Tuesday 21 July 2009 (starting 11:15am)
 Technical Plan
The Director of Technical Activities presented the latest version of the IASB's technical plan, noting that the recommendations being made at the meeting sought to 'create space' in the IASB's agenda for Board members, staff, and constituents. In addition, the Board should endeavour to link due process documents that have common thinking underlying them, wherever this made sense.
Three projects were proposed for conscious delay: earnings per share, extractive activities; and management commentary (already out for extended exposure). Further work on these topics would be deferred until later in 2010. A revised project proposal would be released on the IASB website as soon as possible. Work would continue as planned on financial crisis-related issues and on the FASB/IASB Memorandum of Understanding issues.
The Board broadly supported the approach, but several Board members had specific comments on individual projects. Several were puzzled by or critical of the linkage of the IAS 37 project and the forthcoming Insurance exposure draft (due later in 2009). While an approach 'based on' the revised liability measurement model developed in IAS 37 was a potential measurement candidate for insurance contacts, to say that they were 'linked' was a step too far for some Board members. In addition, linking the two projects seemed to pre-suppose a decision that IAS 37 would require re-exposure, something the IASB had not yet considered (this is scheduled for September 2009).
Another Board member noted that there were a number of projects out for comments at the moment, and that the Board should reassess each of those projects when it considered the initial analysis of comments received. If it was apparent that a high degree of consensus had been achieved as a result of the exposure process, then the Board should be able to complete redeliberations quickly. However, if the redeliberation phase was likely to be protracted (as it had been in the case of IAS 37), then the Board would need to look critically at whether that project should be deferred. This Board member thought that the critical projects were: Liabilities (IAS 37); Financial Instruments; and Annual Improvements (because this project addressed real issues that were a nuisance in the daily use of IFRS).
In response to a question about how the revised technical plan affected the cooperation and coordination with the FASB, the staff responded that with respect to critical projects the two Boards remained aligned.
Annual Improvements
The IFRIC Coordinator reported that the July 2009 IFRIC meeting had been a relatively full day and had resulted in a number of Agenda Decisions being issued in final, the most significant of which was perhaps on related to IAS 39 and the meaning of 'significant or prolonged' in IAS 39.61 (see the IAS Plus report of the July 2009 IFRIC Meeting for further information).
Write-down of a disposal group (IFRS 5)
The Board agreed that the staff should prepare a full agenda proposal to address an issue identified by the IFRIC to resolve a conflict between IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and IAS 36 Impairment of Assets. In addition, the proposal should include the solution suggested by the staff together with the proposed Basis for Conclusions. The solution suggested was to align the presentation of disposal groups in IFRS 5 with that for associates - this results in displaying the disposal group as a single line, measured at fair value less costs to sell. This would be included in the next round of annual improvements (2010-2011).
Debt-to-equity swap in a restructuring (IAS 32 and IAS 39)
The Board noted that the IFRIC, noting the significance and pervasiveness of the issue, had decided to develop an Interpretation with respect to the application of IAS 39 when an entity issues its own equity instruments in settlement of its existing debt instruments in a restructuring. The IFRIC had reached a tentative consensus at its July meeting and would meet by teleconference on 4 August at 1200 London time, with the intention of confirming its draft consensus. The Draft Interpretation would be issued as soon as possible thereafter with the usual 60 day comment period. The IFRIC would seek to confirm the consensus in November 2009, if possible, or in January 2010. The Board approved the approach and commended the IFRIC for acting as swiftly as it was.
Some Board members were concerned that the exchange of debt for equity resulted in a gain being recognised in profit and loss, but other Board members defended this result noting that it was the only logical result of the extinguishment of a liability for no cash outlay. The IFRIC was likely to conclude that the equity instruments issued should be measured at the fair value of the equity instruments issued or the fair value of the liability extinguished, whichever provides the most relevant measure.
A Board member asked what would be the accounting if the debt was held by a majority shareholder. The IFRIC Coordinator noted that IFRS had no measurement guidance for related party transactions. Judgement would be required and the transaction would need to be assessed to determine whether the shareholder was acting in their capacity as an owner before the appropriate accounting could be determined.
Measurement of Non-controlling Interest (IFRS 3)
The staff noted that IFRS 3 and IAS 27 (as issued in 2008) amend the definition of non-controlling interest (NCI) to 'the equity in a subsidiary not attributable, directly or indirectly to a parent'. They also noted that some constituents had suggested that the amended definition of NCI widened the scope of instruments to include, for example, the equity components of convertible bonds, warrants, options over own shares and options under share-based payment plans (not held by the parent). IFRS 3.9 (2008) permits a measurement choice of acquisition date fair value or the proportionate share of the acquired entity's identifiable net assets. There are differing interpretations of how the latter measurement should be applied.
The Board agreed that components of NCI other than the present ownership instruments that entitle the owners to a proportionate share of the net assets of the subsidiary should be measured at fair value or using the measurement basis required by IFRS. For example, a stock option under share-based payment awards should be measured in accordance with the method in IFRS 2 and the equity component of a convertible bond should be measured in accordance with IAS 32.
This item will be included in the 2009-2010 Annual Improvements.
Un-replaced and voluntarily replaced share-based payment awards
The Board agreed that un-replaced awards are non-controlling interests and are measured at a market-based measure in accordance with IFRS 2 on the date of acquisition; and that the application guidance in IFRS 3 paragraphs B57 to B61 [the split between consideration and post-combination compensation expense] should be adopted for the apportionment of the market-based measure of the un-replaced awards to the consideration transferred and post-combination expenses.
This item will be included in the 2009-2010 Annual Improvements.
Meaning of 'general borrowings' (IAS 23)
One Board member noted that in his opinion it is not appropriate to exactly match the qualifying asset with the liability. Another Board member acknowledged the apparent inconsistency between IAS 23.10 and IAS 23.14 and supported the staff in proposing amendment to IAS 23 to limit the capitalisation to general borrowings taken for an unspecified purpose.
Nonetheless, the majority of the Board was of the opinion that the standard is clear enough, any further allocation criteria would be rule-based and this amendment would not lead to improvement of financial reporting. Moreover, the Board was concerned that any amendment could lead to the need for further amendments to this standard that are of nature of application guidance.
The Board finally decided not to include this issue in annual improvements process.
Classification of rights issues (IAS 32)
Finally, the Board considered the urgent issue arising from the IFRIC meeting regarding classification of rights denominated in a foreign currency. The staff proposed a fast-tracked amendment to IAS 32 to deal with a narrow issue of classification of rights denominated in foreign currency distributed pro rata to all the shareholders as an exception to the principle developed in IAS 32. The Board agreed that as the issue is urgent and widespread, urgent amendment of IAS 32 is necessary.
One Board member noted that the issue shall be not limited to the narrow issue, but to all the instruments for all instruments where the price is defined in the fixed amount in a foreign currency. This proposal received a mixed reaction.
While many members would be prepared to support such proposal under normal circumstances, they felt that it would be such a significant change for a fast-tracked ED that not all the consequences of the change could be carefully assessed by the Board and the constituents. Moreover, as director of the capital markets pointed out, broadening of the issue could cause problems in developing of the liabilities and equity project. Even with the narrow amendment some conclusions in this project has to be revisited in order to link these two conclusions together. Moreover, some of the Board members were concerned that broadening of the scope could also lead to structuring opportunities. The Board finally agreed that the amendment should be extremely narrow; limited to rights denominated in foreign currency distributed pro rata to all shareholders.
The Board discussed the transition and effective date and agreed on the staff proposals that the amendment should be applied retrospectively and that the intended effective date should be included in the ED (90 days after it is published with early adoption permitted).
The Board agreed the timetable for the project, with ballot to be circulated during the week commencing 27 July, ED issued in the week commencing 3 August with a 30 days comment period (as the issue is narrow and matter urgent). The Board intends to analyse the comment letters at the September meeting where it also plans to finalise the amendment. Final amendment would be issued in late September or early October.
The Board approved the ED, subject to drafting and balloting, with one member dissenting.
Post-employment Benefits
Discount rate for post-employment benefit obligations
The Board agreed to amend IAS 19 paragraph 78 to remove the requirement to use a government bond rate when there is no deep market in high quality corporate bonds. Instead, the objective should be to estimate the rate for high quality corporate bonds in all cases.
The Board also agreed that additional guidance should be provided on how to estimate a high quality corporate bond rate. This would draw on the principles being developed in the Fair Value Measurement project but, until that project is finalised and an IFRS issues, no cross-references would be used. Instead, the current guidance in IAS 39 AG69-AG82 would be referenced.
Exposure Draft to be issued for 30-day comment period
The Board agreed that because this issue is of wide-spread application, it would assist preparers greatly if they could address it promptly. An amendment to IAS 19 now would help to solve a significant issue in the application of IFRS. Consequently, the Board agreed unanimously to propose the necessary amendments to IAS 19 using the 30-day comment period approach: the issue was tightly defined and the matter was urgent (as provided in the IASB Due Process Handbook, paragraph 42).
Disclosure
The Board discussed staff proposals to require disclosure of alternative measures of the defined benefit obligation; such disclosure had been suggested by some as providing useful information and mitigating some concerns surrounding the current IAS 19 requirements. The staff suggested the following as possible alternative measures that might be candidates for disclosure:
- Settlement value (including buy-out amount)
- Fair value
- Accumulated benefit obligation
After a short discussion, the Board agreed to propose that an entity disclose the accumulated benefit obligation. The Invitation to Comment would ask constituents whether other alternative measures should be provided.
The Board then reviewed the totality of the proposed disclosure package.
The Board agreed to modify the requirement (adapted from IAS 19.120A(q)) that an entity should provide its best estimate of the contributions it expects to pay to the pension plan during the next annual period, to require disaggregation into:
- contributions required by funding arrangements or regulation,
- discretionary contributions and
- noncash contributions.
The Board had a protracted debate over a suggestion by some Board members that entities should disclose a sensitivity analysis for the net position of the defined benefit asset or obligation. Board members noted that this would be challenging if the plan was heavily invested inequity instruments as opposed to debt instruments. Supporters thought that this information would be available for all entities anyway and that the incremental cost of providing the disclosure would be minimal. Others disagreed: that might be the case for single jurisdiction plans, but was less likely to be the case for multi-employer plans, insured plans and pension plans for a large multi-national group. These Board members questioned the utility of the disclosure to the users of the financial statements, especially how such disclosure would assist users to assess the future cash outflows of the sponsoring entity (as opposed to the plans). They were also very concerned about providing information about risks that do not exist from the point of view of the sponsoring entity – one Board member calling this a 'deception'.
Ultimately, the Chairman asked the staff to work with the Board members involved to see whether it was possible to reconcile the views, and to propose alternative sensitivity disclosures. These would be circulated to the Pensions Working Group for their views.
If possible, the staff will present their draft proposals later in the meeting.
Transition
The Board agreed that the exposure draft should not include specific transitional provisions. Thus, the general requirements of IAS 8 and IFRS 1 would apply. The amendments would apply retrospectively.
The Board agreed that IAS 19 paragraphs 153-156 and IFRS 1, Appendix D, paragraph D10 are redundant and should be deleted.
Discontinued Operations (Amendments to IFRS 5)
Definition of discontinued operations
The Board discussed the definition of discontinued operations and the need for the presentation of discontinued operations on the face of the statement of comprehensive income following comments received on the exposure draft published in 2008.
Some Board members did not feel that discontinued operations shall be presented on the face of the statement of comprehensive income; they would have preferred alternative disclosure in the notes. One Board member suggested that the most suitable place for such disclosures and accompanying reasons for classification is the management commentary. Nonetheless, most of the Board members defended the current requirements as they did not feel that notes are the right place for such important information (as net income from continuing operations represents input to basic performance metrics). Moreover, some members of the Board were concerned that requiring only disclosure in the notes could open further structuring opportunities. After a prolonged discussion the Board approved (by 10 votes to 5) retaining the requirement for presentation of discontinuing operations on the face of the statement of comprehensive income.
Most of the following discussion focused on the appropriate definition of a discontinued operation. The staff presented three alternatives of a definition (component representing strategic shift in operations, operating segment representing strategic shift in operations and significant operating segment). The Board discussed this issue in great detail, with many Board members uneasy about a definition based on operating segment as that definition would on one hand increase the structuring opportunities and on the other hand excessively increase the number of reported discontinued operations. Many Board members were also uneasy about including 'significant' operating segment in the definition, as significant is not defined. After a significant discussion the Board agreed that a definition shall be based on the reportable segments (segment already reported) in order not to have a large number of different operating segments to be reported as discontinuing operation. By aligning the definition in IFRS 5 and IFRS 8 the Board tried to improve consistency between those standards.
On disclosures, the Board discussed the proposed enhancement of required disclosures. Many members of the Board felt that the proposal brought by the staff requiring additional separate disclosures on components and rules on their aggregation would place excessive requirements on the preparers without enhancing the quality of the financial statements. Many Board members also raised the issue that these requirements seem to be more prescriptive and detailed that those currently in US GAAP due to difference in requirements for operating segments (difference in definition, required disclosures). As a consequence, the staff was directed to re-visit the US requirements and propose disclosure that would fully converge with US GAAP.
OCI items within discontinued operations
The staff presented the Board with a potential annual improvement item regarding presentation of OCI items related to discontinued operations in the statement of comprehensive income. In discussion some of the Board members proposed combining presentation of discontinued operations into one line of statement of comprehensive income (income statement and OCI items together), some proposed similar changes for the statement of financial position within equity. Several Board members felt that the disclosure in the statement of financial position would be more informative. Other members believed that the need for separate presentation would create more work for the preparers without any additional benefit to the users. Finally, the Board decided to limit the amendment for statement of comprehensive income and include it in annual improvement process.
Wednesday 22 July 2009
Related Party Disclosures (Amendments to IAS 24)
The Board considered an analysis of the comment letters on the 2008 exposure draft (ED) Relationships with the State, which proposed amendments to IAS 24 Related Party Disclosures. The Board reiterated that it did not want to overhaul the basis of related party disclosures but, rather, address some specific issues that have arisen in applying it.
Exemption from disclosure for state-controlled entities
The Board first addressed the issue of the scope of the proposed exemption. The staff recommended retaining the exemption as proposed by the 2008 ED. The staff noted that most of the respondents to the ED supported the proposed exemption, as it overcomes the obstacles to identify all related parties and provide a balance between required disclosures and costs to compile it. A minority of constituents (mainly from China) commented that state-controlled entities should be exempted from IAS 24 altogether. On the other hand, some constituents were concerned that the proposed exemption is too broad and would lead to loss of information in the financial statements. The concerns of constituents seemed to be fuelled by the financial crisis and the absence of a level playfield for private FSI institutions in comparison with those bailed out by the governments.
The main issue of discussion was whether the exemption is applied for vertical groups (for example, in separate financial statements of a subgroup containing state controlled parent and its subsidiaries). Several Board members felt uncomfortable to grant such an exemption to state controlled parent because comparable private companies would have to comply with full requirements of IAS 24. They did not see any difference whether the group was state-controlled or private controlled. The staff responded that as state influenced directly the decisions of the parent and subsidiaries, the exemption is appropriate. Moreover, the staff was concerned about the potential level of randomness in the disclosures as the exemption would be based on the legal structure (if the entity is state controlled or is part of the state itself). One Board member responded that he would rather see tension on the level of definition of state rather than see on the level of companies having different requirements. Several Board members noted that the exception was proposed mainly for the jurisdictions where the level of state ownership is rather pervasive, to avoid excessive disclosures of routine transactions that have no user benefit.
After substantial discussion in which many Board members expressed their concerns that the Board would create two different regimes for operations for comparable entities (a 'non-level playing field'), most of the Board members said that the wider exemption was appropriate as long as it is supplemented by additional disclosures. Finally, the Board voted for the wider exemption being applied.
The Board continued its discussion with the proposed disclosure requirements when exemption applies. Most Board members noted that some additional disclosures are needed to provide a summary of significant transactions. The Board supported the staff in not requiring additional disclosures of direct related party relationships (vertical groups) as those disclosures are provided by other IFRSs requirements.
The staff proposed to add disclosures about individually significant transactions (for example, disclosures to regulators). Some Board members proposed that disclosure about collectively significant transactions should be added. The Board agreed.
Several Board members were concerned by the usage of the word 'significant' and proposed to replace it with 'material'. Nonetheless, the Board decided to retain the significant and define it both qualitative and quantitative sense. Several Board members seemed to be concerned that similar requirements are not placed on private companies as well, as those could improve the quality of disclosures as private companies may face similar difficulties in providing the disclosures as the state controlled entities.
Definition of state
The staff proposed to change the proposed definition of state by the definition of the government already established in IFRSs (such as in IAS 20) as this definition is more comprehensive. One Board member was concerned that this definition would not capture all types of rulers who do not see themselves necessarily as the government. Another Board member was concerned about whether the proposed definition of government from IAS 20 would capture, for example, the US Federal Reserve Board. The Board concluded that capturing all the different notions of state involvement would be very difficult whichever definition is adopted. The Board approved the change of the definition to that used in IAS 20 encompassing statutory power and governing jurisdiction. The Board deliberately did not include regulatory power in explanation of the definition.
Revised definition of related party
The Board then discussed the revised definition of related party. The Board agreed with the staff proposal to remove anomalies in the definition of a related party by agreeing that two entities are related to each other whenever a person or a third party has joint control over one entity and that person (or a close member of that person's family) or a third party has joint control or significant influence over the other entity.
The staff also discussed the apparent inconsistency with the use of significant voting power concept as there was no definition of significant voting power in IAS 24. The staff proposed to delete the reference to significant voting power from the proposed standard as it increases its complexity and generate anomalies. Moreover, the undefined notion is hard to distinguish from significant influence and leads to counterintuitive conclusions. The Board agreed.
Other issues
The Board briefly touched two other issues: consequential amendments to IFRS 8 and the question whether an entity can be 'key management personnel'. The Board stated that it has already discussed these issues and reaffirmed its conclusions.
Timetable and transition
The Board approved the proposed timetable which expects the publication of the final standard in November 2009 and directed the staff to proceed to drafting the amendments.
The Board diligently examined the proposed retrospective application of the government controlled entities exemption with immediate effect. Most Board members felt that retrospective application would lead to undue complexity as now the disclosures are more extensive and this requirement would lead to re-examining them. The Board decided to apply the requirements prospectively.
Most of the Board members agreed that amendments to the definition of related party shall be applied retrospectively, with the effective date on 1 January 2011.
The Board examined also the need for re-exposure of the draft. Two Board members felt that re-exposure would be welcome due to several changes made, but majority of the Board thought that changes made to the ED were insignificant.
Overall, the Board approved the Amendment to the Standard with one dissenting opinion. One Board member dissented on issuing of the standard as he felt that the amendment does not create a levelled playing field for private and government-controlled entities.
Liabilities - Amendments to IAS 37
Staff presented a paper proposing more detailed specification of the measurement objective underpinning the proposed measurement guidance for IAS 37. The objective is to facilitate the use of the IAS 37 measurement model for other types of liabilities (for example, insurance). The Board agreed in principle to include more detailed guidance. Nonetheless, Board discussion suggested that reaching conclusion on the detailed guidance would be difficult, as many Board members have differing views. The most contentious issues relate to including profit in measuring of liabilities, with some Board members concerned that this would create 'a mess' in accounting. However, other Board members argued that a notion of risk margin must be included in the measurement guidance as it reflects the risk of investment and business (as the objective of business is not to earn a risk free interest rate). They saw the risk margin as the conceptually sound solution and understood is as a compensation for bearing the risk, not as a profit. Another Board member said that while he was happy to include the risk margin in the framework of a performance obligation of revenue recognition, he struggled to see the benefit for other liabilities.
After a prolonged discussion the Board agreed in principle that the measurement objective should be the lower of the value to entity of not having to fulfil the obligation and the amount that the entity would have to pay to cancel the obligation or to transfer it. The Board decided that the details will be drafted by staff with a group of Board members before the amendments to IAS 37 are finalised. Several Board members disagreed with this approach.
Revenue Recognition
Presentation of contracts with customers
The Board reaffirmed its preliminary view expressed in the discussion paper that the unit of account is the remaining rights and obligations in the contract with the customer and the contract position is presented net in the statement of financial position. The Board also made a tentative decision that no exceptions be made to this principle. There was some discussion on the latter point as Board members sought to clarify that this accounting applied before the entity recognised a receivable from the customer (it did).
The Board also decided that, where material, net contract assets should be presented separately from net contract liabilities; short-term contract assets should be presented separately from long-term contract assets; and short-term contract liabilities should be presented separately from long-term contract liabilities. Prompted by a Board member, the staff agreed that the general offsetting rules applied: that an entity had to satisfy the offsetting rules in IFRSs before it could offset a contract asset and a contract liability.
Consolidation
The Board discussed the principle that 'control' should be the basis for consolidation, in particular the extent to which risks and rewards (including reputational risk) should be considered when assessing control of an entity. The staff recommended that:
- control, defined to require a reporting entity to have power and the ability to benefit from that power, be retained as the only basis for consolidation.
- the final standard should include exposure to risks and rewards as an indicator of control such that, the greater a reporting entity's exposure to risks and rewards from its involvement with an entity, the greater the incentive for the reporting entity to obtain rights sufficient to give it the power to direct the activities of that entity.
A Board member questioned whether this recommendation was operational and proposed a structured transaction in which he suggested that power was surrendered but all the risks and rewards were retained. Several Board members and senior staff challenged this hypothetical transaction, suggesting that it was unrealistic to expect an entity to accept all risks and rewards without retaining some power. The original Board member remained unconvinced, but was willing to work with the staff to develop guidance that might satisfy his concerns.
The Board agreed that 'reputational risk' was not a factor that indicated 'control', but was a factor to consider whether an entity was exposed to benefits: that is, reputational risk is a specific type of business risk. Board members noted that several financial institutions had stepped in to rescue structured entities citing 'reputational' reasons: these were often business decisions aimed at avoiding litigation.
The Board had an extended and inconclusive discussion of options and whether options were indicative of control. The staff stated that they would be bringing issues related to 'kick-out rights', call and put options and similar matters to the September meeting.
Power to direct the activities on an entity without a majority of the voting rights
The Board affirmed the position in the Consolidation ED that to have 'power' the reporting entity should be able to direct the activities of another entity currently. That does not mean that the mechanism that provides a reporting entity with power could not have timing delays, but it should be in place (for example, an entity might have power currently even though it might have to wait for the next shareholder meeting to enforce its will; this does not negate the presumption of power).
The Board agreed that, in the absence of contra-indicative factors, a passive majority shareholder is presumed to meet the power element of the control definition.
The Board discussed the presence of power in the absence of a majority of voting rights. After a protracted debate, the Board reaffirmed the view in the ED that a 'dominant' minority shareholder might be able to satisfy the power element of the control definition, but must be able to demonstrate that this shareholding allows it to exercise that power to effect control. This determination would need to assess all facts and circumstances. In particular, the dispersion of the other shareholdings would need to be assessed. The final IFRS would provide further application guidance on this issue.
Power to direct the activities of another entity: Options and convertible instruments
The Board discussed the situations in which an unexercised option would give the holder of the option the power to direct the activities of another entity.
A bare majority of the Board preferred the Alternative View expressed in the ED: that the holder of an option over a sufficient number of voting rights that is capable of being exercised currently meets the power element of the definition of control. The Board agreed that a currently exercisable option might give the holder the power to direct the activities of an
entity but other factors should be considered to assess whether there are any barriers to exercise.
A Board member noted that the fact that a conversion feature that was out-of-the-money should not be excluded from the assessment of control solely on that basis: often the exercise of such an option was cheaper than other alternatives open to the holder, such as bankruptcy or litigation.
Insurance Contracts
Measurement approach for insurance contracts
The Board was encouraged by the staff to narrow still further the candidates for the measurement approach to insurance contracts to the 'modified IAS 37' model only. However, in light of its discussion of the IAS 37 model earlier in the day, the Board was not in a position to make this decision. Instead, the Board requested a more detailed analysis of what the 'modified IAS 37' model might look like, together with a comparison to the current fulfilment model.
Unearned premium model
The Board agreed that an unearned premium approach should be the required measurement approach for insurance pre-claims liabilities arising from 'short duration' (such as property and casualty and marine) contracts. This approach was accepted as a simplification.
Other aspects of the unearned premium model would be discussed at a subsequent meeting.
Thursday 23 July 2009 – Joint Meeting with the FASB
Technical Plan
The IASB Technical Director reviewed the IASB's technical plan, paying particular attention to the financial crisis-related activities, Memorandum of Understanding issues, and activities related to the Conceptual Framework. He noted that the IASB had, on 21 July 2009, decided to defer work on certain projects in order to 'create space' for the projects assessed as critical. He noted also that the MoU projects were seen as 'very necessary improvements' to financial reporting and that the self-imposed deadline of 30 June 2011 provided an important focus point for the IASB.
The staff reviewed the MoU projects in turn, noting areas in which the IASB and FASB were aligned and where they were not, and what issues needed resolution. The most recent decisions taken by both Boards were mentioned, and the possible effects on the joint timetable were discussed briefly, without any specific directions being made.
Board members were interested in the progress being made on the Conceptual Framework project. The FASB staff noted that chapters 1 and 2 (objectives of financial reporting and qualitative characteristics of general purpose financial statements) were almost ready for balloting. In addition, an exposure draft of the chapter on the reporting entity was also nearing completion. It was hoped that both could be released in September 2009. Work was continuing on measurement. Work on the elements chapter was pending as the staff had been diverted to activities related to the liabilities and equity project. However, it was hoped that work could be resumed soon, though the timing was 'still vague'.
The FASB Technical Director explained the FASB's recent decision to add a disclosure framework project to its agenda. The project objectives are to raise the quality of disclosure, to eliminate redundancies (between information provided within and outwith the audited financial statements), and to seek to provide more focused disclosure. The FASB will work with the US Securities and Exchange Commission throughout the effort. In addition, the project would seek to take full advantage of XBRL technology. The IASB Technical Director stated that IASB staff would monitor the project and that there were obvious connections with the IASB's management commentary project.
Insurance Contracts – update from the International Association of Insurance Supervisors
Robert Esson, chair of the Insurance Contracts Subcommittee of the International Association of Insurance Supervisors, made a short presentation on four aspects of the IASB's insurance contracts project that were of particular concern to insurance regulators at present.
Timing of the insurance contracts project
Mr Esson noted that, including work done by the IASB's predecessor, the insurance contracts project had been running for over 10 years and that any delay beyond the projected May 2011 deliverable would risk losing the international consensus that exists currently. He noted that certain regions would likely develop their own solutions if there was a significant delay.
An IASB solution is the IAIS's preferred solution, as they would seek to use IFRS financial information as input to (rather than to determine) insurance regulatory requirements.
Acquisition costs
Mr Esson noted that, especially in long-term insurance contracts, acquisition costs can exceed the first year's premium, but that overall the contract is expected to be profitable. This suggests that the insurance contract has value and that the value is bigger after the payment of acquisition costs.
In addition, he recalled the IAIS's recommendation to the Boards about the how to define the contract boundaries, which should help the Board with the issue of the renewal options in long-term contracts.
Day 2/Day 366
The run-off of margins was a significant issue that had been largely ignored in the past ten years and 'desperately' needed a solution before the ED was published. Any answer had to be simple, understandable and capable of being audited. He provided some examples that illustrated the issues and asked the Boards whether the margins run off based on release from risk or based on the expected cash flows.
Financial instruments
Mr Esson suggested that insurance companies were the largest purchasers of financial instruments in the world and that there was a need for consistency between the asset and liability side of the balance sheet – especially in relation to long-term insurance. In his view, there needed to be coherence between the assets and liabilities. He was concerned that the timings of the financial instruments project (that is, insurers' assets) and the insurance contracts project (the liability side) were problematical and could raise significant issues on transition. Insurers were very interested to see how the two projects interacted-in particular how will assumption unlock and margins run off for liabilities and whether amortised costs (as proposed in the recent IASB ED) would 'hedge' these liabilities.
Mr Esson took questions from Board members, during which he pointed out that the IAIS's view was that a useful set of IFRS financial statements would be a very important input to regulatory activities. Understanding an insurer's exposure to risk was important; so too was having useful and understandable measures in the financial statements.
Insurance Contracts
Measurement approach
The IASB staff briefed the Boards on each other's latest decisions (taken earlier in the week) on their preferred measurement approach. The FASB supported the current fulfilment value approach; the IASB was continuing to consider both a 'modified IAS 37' model and the current fulfilment value approach.
The FASB supports the building block approach for Day 1 measurement, but does not agree with including a transfer notion with respect to subsequent measurement – because there is often no transfer market for insurance liabilities (this is why a 'pure' fair value measure will not work).
There was a good but inconclusive debate between IASB and FASB members, which demonstrated some of the basic measurement issues, including what was the liability being measured – the performance obligation or the claims liability? Board members noted that whatever model was accepted, it needed to be logical, easy to explain, supported by preparers and useful to users.
No decisions were made by either Board. Both would consider this further and make decisions in September and return to a joint discussion in October.
Acquisition costs
Both Boards agree that acquisition costs should be expensed; the IASB's tentative view is that it would release some of the premium (customer consideration) to match the incremental costs of acquiring the individual insurance contract. The Boards discussed whether they could resolve this issue.
An IASB member suggested that the IASB should be asking whether the insurer should recognise the insurance contract itself as an asset on Day 1 and amortise that asset over some period. Heretofore, the insurance industry had used deferred acquisition costs as a surrogate for the contract value.
The FASB Chairman challenged the IASB's agreed position, asking why an insurance contract was any different from other long-tail business for which significant acquisition costs were incurred.
The FASB affirmed its view (5 in favour of expense); the IASB was split: 4 would expense; 8 would release revenue. An IASB member also polled his colleagues as to how many would prefer to measure the value of the insurance contract asset – at least 5 would.
The IASB will need to return to this issue at a later date.
Revenue Recognition
Comments received from constituents – summary analysis
The FASB staff (by video link) presented the summary analysis of comments received prior to 10 July. 211 comments had been received; the majority were from preparers and six from users or user representative organisations. Comments were still being received, but the broad themes in those later letters were consistent with the analysis presented.
Broadly, constituents supported the preliminary views in the Discussion Paper, in particular the ideal of a single revenue recognition model, but there were significant application issues – both industry and activity-specific issues and concerns about how to make the model operational. In particular, the definitions of revenue, customer and contract were criticised by many respondents.
The staff noted that detailed analyses of all issues would be brought to both Boards during redeliberations and development of the exposure draft.
The Board discussed the issues raised in the summary, especially the problems identified in industries such as telecommunications. A Board member suggested that a mechanism was needed to feed experience on applying IFRSs in various industries, gained during the Board and staff outreach activities, to the project team. This would help to identify areas in which application guidance is actually necessary, but the Boards should resist the temptation to provide detailed application guidance.
Project objective and strategy
The Board discussed the objective of the revenue recognition project and the strategy to develop an exposure draft, taking into account the views expressed by constituents.
Board members noted that the project does not have a single model for revenue recognition: it as a model based on an asset and liability approach, with two applications, one for services and one for goods. It was important to distinguish goods and services, and the best place to start would be to address construction and long-term contracts first. Many of the issues in this type of contract were critical and if they could be solved in a rigorous manner, many other decisions would follow more easily.
The Boards discussed whether a roundtable with constituents was necessary. After discussion, the suggestion was refined such that the Boards would see whether it would be possible to conduct meetings with constituents (in various locations) that would be a combination of roundtable and field visit – an opportunity to involve preparers, auditors and industry analysts to discuss specific application issues identified in certain industries/ sectors. However, it was also noted that the Boards' calendars are already pretty full and that it might not be possible to arrange such meetings in the time available to the Boards.
The staff will investigate whether it would be possible to hold such meetings.
Leases
The Boards discussed a staff paper on preliminary views on lessor accounting. At the May meeting the Boards tentatively decided that a lessor would recognise an asset representing its right to receive rental payments from the lessee (a lease receivable) and a liability representing its performance obligation under the lease.
The initial and subsequent measurement of the lessor's receivable
The Board agreed with the staff's proposal to measure lessor's receivable in line with the applicable requirements of IFRSs and US GAAP.
For initial measurement, the Boards agreed that little divergence is to be expected between the respective definitions as fair value is used under both systems (calculated as present value of future cash flows). Nonetheless, several members of the Boards raised the issue whether the lease receivable was a financial instrument or was to be scoped out from the financial instruments standard. The Boards were unable to agree on the answer. Several members were concerned about possible inconsistency between lessee and lessor accounting.
The Boards agreed that using the interest rate implicit in the lease for discounting the expected lease payments is appropriate.
Some Board members were concerned about the divergence between the proposed financial instruments standards by FASB and IASB and its impact on initial and subsequent measurement. On subsequent measurement, many of the Boards' members though that scoping out leasing from the financial instruments project would be necessary (as it is uncertain whether it would fulfil the basic loan feature and whether it can be assessed to be managed on a contractual yield basis) and its fair value could not be ascertained.
One Board member was concerned about the fluctuations of fair value of the receivable that can arise not only from the interest rate changes but also from the changes of the value of the underlying. As the Boards were unable to agree at this point if it would represent a receivable (as a financial instrument) or a right (within the meaning of revenue recognition project), the staff was directed to provide additional analysis. The Boards seemed to like the notion that in simple leases the receivable could be a financial instrument, whereas in more complex issues (contingent rent, options) the conclusions seemed to be the opposite.
The initial and subsequent measurement of the lessor's performance obligation
The Boards agreed that performance obligation should be measured at transaction price. Some Board members seemed to be concerned that this approach could instigate a Day 1 gain.
The Board also agreed with the subsequent measurement as reflecting decreasing in the entity's obligation to permit the lessee to use the leased item over the lease term. Some of the Boards' members noted that different principles for goods and services shall be developed in line with the principles within revenue recognition.
The presentation of a lessor's receivable and performance obligation
The Boards had divided opinions of how to present leases in lessor's accounting. The Boards were split between gross presentation of all three items (leased asset, lease receivable and performance obligation), lease receivable net of performance obligation, leased items net of performance obligation and a bifurcation between the present value and the estimate of residual amount. Several Board members noted that it is the old finance and operating lease issue. Other Board members noted that perhaps three distinct models of presentation would be required in order to capture the underlying economic reality (financing, provision of goods and provision of services). No decision was reached.
The Boards discussed various issues related to specific industries, requirements to Banks as lessors, real estate sector. The Boards were stuck in the debate of the recognition of the whole asset, rights previously not recognised being recognised, inconsistency between treatment of purchase finance and leases even though they represent the same economic reality.
The Boards concluded that significant issues of definition, scope and measurement would have to be revisited. The staff noted that the Board will be presented additional analysis (revenue recognition model versus financial instruments) in October, after taking into account the feedback from the constituents to the preliminary views discussion paper as well as input from the discussions at working group on leases in September.
Friday 24 July 2009 – Joint Meeting with the FASB
Financial Instruments with Characteristics of Equity
Staff presented a preliminary analysis disaggregating the total changes in the fair value of financial liabilities with the characteristics of equity between recurring and non-recurring changes using the cost of capital method. By this method, the total change in the fair value, which is perceived to have little informative value, is disaggregated into a more informative 'flow' amount representing interest change and the remaining part of the change in the fair value, which represents a value effect with little predictive value.
Several members of both Boards seemed to be concerned that when liabilities with characteristics of equity are measured at fair value as proposed, net income and earnings per share will be distorted by the wealth effect (effect of future expected cash flows) that has little correlation with performance.
Other members challenged the staff, noting that, in their opinion, the disaggregation had little value and seems to contain relatively complex calculations. The staff responded that users demanded classical interest charge on more complex and hybrid instruments (such as zero coupon convertible bonds). Another Board member stated that he had the impression that, given complexity of the calculation and presentation, perhaps the Boards could revisit the measurement basis as such. He proposed that the invitiation to comment in the exposure draft ask whether respondents ageeed with fair value measurement if the consequence is this type of disaggregation of fair value measurement.
A Board member was concerned about the lack of comparability and consistency with the general financial instruments project. He proposed that the same disaggregation criteria for all financial instruments. One FASB member noted that the FASB considered disaggregation of the changes in the fair value of financial assets into a credit risk part and remaining part and supported application also for financial liabilities in general. Several Boards members challenged applicability of such approach to derivatives.
One IASB member noted that in his opinion disaggregation in the statement of comprehensive income is not appropriate, and disclosing in the notes is most appropriate. In his view, the staff has tried to bring precision in a component of financial statements that is imprecise in nature. Another Board member responded that users are aware of the imprecise nature of the calculation but want the magnitude and direction of the change reported in the financial statements.
Overall the Board sensed that the proposed model is too complex and directed the staff to develop a simplified model of disaggregation of fair value changes on financial instruments with characteristics of equity.
Financial Statement Presentation
Project scope
The FASB informed the IASB that at its last meeting it agreed to propose to require one statement of financial performance with subtotals for net income and other comprehensive income. The staff asked the Boards to clarify whether this decision means enlarging the scope of Financial Statement Presentation project or if a short term convergence project on this narrow topic shall be initiated.
Most of the IASB members agreed that a single statement of comprehensive income was always the aim of the Board and agreed to initiate a short term project that would eliminate the separate income statement option from IAS 1. One Board member noted that the Board had to be very careful and as transparent as possible, given the comments from constituents during the last proposed amendments to IAS 1. Nonetheless, concerns would be alleviated by the fact that FASB would propose the same amendment. The Board also agreed to include in the project separate presentation of recycling and non-recycling items within other comprehensive income (OCI).
The chairman of the IASB suggested a plan how to tackle the question of recycling in the long term. All members agreed that this question was outside of the scope of the short term project and rules would be governed by the applicable standards. Nonetheless, from a long-term perspective, principles embodied in the conceptual framework should be used to develop a principle-based approach for OCI presentation.
The Boards discussed the tentative timetable for the move to a single statement of comprehensive income. The FASB plans to expose the proposal together with the financial instruments proposal. The IASB will discuss the proposal in September.
The Boards discussed whether the IAS 1 amendment should be adopted at the same time as financial instruments standard. IASB members noted that even if IASB decided to adopt the FASB approach for financial instruments it could manage with the old IAS 1, as a separate statement of comprehensive income exists under IFRSs (under US GAAP is included in the statement of changes in equity).
Plan for Deliberations
The Boards considered the planned deliberations for the Presentation ED given the comments from constituents on the Discussion Paper (DP). The staff noted that despite overall support for the principles in the DP, many constituents were concerned by the application of the basic principles, especially in the area of presentation of direct method of statement of cash flows, level of disaggregation on the face of the statement of comprehensive income, and the reconciliation schedule as a whole. Some Board members noted that reconciliation schedule could be simplified by a balance-sheet-to-balance- sheet reconciliation.
The staff plans to obtain input from the project's advisory group on 27 July 2009 and finalise the analyst portion of the field test. The Boards agreed with the plan of deliberations in September and October meetings and a joint meeting, with the aim to publish ED in April 2010.
Proposed Presentation Objectives
The Boards were asked by the staff to provide a high level direction on the question of presentation objectives given the comments by constituents on the discussion paper. The Boards generally liked the idea of rewriting the presentation objectives and principles and linking them to objectives of financial reporting. Board members were much less convinced about the need and usefulness of linking of those principles to qualitative characteristics and constraints of decision-useful information. Those members believed that this linkage would not be operational.
After a significant discussion the Boards agreed that cohesiveness should remain one of the main principles, but a cost benefit analysis is needed when applying the principles at the line-item level. The Boards noted that cohesiveness should lead to comparability, not to uniformity. Some Board members challenged this approach, as they did not feel it would be operational, but another member presented a convincing example of the sale of subsidiary, where cohesiveness at line-item level could lead to huge complexity. Another Board member noted that a kind of uniformity in taxonomy is necessary, especially when XBRL is implemented.
The Boards agreed that disaggregation of decision useful information shall be the core presentation principle with a cost-benefit analysis applied.
The Boards discussed objectives of liquidity and financial flexibility. The Boards agreed not to include them as core presentation principles, as they are embedded in the Conceptual Framework. One IASB member seemed to be particularly concerned by demotion of the liquidity objective in the time of financial crisis. The FASB members seemed also to be concerned as Framework is not part of the authoritative guidance. The Boards agreed to make these features more prominent as part of disaggregation principle.
The Boards agreed not to add stewardship as one of the core presentation objectives.
Finally, the Board tentatively agreed that Presentation project should be applicable all business models, including those of financial services institutions. Several Board members were concerned about the need for specific requirements for financial services institutions and the usefulness of the proposed statement of cash flows and reconciliation schedules to financial services entities. The staff noted that this is only a preliminary decision and this will have to be confirmed at the time the ED is prepared. The staff noted that it would seek feedback from the Financial Institutions Advisory Group.
Financial Instruments – Comprehensive project to replace IAS 39
Russ Golden, FASB Technical Director, outlined the FASB's tentative conclusions on its project on improvements to financial instruments recognition and measurement. He explained that the FASB agreed to propose a model to improve financial reporting for financial instruments. So far, the FASB's tentative decisions were as follows:
- All financial instruments would be presented on the statement of financial position at fair value, with changes in value recognised in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which would be measured at amortised cost. For those financial instruments whose change in value was recognised in other comprehensive income, amortised cost would be displayed on the statement of financial position in addition to a fair value adjustment to arrive at fair value.
- Changes in an instrument's value may be recognised in other comprehensive income on the basis of qualifying criteria related to an entity's business model and the cash flow variability of the instrument. The FASB would provide additional guidance on how to apply those qualifying criteria. FASB will also propose that changes in value of three types of instruments should be recognised in net profit or loss: derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation under FASB Statement 133 Accounting for Derivative Instruments and Hedging Activities. In addition, for all financial instruments, interest and dividends would continue to be recognised in net profit or loss. Credit impairments, as well as realised gains and losses from sale and settlement, also will be recognised in net profit or loss. The classification of instruments would be determined at initial recognition of the instrument and would not be subsequently changed (no reclassifications would be permitted).
- One statement of financial performance, with subtotals for net income and other comprehensive income, would be required. The FASB will propose to continue to require earnings per share for net income only.
Mr Golden noted that the FASB's deliberations were less advanced than the IASB's and that certain issues, such as the treatment of demand deposit liabilities and impairment, still needed to be addressed by the FASB.
During the discussion that followed, FASB members and staff clarified and amplified certain points. For example, an IASB member noted that, for a bank, the amortised cost option would almost never apply, since most of the bank's financial assets would be at fair value.
It was noted that what was eligible for the 'amortised cost' category was similar between the IASB and the FASB, but that the treatment was different – especially the measurement in the statement of financial position and the treatment in the statement of comprehensive income. This would be raised with constituents with the view to converging to a common solution.
The FASB Chairman noted that the IASB and the FASB shared a common goal: to deliver a common, high-quality financial reporting standard. The FASB needed more time to complete its deliberations, but acknowledged the pressures on the IASB and the reasons it was pursuing the project in the way it was. The FASB would make its proposed model available in advance of a formal exposure draft – it would probably be available on the FASB's Website by late August 2009. Detailed discussions would be held at the October 2009 joint IASB-FASB meeting and, if necessary, in November.
The IASB Chairman said IASB still had to address impairment and the expected loss model. It is also likely that the IASB would propose a single statement of comprehensive income, so that the financial statement presentation was also aligned between IFRSs and US GAAP.
Roundtable discussions
The FASB and IASB will hold joint roundtable discussions as part of the outreach activities on this common project. These will be held in early September 2009 (before the comment period for the IASB exposure draft on classification and measurement closes) in London, New York (Norwalk?), and Tokyo.
It is likely that a condition of participating in the roundtable would be that a comment letter would have been submitted – or at least a summary comment letter. Board members wanted to be able to engage constituents and discuss their views, rather than help them to identify issues for their comment letters.
The joint meeting concluded.
Sweep Issue for the IASB: IAS 19
This discussion followed up on the Tuesday 21 July 2009 discussion of the proposed amendment of IAS 19 with respect to the discount rate.
This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.
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