It seemed many Board members were concerned over the discretion preparers would have in determining whether to recognise an impairment loss.
The chairman asked the FASB staff whether this model would impact the long-term project to improve reporting for financial instruments. FASB staff responded that this was not the case, but there was always the possibility that constituents would favour this proposed new model, which would be reflected in their comment letters.
The chairman asked the IASB Board members what the IASB's response to these developments should be. He proposed to issue the FASB proposals as an IASB 'wrap around'. It was agreed that any document would highlight the differences between US GAAP and IFRSs with respect to accounting for impairments.
There was some debate over the form of the document, as the objective is to ask constituents whether the IASB should develop similar guidance. It was agreed to wait until the IASB has seen the FASB proposals and discuss the form of the document in due course – [subsequently scheduled for Thursday 19 March 2009]. Further the Board agreed that any document should be exposed for comment for 30 days.
Revenue Recognition – Measurement issues
(FASB staff participated by video link.)
The objective of this session was for the Board to reach tentative decisions on the main issues relating to the measurements of rights in a contract. Specifically, the Board would be asked to consider how rights in the contract should be measured when the amount of consideration to be paid by the customer:
- is paid significantly before or after performance by the entity (time value of money);
- is uncertain; or
- is paid other than in cash.
Effects of the time value of money
The staff introduced the paper by noting that in developing the proposed revenue recognition model the Boards have ignored the time value of money for simplicity; however, an entity's net contract position may contain a financing element. The staff asked the Board to consider whether and how the carrying amount of an entity's net contract position should reflect the time value of money.
The staff recommended that:
- a. Conceptually, the carrying amount of an entity's net contract position should reflect the time value of money.
- b. Practically, the carrying amount of an entity's net contract position needs to reflect the time value of money only if payment by the customer and performance by the entity differ by approximately one year or more.
- c. The discount rate used to reflect the time value of money should be the rate at which the entity and its customer would have entered into a financing transaction independent of providing goods and services under the contract.
- d. The interest income or expense on the net contract position should be presented as a component of revenue.
The Board agreed with the staff recommendation that, in concept, the carrying amount of an entity's net contract position should reflect the time value of money. A number of Board members noted that the concept is right; it is just a question of materiality as to whether it affects the financial statements.
In response to the question of when should the time value of money be reflected, the Board disagreed with the staff recommendation that the Board should specify the circumstances in which an entity should reflect the time value of money. A number of Board members were of the view that the time value of money should be reflected, subject to materiality. Another Board member noted that whether the time value of money is material is a function not only of time, but also of the level of interest rate. One Board member also stated that the Board should resist bright line accounting.
Another Board member noted that the only way to judge if something is material is to calculate the numbers. So that Board member would support an IAS 39.AG79 type model being applied, in which short-term receivables and payables with no stated interest rate may be measured at the original invoice amount if the effect of discounting is immaterial. Other Board members agreed with the concept, and requested the staff to develop some guidance on applying materiality on this basis.
The third issue addressed in relation to time value of money was what interest rate should be used. The Board agreed with the staff recommendation that the discount rate should be the rate at which the entity and its customer would have entered into a financing transaction; however, a number of concerns were raised as to the level of detail in the guidance being developed by the staff. The staff were requested to keep any guidance related to this area high level in nature.
The final question addressed in relation to the time value of money was how should the effects of the time value of money be presented in the financial statements? The Board indicated that this issue was better addressed as part of the financial statement presentation project.
Effects of uncertain consideration
The staff introduced the second paper by noting that, in developing the model to date, the Board has assumed that the promised customer consideration amount is fixed. However, in many contracts the promised consideration amount is uncertain.
The staff recommended that:
- a. At contract inception, the transaction price is the amount of consideration that an entity expects to receive from the customer. The expected consideration is the entity's probability-weighted estimate of consideration from the customer.
- b. After contract inception, the entity should update the measurement of rights to reflect the current transaction price. Changes in the transaction price should be allocated to all performance obligations. Consequently, the entity recognises those changes in profit or loss only to the extent that they relate to satisfied performance obligations.
The staff then directed a number of questions to the Board for consideration in response to these recommendations.
Question 1
- Does the Board agree that the transaction price at contract inception is the amount of expected consideration to be received from the customer (that is, at the entity's probability-weighted estimate of customer consideration)?
Question 2
- Does the Board agree that after contract inception the measurement of rights should be updated to reflect changes in the transaction price?
Question 3
- If the measurement of rights is updated to reflect changes in the transaction price, does the Board agree that those changes should be allocated to the performance obligations? Consequently, an entity would recognise revenue for changes in the transaction price only when those changes relate to satisfied performance obligations.
Question 4
- Does the Board think that an expected consideration approach should be constrained to minimise the risk of reversing revenue? If so, does the Board agree that cumulative revenue should be limited to the amount of certain consideration?
Question 5
- Does the Board agree that a change in the transaction price should be allocated to all performance obligations in a contract? If not, what is the basis for excluding some performance obligations from the allocation of a change in the transaction price?
The Board generally agreed with questions 1, 2 and 3.
In response to question 4, the Board disagreed with the staff recommendation that the expected consideration approach should be constrained to minimise the risk of reversing revenue. One Board member asked where this concept was in the Framework?
Another Board member noted that the expected value already takes into account the considerations being put forward in the proposal, so also disagreed with the staff recommendation. The majority of Board members did not support the staff recommendation; that is, they supported the view that the expected consideration approach should not be constrained.
In response to question 5, a number of Board members expressed concern with the proposals, with one Board member requesting the staff to identify the principle they were applying. Following discussion, the staff was requested to bring back the issue as part of a future discussion on segmenting transactions.
Noncash consideration
The staff introduced the third paper by noting that in developing the proposed revenue recognition model to date the Board had only considered contracts in which customer consideration is in the form of cash. However, customer consideration might be in the form of goods, services, or other noncash consideration.
In relation to noncash consideration the staff recommended that:
- An entity should measure its right to noncash consideration at the fair value of the promised consideration unless the fair value of the promised consideration cannot be measured reliably or the contract lacks commercial substance.
- If the fair value of the noncash consideration cannot be measured reliably, but the contract has commercial substance, the entity should measure the promised consideration indirectly by reference to the fair value of the goods and services promised in exchange for the consideration.
- A contract in which goods or services are exchanged for goods or services that are of a similar nature is not a revenue generating contract if that contract lacks commercial substance.
- A new revenue standard should not provide specific guidance for particular exchanges involving noncash consideration (for example, barter credit transactions, exchange of advertising services).
The board agreed that, in principle, an entity should measure its right to noncash consideration at the fair value of the promised consideration. The board also agreed with the second recommendation made by the staff that if the fair value of the noncash consideration cannot be measured reliably, but the contract has commercial substance, the entity should measure the promised consideration indirectly by reference to the fair value of the goods and services promised in exchange for the consideration.
In response to a question as to whether a revenue standard should include guidance on when the fair value of an asset received can be measured reliability in the absence of comparable market transactions, the board thought that this issue would be better addressed as part of the fair value measurement project.
The board discussed whether entity should be allowed to recognise revenue in a contract for an exchange of similar goods or services. A number of board members expressed concern as to how this could be applied in practice. It was noted that some guidance already existed in IAS 16. One board member said that if the entity was in the same position before and after the transaction there should be no revenue. Another board member asked the staff to clarify what they meant by the term 'similar'. Following discussion, the staff agreed they needed to consider the issue further and bring the issue back to the board at a later date. No final decisions were made.
Wednesday 18 March 2009
Post-employment Benefits
At this session the staff sought input from the Board on the following topics:
- Presenting the remeasurement component
- Classification of the effects of settlements, curtailments, and the effect of the asset ceiling
- Additional guidance on the discount rate
- Multi-employer exemption
- Attribution to periods of service
- Plans with risk sharing
- Definition of short and long term
- Tax relating to pension costs
Presenting the remeasurement component
The Board has decided at previous meetings to recognise all changes in the defined benefit obligation in profit or loss; to split up the change into employment, financing, and remeasurement components; and to define the remeasurement component.
The staff proposed:
- To allow entities to present the remeasurement component as one line item or to disaggregate the remeasurement component and present its disaggregated components in separate line items in the income statement
- To prohibit entities from disaggregating the actual return on plan assets in the statement of comprehensive income
- To amend IAS 1 to allow entities presenting a subtotal that would be profit before income taxes and specified remeasurement components (that is, remeasurements could be presented net of tax)
The staff also provided the Board with possible examples how the proposals could be used in the statement of comprehensive income.
The proposals lead to a considerable amount of confusion and discussion amongst Board members – not only on the remeasurement component, but on all aspects of the disaggregation. Some Board members felt that previous decisions would have to be revisited.
Others were not clear what the remeasurement represents. Many were concerned over the proposal to allow a net of tax presentation for the remeasurement component. Board members also highlighted that the proposals would interact with the outcome of the financial statement presentation project.
The chairman proposed four further approaches to resolve the issue and address some of the concerns of Board members, which would have to be applied mandatorily:
- 1. One line item only
- 2. Pensions must be separated into two line items
- a. Service cost
- b. All other changes
- 3. Pensions must be separated into three line items
- a. Service cost
- b. Interest cost on the obligation
- c. All other changes
- 4. Pensions must be separated into three line items
- a. Service cost
- b. Interest cost on the obligation and expected return or imputed interest on plan assets
- c. All other changes
The Board agreed on alternative 3 vs the staff recommendation (by casting vote).
The Board also agreed by majority vote to allow a net of tax presentation of the 'all other changes' component, acknowledging that this requires rules for the tax allocation. Staff noted that the upcoming ED on Income Taxes would address some of the issues surrounding tax allocation.
Classification of the effects of settlements, curtailments, and the effect of the asset ceiling
The Board was asked to decide on where the effects of settlements, curtailments, and the asset ceiling should be classified (employment, financing, remeasurement).
The staff recommended that the effects of settlements should be classified into remeasurement component. The Board agreed.
The staff recommended that the effects of curtailments should be classified into the employment component. The Board agreed.
The staff recommended that the effects of the asset ceiling should be classified into the remeasurement component. The Board
agreed.
Additional guidance on the discount rate
Staff introduced the topic by noting that constituents requested more guidance on determining the discount rate, particularly when bonds can be considered high quality and when a market is considered deep.
Some Board members had specific questions on technicalities when determining the discount rate. There was a general feeling that addressing the discount rate could only be done if the Board was to address measurement of defined benefit obligations – which is not in the scope of this phase of the pensions project.
The staff proposed the following:
- Not to investigate changing the discount rate
- Not to amend IAS 19 to allow use of an unobservable rate.
- To amend IAS 19 to provide more guidance on how to determine whether a deep markets exists
- Not to include guidance on determining whether a corporate bond index is high quality
The Board agreed to 1, 2 and 4 and disagreed with recommendation 3.
The chairman asked the staff to seek input from constituents (in particular, actuaries) on the appropriate discount rate that could be used when the Board in the future revisits measurement of defined benefit obligations.
Multi-employer exemption
The staff proposed to provide preparers with a blanket exemption for multi-employer plans. This would result in such plans classified as defined contribution. However, this exemption would be accompanied by additional disclosures. Staff noted they believed that defined benefit accounting cannot be applied in a useful manner to such plans.
Board members were concerned over the abuse potential of a blanket exemption.
The Board in the end disagreed with the staff recommendation.
Attribution to periods of service
The staff asked the Board whether expected future salary increases should be taken into account in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit in later years.
Board members saw no difference in the benefit formula leading to materially higher levels of benefit in later years or the salary projection – both would impact the absolute amount.
The staff recommended that IAS 19 should be clarified to state that salary increases in the future should be included when assessing the requirements in IAS 19.67.
Plans with risk sharing
The staff asked the Board whether to clarify the accounting requirements for plans with risk sharing or conditional indexation features.
Staff recommended that the wording in IAS 19 is amended to make clear that such features should be reflected in the measurement of the obligation. The Board agreed.
Definition of short- and long-term
The Board confirmed its view that the distinguishing feature between long- and short-term benefit is the entity's expectation when a benefit becomes due to be settled. The paragraphs in the Basis for Conclusions will be amended to remove the wording that caused confusion.
Tax relating to pension costs
The staff explained that constituents asked for clarification on how to reflect taxes payable by a plan itself should be reflected as part of the actuarial assumptions or as part of the return on plan assets. Some constituents believed that the wording in IAS 19 requires an entity to include it in the return on plan assets. Staff proposed that both treatments were acceptable as long as the tax is not double counted or not reflected at all.
Some Board members were confused about the type of tax staff was talking about. Other Board members were concerned over the accounting for administrative costs the staff mentioned as an analogy. The staff was asked to bring the issue of administrative costs back at a future meeting.
On the tax issue the Board agreed with the staff recommendation.
Financial Instruments: Replacement of IAS 39 – How to proceed with this project
The purpose of this session was to gauge views from Board members on certain aspects of the project on a comprehensive review of financial instruments accounting. This project was added by both the FASB and the IASB in November and December 2008 respectively. The Board was not asked to make formal decisions.
The staff discussed possible objectives for this project. Staff proposed to define the following project objective: To improve usefulness of financial reporting for financial instruments for users. The Board indicated agreement with this objective.
By a nine to five majority, the Board also confirmed its view that conceptually the long-term goal must be fair value measurement for all financial instruments, but that a mixed-attribute model would be the appropriate answer in the short-term.
The staff then tried to identify possible ways of drawing a line between what is measured at fair value and what is measured at a different basis (presumably, amortised cost).
The Board discussed whether management intent (or 'business model') is the appropriate distinguishing feature. There seemed to be agreement that this is not the case. Many Board members had sympathy that the characteristics of a financial instrument are important in deciding on the measurement attribute. There seemed to be consensus that there will not be only one criterion to base the measurement decision upon.
Update on the Standards Advisory Council Meeting – 23-24 February 2009 (IAS Plus Notes of the Meeting)
The Director of Technical Activities gave a brief update on the last Standards Advisory Council (SAC) meeting that took place on 23-24 February 2009.
It was highlighted that this was the first meeting of the restructured SAC. The SAC discussed the work plan of the IASB and recommended prioritising credit crisis, convergence, and framework projects.
One Board member noted that SAC took formal votes on several issues in February – something this member believed the SAC is not supposed to do. The chairman intervened by noting that this was not a formal vote, but more a 'where are people' exercise.
Further, the SAC agreed to establish its own agenda committee.
SAC members also asked to make the meeting less technical and more strategic. It also asked for increased input of the Board members present at the SAC meetings.
Update on the Analyst Representative Group Meeting – 25 February 2009
One of the Board members present at the Analyst Representative Group (ARG) meeting gave a brief oral update on the issues discussed.
It was noted that analysts had sympathy for a comprehensive disclosures project. Further, analysts were concerned over the discussion on dynamic provisioning, as this would result in income smoothing. Also, analysts recommended to the Board not to pursue the Earnings per Share project until other related Board projects are resolved. Finally, the ARG discussed certain aspects of the Financial Statement Presentation Discusison Paper.
Thursday 19 March 2009
IFRS for Non-publicly Accountable Entities (formerly SMEs and Private Entities)
The staff opened the discussion by informing the Board that this was the 42nd board meeting at which this was discussed. The objective of this discussion was to decide whether there is a need to re-expose the revised proposals for an IFRS for Non-publicly Accountable Entities (NPAEs) as a result of the changes made during the Board's redeliberations of the February 2007 exposure draft (ED).
The staff recommendation was that re-exposure was not required.
The Board discussed whether there is a need to re-expose the revised draft as a result of the changes made during the Board's redeliberations of the February 2007 exposure draft (ED). The Board considered the nature of the changes made in relation to the guidelines for re-exposure in the Due Process Handbook for the IASB as approved by the Trustees of the IASC Foundation.
The Board decided unanimously that re-exposure is not required.
The Board asked the staff to develop a plan for post-issuance implementation and review of the standard. The plan should address (a) how to deal with issues that inevitably will arise as entities around the world adopt the new standard for the first time and (b) how to maintain the standard particularly in light of the changes to full IFRSs that are expected based on the IASB's current work plan.
One board member asked whether constituents were prohibited from sending issues relating to the NPAE to the IFRIC. The Chairman noted that issue will be addressed at an administrative session later. Another board member note that whatever is decided it will need to be brought back to the board to formalise the process.
The Board then discussed the reaction to its tentative decision in January 2009 that the name of the final standard should be International Financial Reporting Standard for Non-publicly Accountable Entities, or IFRS for NPAEs. Some Board members observed that reaction to IFRS for NPAEs has been somewhat unfavourable because (a) it sounds negative, (b) all entities have some types of accountability to the public for their actions, and (c) 'non-publicly accountable entity' is a complicated phrase to say and to translate. The Board discussed alternative names proposed including (1) Simplified IFRSs, (2) IFRS for SME, (3) IFRS for Smaller Entities, and (4) IFRS for Private Entities. The board expressed a preference to revert to IFRS for Private Entities, with Simplified IFRSs as a second preference. The Chairman will discuss the name with representatives of the National Standard Setters at their meeting in April 2009.
The Chairman asked the Board members to indicate how they currently intend to vote on the final standard based on the changes made during the Board's redeliberations of the February 2007 exposure draft (ED). Thirteen Board members indicated an intent to vote in favour, and one intends to dissent.
The Board noted their appreciation for the efforts of the staff in finalising the IFRS.
Conceptual Framework Phase A – Objective and Qualitative Characteristics
The objective of this session was to discuss concerns raised by respondents regarding the objective of financial reporting. The staff introduced the topics by noting that the ED proposed that the objective of financial reporting should encompass all decisions made by capital providers of a reporting entity in their capacity as capital providers. Such decisions will induce resource allocation decisions and decisions made to protect and enhance their investments. Most respondents agreed with the proposed objective. The board was asked to confirm that the objective should be broad enough to encompass all the decisions that equity investors, lenders and other creditors make in their capacity as capital providers.
One board member noted that all decisions cannot be included, and recommended that the wording be amended in the question. The staff agreed, and subject to rephrasing the question, the board agreed with the objective.
The board then discussed whether the objective should be for financial reports or financial statements. The board agreed that the focus should be on the objective of financial reporting and the scope should not be limited to only financial statements at this time. A later phase will deal with more specific issues relating to boundaries of financial reporting.
The staff then advised the board that a group of respondents had expressed concern about the ED's discussion of economic phenomena and information that depicts economic phenomena. The concern is that it could be misunderstood as excluding or precluding forward-looking or prospective information or management commentary. The staff proposed revisions to the
discussion to address these concerns. The board agreed with the proposed revisions.
The primary user group, entity perspective and parent company approach
The first question addressed by the staff was what should financial reports report on? The staff noted that the entity is the focus of financial reporting, rather than the owners or other who have an interest in it. The feedback from respondents to this was while there were differing views among respondents regarding other aspects of the entity perspective, no respondent disagreed that the reporting entity is separate from its owners. The staff recommended that financial reports of the reporting entity report on the financial position and changes in financial position of the entity and do not include the financial positions and changes in financial position of the entity's owners. The board agreed. One board member noted that this decision may need to change if the board agrees at a later date to cover non-profit or co-operative type entities.
The staff further recommended that in the context of a group reporting entity that financial reports of the entity report on the financial position and changes in financial position of the group, rather than the financial position and changes in financial position that are attributable to a specific group of capital providers. The board agreed with the staff recommendation in principle; however, a number of board members were concerned that the recommendation read such as to exclude reporting for common shareholders. This was not the intention of the staff recommendation, and the staff agreed to rephrase the question so that it was clear.
The next issue addressed by the staff was whether the general purpose financial reports should focus on a primary user group. In the Objective ED the Boards proposed that the presentation of general purpose financial reports focus on a primary group that consists of present and potential equity investors, lenders and other capital providers. The staff noted that most respondents supported having a primary user group; however, a group of respondents, the Publish What You Pay group, argued that the IASB had failed in its mandate to consider the special needs of emerging economies by identifying a primary user group, particular in their choice of the primary user group. The staff recommended that the board confirms having a primary user group. The board agreed.
The staff then outlined responses from those who supported having a primary user group. There were differing views regarding who the primary users should be from respondents. Most supported the proposed primary user group (the present and potential equity investors, lenders and other creditors), however other suggestions from respondents included management, employees and governments.
Some respondents also stated that there should be a hierarchy of primary users because each type has different information needs that may conflict with one another. Other respondents stated that the term capital provider implies a focus on providers of equity capital and recommended that the term resource providers be used instead.
The staff asked the board if the term capital providers should be replaced with resource providers. The board did not support the change.
The staff asked the board if the primary user group should consist of present and potential equity investors, lenders and other capital providers. The board agreed.
The staff asked the board if there should be a hierarchy within the primary user group. The board did not think there should be such a hierarchy. The board agreed that the term entity perspective and related labels should be removed.
The board directed the staff to commence drafting the final Chapters.
Conceptual Framework Phase D – Reporting Entity
The staff introduced the topics by noting that the objective of the meeting is to redeliberate the issues related to control of an entity included in the May 2008 Discussion Paper. The DP presented the Board's preliminary view that control of an entity should be defined at the conceptual level. Most respondents agreed with the Board's preliminary view. The staff asked the Board whether they agreed that control of an entity should be defined at the conceptual level.
The board agreed that control should be defined at the conceptual level, a number of board members raised oncerns as to the interaction of this definition with the standards level definition of control. Board members asked the staff to draft the definition of control in broad, high level terms, with much less detail than is currently being considered. A number of board members noted that the specific definition of control is already in ED10, so there is no need to repeat it in the Conceptual Framework. The Chairman directed the staff to wait until comments were received on ED10 before finalizing any definition on control.
In relation to significant influence and proportionate consolidation the board continued to express support that the relationship referred to as significant influence does not constitute control of an entity, and the board agreed that proportionate consolidation should not be discussed in detail in the forthcoming Exposure Draft.
The board agreed that the staff should proceed with drafting the Exposure Draft, subject to timing on the feedback on the ED10 proposals.
Insurance Contracts – Education session
(FASB staff participated by video link.)
The purpose of this session was to get a high-level direction from the Board on the cash flows that would be included in the measurement of insurance liabilities for both an exit notion or a fulfilment notion. After a brief update on the expected time table for the project the staff turned to the actual topic of the session.
The staff pointed Board members towards a detailed table in the agenda papers that contained a detailed list of guidance on determining current estimates of expected cash flows (largely taken from the Discussion Paper) showing the similarities and differences when applied to an exit or fulfilment notion.
Staff highlighted the high degree of similarity of both approaches from a cash flow estimation perspective.
While many Board members where generally supportive of the analysis presented, some were concerned over the interaction of components of measurement that were to be discussed at future meetings (in particular, the margin). Others expressed reservation that the analysis implied that the margin was realised over the premium period, not over the risk-taking period, which might be significantly longer in certain circumstances. On Board member was particularly concerned that changes in administrative expenses, for example, would be recognised in total in the period the change in estimate of these expenses occurred. This member preferred recognition of the change over future periods.
Another Board member pointed out that he could not assess the appropriateness of the analysis presented if he did not know the proposals on the other measurement components.
The session closed with no explicit decisions made.
Liabilities and Equity
Staff introduced the session by reminding Board members that it had been asked to analyse an approach where redeemable instruments were divided into two categories:
- Instruments that are redeemable upon the occurrence of an event that is certain to occur (such as death or retirement)
- All other redeemable instruments
The staff asked the Board the following questions:
Q1. Does the Board agree that instruments that are redeemable at the option of the issuer (callable instruments) are perpetual?
The Board agreed provided the instrument has no other feature of a financial liability.
Q2. Does the Board agree that instruments that are redeemable at the option of the holder or that are required to be redeemed only upon the holder's retirement or death should be classified as equity?
Staff clarified on request that the redemption price was not relevant for this criterion. Board members noted that such an instrument could possibly not provide any kind of equity return, but would still be classified as equity. This was also extended to limited life entities, but this discussion was deferred to a later question.
In the end the Board agreed.
Q3. Does the Board agree that instruments that are required to be redeemed on a specific date, in a range of dates, or upon an event that is certain to occur (except for retirement or death) should be classified as liabilities?
The Board agreed.
Q4. Does the Board agree that instruments that are required to be redeemed upon an event that is not certain to occur should be classified as liabilities?
Some Board members asked what the difference to the scenario in question 2 (see above) was. Another Board member believed that in this situation only bifurcation of the instrument produces a sensible outcome. The Board did not provide a definite position on this question as it interacted with the next question
Q5. Does the Board agree that instruments that are redeemable at the option of the holder (except upon death or retirement) should be classified as liabilities?
The chairman asked whether this would resolve the issue with puttable instruments in Germany. It was clear from the staff analysis that it did not. One Board member noted that the staff could try to expose this, but would get significant pushback from constituents on this point. This Board member gained support for his idea that the issue could be resolved by splitting out the embedded written put option. After some debate, the Board agreed that on questions 4+5 the staff would bring back an analysis on a bifurcation approach.
Q6. Are there other types of instruments that are redeemable (mandatorily or at the option of the holder) that the Board thinks should be classified as equity?
Board members mentioned shares of limited life entities that should be treated as equity. The staff was also asked to analyse the situation where the shareholders could trigger liquidation of an entity.
Emissions Trading Schemes
The Board was presented with, but did not discuss, a paper that explained the mechanisms in an emissions trading scheme. The staff had prepared this paper as useful background for the Board in deciding on an approach for the initial accounting of an allocation of tradable offsets in a 'cap and trade' scheme.
Accounting for issued tradable offsets in the context of a cap and trade scheme
The Board discussed the initial accounting for instruments that may be used to offset an emissions obligation ('tradable offsets') that have been issued to an entity free of charge in an emissions cap and trade scheme.
Is there and asset and, if so, what is its initial measurement?
The Board agreed that a tradable offset met the definition of an asset in the IASB Framework in that they are a resource controlled by the receiving entity that provide future economic benefits. The entity can use issued offsets in settling emissions obligations or it can sell issued offsets on the open market for cash. Issued offsets held result from a past event (the receipt of tradable offsets) and are a present resource.
The Board considered whether the tradable offsets should be measured at cost (nominal amount) or fair value and concluded that measuring the tradable offsets on initial recognition fair value provides more transparent and decision-useful financial information than cost.
How to account for the credit
The Board considered three possible approaches:
A: Non-reciprocal transfer model
This model considers whether an entity incurs a present obligation when it is issued offsets. The staff noted that this most likely results in a gain upon initial recognition of issued offsets. Only if a claw-back attaches to issued offsets and the Board concluded that this to give rise to a present obligation might entities recognise a liability, reducing (or perhaps eliminating) the gain. The staff noted that they had spoken with a wide variety of interested parties, including large emitters, other standard setters, auditors, analysts, ratings agencies, and investors. They generally believe that recognizing a gain on initial recognition of issued offsets does not provide useful information.
B: Performance obligation model
Under this model, when an entity is issued offsets, it has a performance obligation that it must fulfil in order to realise income from the offsets. Effectively, the entity enters into an agreement with the scheme administrator. The entity agrees to reduce its emissions below the level represented by the allocation of tradable offsets. That is, the offsets exist only as a result of the agreement with the scheme administrator. The agreement establishes a performance obligation. The performance obligation model does not result in a gain on initial recognition of issued offsets.
C: Compensation model
The compensation model takes the view that the issuance of tradable offsets is not a non-reciprocal transfer from the scheme administrator to an entity. Instead, the compensation approach considers the issuance of tradable offsets in the context of the whole package of requirements imposed by an emissions trading scheme. The model adjusts for a measurement mismatch that arises as a result of different measurement bases.
In the discussion that followed, none of the Board members supported the Compensation model.
The Board was finely balanced between the non-reciprocal transfer model (6 in favour) and the performance obligation model (6 in favour). One Board member put forward a model somewhere between the two.
Those who favoured the non-reciprocal transfer model noted that, when the tradable offsets were issued (presumed to be prior to the emission year), there was no obligation that meets the definition of a liability in IFRS. One member noted that the IFRIC had debated this issue for several meetings as it developed IFRIC 3, had come to an appropriate answer under the existing IFRS requirement, and the Board had not supported them.
Those who supported the performance obligation model did so for a variety of reasons-not all of them consistent. Some saw tradable offsets as a sort of conditional government grant (cf IAS 41); others supported the performance obligation approach because they liked the answer, even though it did not fit nicely with the Framework or existing IFRS.
The conclusion of the debate was not clear, but the Board will need to address the issue at a subsequent meeting given the lack of consensus.
Fair Value Measurement - Determining whether a market is not active and a transaction is distressed
The Board noted that the FASB had issued a proposal in the form of Proposed FSP FAS 157-e Determining Whether a Market is Not Active and a Transaction is Not Distressed on Tuesday 17 March 2009. The IASB staff is currently preparing a pre-ballot of an exposure draft (ED) on fair value measurement. The proposals in the ED differ from those in the proposed FSP. The Board discussed what, if anything, they should do-given that they were unlikely to be able to have any meaningful discussion of the proposed FSP so as not to delay the issue of the ED.
The Board agreed not to amend the ED, but to refer to the FASB's proposals in the Invitation to Comment. The IASB has already asked its Expert Advisory Panel and other interested parties to comment on possible actions that the IASB should take in response to the FASB's actions, and the Invitation to Comment should also refer to these activities.
The staff expects that the ED will be issued in mid- to late April 2009, for a comment period of 120 days.
The staff also noted that they now intend to schedule roundtable discussions after the comment period closes rather than during the comment period, as had previously been stated. The Board agreed.
Friday 20 March 2009 (morning only)
Conceptual Framework Phase C – Measurement
Choosing between a current and a non-current measure
The Board held a lively, if inconclusive, discussion of an aspect of the measurement chapter of the proposed conceptual framework. The staff continues to develop issues for inclusion in a discussion paper. After the last Board discussion of this aspect of measurement (see November 2008 IASPlus Notes), the staff determined that 'value-flow weighting' was the primary factor to be used when distinguishing between items to be reported at 'current amounts' and items to be reported at a past transaction amount. Consequently, the staff examined this further and used it to divide the population of assets and liabilities into two subpopulations:
- Those whose value is realised directly
- Those whose value is realised indirectly
The staff also presented the view of a Board member, who had proposed an alternative view too late to be incorporated in the agenda papers. That view centred on the fact that future cash flows are fundamental to investors and that a better way to implement this idea in measurement would be to incorporate 'anticipated realisation or settlement' in that measure. This would address (a) whether there was a market for an item; and (b) whether the entity would access that market for that item. If there was no market for the item, and there were fixed or contractual cash flows, the item would be measured on the basis of those contractual cash flows. The result would be that the statement of financial position would contain measurements that reflected the cash flows the entity would expect.
The Board discussed this alternative model for a while (before they addressed the model advanced by the staff). One Board member suggested that his colleague's alternative approach put forward a measurement attribute based on management intent (or 'business model', which he sees as a synonym for management intent). Other Board members were uncomfortable discussing an alternative approach without proper documentation or analysis.
The discussion returned to the staff paper. During the discussion, the staff clarified that, in their view, financial instruments – and especially financial liabilities – would always be measured using direct measurement.
A Board member noted that the 'direct' approach resulted in a 'current measure' that was not 'fair value' as defined by the Board in the forthcoming ED on fair value measurement. Thus, an item would be measured based on current inputs for some but not necessarily all components of the item's value. He also suggested that if all of the components of the indirect measurement were done correctly, the measure derived should be the same as would be achieved under the direct method. If this was indeed the case, the staff had proposed a distinction without a difference.
Another Board member did not agree with the staff conclusions. The member thought that a 'current measure' could only be the present value of the expected future cash flows, and that this measure should always be better than an indirect measure based on historical costs. In addition, the Board member did not support layering business model/management intent considerations over the measurement attributes. Another Board member supported these concerns, especially with respect to biological assets (for which indirect, historical measures were meaningless) and investment properties (which had elements of both direct and indirect measures inherent in them).
At least one Board member disagreed with his colleagues and found the proposed staff approach useful: it matched how investors looked at a business. Items used in conjunction with other things, like employees and unrecognised intangible assets, to generate value were measured indirectly; those held for sale or realisation would be measured directly.
After much discussion, a Board member intervened suggesting that the staff needed to restructure their proposals along the following lines:
- The ideal measurement objective for all assets and liabilities should be fair value, but there are situations in which the utility or cost-benefit considerations were such that fair value would not provide useful information to users.
- To the extent that fair value is determinable it should be used.
- Point estimates of fair value (especially with respect to some liabilities) might not provide the type of information that users want or need, for example because it gives no information about variability in the outcome.
- In addition, a current measure will not convey the most useful information to investors, so another measure (other than fair value) would be necessary. It is likely that such a measure would be based in historical cost, but might not be 'pure' historical cost.
- The measurement attribute must be chosen to reflect the utility in determining future cash flows.
The staff will return to this topic at a later meeting, taking into account the views expressed by Board members on the staff proposals as well as the suggestion about how to restructure them.
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
