Post-employment Benefits

Presentation

The Board discussed the presentation of pension costs. The Board was reminded that it had previously reached the following tentative decisions related to presentation:

• Recognition of all components of pension cost in the period in which they occur
• Disaggregation of the total pension cost into an employment component (service cost), a financing component (interest cost), and a remeasurement component (actuarial gains and losses on the defined benefit obligation and the total return on plan assets)
• Presentation of all of those components in profit or loss, displaying the remeasurement component separately net of related income taxes

The Board was asked to reconsider those tentative decisions and re-evaluate them in the light of the decisions made or proposed in other projects: the proposal of single statement of comprehensive income and the other comprehensive income (OCI) presentation option for equity instruments in IFRS 9.

The Board discussed the issue, with Board members expressing a wide variety of opinions. Several approaches and combinations of approaches were discussed, ranging from full recognition in profit or loss to presenting all remeasurement components in OCI with no recycling.

Finally the Board reaffirmed its decision to require full recognition of all components of pension cost in the period in which they occur.

After a considerable discussion, the Board agreed that the proposals in the forthcoming post-employment benefits exposure draft (ED) should be consistent with the proposal of a single statement of comprehensive income. Therefore, the Board agreed in principle that the employment and financing components should be presented in profit or loss and the remeasurement component in the OCI with no recycling. The Board also tentatively agreed to align the timing of this proposal with the timing of the ED on the single statement of comprehensive income.

The Board also discussed the notion of service cost and remeasurement related to service cost. The Board agreed in principle that the related remeasurement should be presented in profit or loss and not in OCI. The Board directed the staff to explore such an approach, in particular with reference of proposal of one Board member to account in profit or loss for the interest accretion on a net deficit instead of gross interest related to expected return on the assets and discount of the defined benefit obligation.

Disclosure

The Board discussed its tentative decision to require disclosure of accumulated benefit obligation (ABA) – the defined benefit obligation excluding projected growth of salaries.

The staff and some of the Board members said that such a measure is neither useful nor meaningful and that, in some jurisdictions, the methodology for calculating the ABA was not consistent.

Other Board members disagreed as they believed that providing of such information is useful. They argued that in other jurisdictions ABA is disclosed without much diversity in its calculation. They also pointed to views of some constituents that the ABA is more meaningful for measuring the pension obligation. Moreover, staff also pointed out that disclosure of ABA is required under the US GAAP.

With a bare majority of votes the Board reaffirmed its previous tentative decision to require disclosure of the ABA.

Income Tax

Scope of the income tax project

The Board discussed the possible ways forward following the largely negative feedback from constituents on the Income Tax ED and following the discussion at the Joint Meeting with the FASB in October. The Board discussed possibilities of a more limited project that would target the most urgent issues.

The Board did not agree with the staff proposal to limit the work to uncertain tax positions. Several Board members encouraged the Board to broaden the scope of its work to include the most pressing issues – notably the issue of the tax effect of property revaluations that has been of concern in some jurisdictions (such as Hong Kong) for a considerable time. They argued that the revaluation issue was delayed for years due to the Income Tax project and that the Board should be responsive to needs of these jurisdictions.

The Board asked a small group of its members to investigate priority issues for a short-term project and consider possibilities for short-term convergence.

Insurance Contracts

Recognition of an insurance contract

The Board discussed a staff recommendation that an insurer should recognise an insurance contract when it becomes party to the contract. This definition is consistent with IAS 39.

The Board did not agree with the staff recommendation and suggested that more clarification around what it mean 'to become a party to the insurance contract' is needed. Concerns were raised that internationally there are a variety of regulatory and legal practices around entering into insurance contract that may affect the answer to the question posed by the Board. For example, in some jurisdictions the act of making an irrevocable offer of an insurance contract may expose the insurer to insurance risk from that point, even before the policyholder accepts the offer. It was not clear how the definition of 'becoming a party to contract' would apply in that case.

Another concern was around the accounting for a time period between entering into the contract and the beginning of a coverage period. In some cases this period can be relatively long, and during that time the policyholder is able to cancel the policy. The staff proposed treating that period as part of an insurance contract, because treating that contract as fully executory until the beginning of the coverage period would not fully reflect the risk an insurer is exposed to from any changes in circumstances in the meantime. A number of views were expressed by the Board members on this proposal. Some members viewed the contract before the start of the coverage period as fully executory. Others observed that once the policy has been issued, even if the loss event occurs before the start of the contractually stated coverage period insurer may be obligated to meet that claim. These members believed that the insurance contract should be recognised from the moment the coverage period begins, but there needs to be more clarification around when the coverage period begins, as this may vary in different jurisdictions and may not be based purely on the contractual terms. Some suggested that the definition should be amended such that: 'an insurer should recognise an insurance contract when it becomes party to the contractual provisions or legal or regulatory requirements'.

The Board asked the staff to clarify how the proposed recognition model would apply in particular fact patterns.

Derecognition of insurance liabilities

The Board agreed that an insurance liability should be derecognised when it no longer qualifies as a liability of the insurer, applying the derecognition principles of IAS 39.

Participating contracts

The Board had an education session to discuss the examples of the participating contracts and the proposed accounting for these contracts. A heated debate ensued about whether a participating feature met the definition of a liability or whether it could be viewed as equity. (Will be discussed further at the Wednesday 18 November session.)

Wednesday 18 November 2009 – Joint Meeting with FASB

Emissions Trading Schemes

Accounting for items in a voluntary scheme

The staff introduced the session by explaining that the staff was asking for direction rather than decisions from the Boards. The staff paper presented at the meeting described the items that an entity exchanges when it becomes a member of a scheme with voluntary participation, and it discussed which items met the element definitions in the Boards' frameworks.

The Boards were not invited to discuss the criteria for recognition, measurement, or presentation of the elements in a voluntary scheme.

The discussion used the following simple example:

On 1 January 2010 an entity becomes a member of a voluntary scheme with a one year commitment period, starting on 1 January 2010. The entity is entitled to an allocation of 100 allowances. The allowances that result from the allocation are issued on 1 January 2010.

In exchange for membership in the scheme and the right to an allocation, the entity promises to pay one allowance for each unit of emissions occurring during the commitment period.

The entity estimates it will emit 110 units of emissions during the commitment period. That means the entity expects that its demand for allowances will exceed its allocation of 100 allowances by 10 units. The entity plans to make up the expected shortfall by acquiring allowances on the market.

The staff analysed the example by reference to each of the Boards' conceptual frameworks and relevant accounting standards. The staff presented two views as to what created the obligating event in a voluntary scheme:

• View 1: The entity's actual emissions create the obligating event. A member of a voluntary scheme does not incur a present obligation until it has emitted. Until emissions have occurred, the member can avoid the outflow of allowances by its future actions.
• View 2: The membership contract signed by the entity creates the obligating event. The entity incurs a present obligation as result of becoming a member of a scheme. As of signing the membership contract, the obligation to pay allowances is unconditional. Only the amount of allowances due under the membership contract is uncertain.

Applying the two views to the base example, the staff suggested that:

• Under View 1, an entity would have a scheme liability on 1 January 2010 only if, and to the extent that, the entity had emitted on 1 January 2010.
• Under View 2, an entity would have a liability on 1 January 2010 that reflects the promise to pay allowances throughout the commitment period. The entity estimates it would pay 110 allowances for the one year commitment period. The liability exists irrespective of whether the entity had already emitted.

IASB and FASB members individually expressed support for both Views. Some saw View 1 as the only view that was consistent with IFRS, US GAAP, and the frameworks. Supporters of View 2 thought that the information provided was more useful to users of the financial statements. Some supporters of View 2 expressed levels of discomfort with how the staff had applied existing standards in supporting their conclusions and suggested alternative ways of achieving the same conclusions. A third alternative was put forward by an IASB member and received some support from a FASB member. Under this third alternative, the analysis should be based on the net position: on Day 1 the entity would estimate the liability or asset based on 'expected emissions less allowances'. Another IASB member, while admitting instinctive support for View 1, suggested that the transaction was similar to a conditional government grant (IAS 20.8).

The IASB Chairman asked for indications of support for the two views as a way of giving direction to the staff. In the 'directional' vote that followed, a majority of both the FASB and IASB supported View 2.

Responding to this direction, the staff noted that the Boards would now have to face the question of justifying how an entity could have an obligation (for the consequences of emitting pollutants) prior to creating the emissions that give rise to that obligation.

The Boards will consider that question, along with recognition, measurement, and presentation issues at a subsequent date.

Insurance Contracts

Participating Insurance Contracts

The Board discussed the main features of the participating contracts and were looking for a general principle of accounting for them. Participating contracts can be characterised by a policyholder paying a higher premium in order to participate in some of the risks and rewards of the underlying pool of insurance contracts. There are typically two elements in such contract: 'guaranteed minimum benefits' and a discretionary 'participating feature'. The participating feature usually has several elements where insurer can exercise discretion but is ultimately constrained by legal, regulatory and contractual terms. This management discretion means that some part of the participating feature may not meet the definition of liability in the Framework. Two proposed ways of accounting were discussed.

View 1: Treat cash flows arising from a participating feature in an insurance contract as integral to that contract in the same way as all other cash flows arising from the contract, including them in the measurement of an insurance liability on an expected present value basis, with no separate recognition.

View 2: Classify participating feature based on whether it meets the definition of liability, leading to bifurcation of the insurance contract. Under this approach 3 options are possible for the participating feature: 1) always recognise it separately as equity given the discretionary terms; 2) split the feature into two elements and classify it as liability to the extent legal or constructive obligation exists; 3) classify the feature as a liability or equity based on whether the features predominantly are that of equity or debt.

Many Board members disagreed with View 2 approach treating policyholder benefits that do not meet the definition of liability as equity because these funds were not due to equity-holders. Proponents of View 1 stated that treating participating features as part of an insurance liability recognised the fact that such features are embedded in an insurance contract and may not have commercial substance without it. It also avoided complex measurement required to bifurcate both the contract liability and insurance premiums. Some thought it may lead to better performance measurement because under view 1 liabilities and expenses for policyholder benefits would be recognised in the same period as the underlying insurance performance.

Supporters of View 2 approach argued that recognition of liability beyond legal or constructive obligation resulted in a departure from the framework. They viewed these benefits as discretionary until declared, and would record them in equity, but possibly in a separate undistributable reserve. Once declared, the liability would be recognised with a charge to the income statement.

IASB has tentatively voted for View 1, FASB for View 2. The two Boards will continue their deliberations.

Leases

Lessee accounting – Initial measurement

The Boards continued deliberating the Leases project by discussing the initial measurement of a lessee's obligation to pay rentals and the right-of-use model. The Boards reaffirmed their decision that the lessee's obligation to pay rentals should be measured at the present value of the lease payments. Two possible approaches to the discount rate were discussed:

• the interest rate implicit in the lease
• the lessee's incremental borrowing rate

Some Board members were concerned that the interest rate implicit in the lease was not consistent with the right-of-use model and would lead to considerable problems for the lessees. Most Board members preferred using the incremental borrowing rate on grounds that it is more operational. While acknowledging that such a decision would not create symmetry in the lessor/lessee accounting, most Board members noted that the lease accounting model being developed will not lead to lessor/lessee accounting symmetry, especially in more complex leases (due to different assessment of options and contingent rentals). Most Board members also noted that these two methods are not exclusive and in the simple examples should lead to the same result.

After a short discussion the Boards unanimously agreed that the lessee's incremental borrowing rate should be used to discount the lease payments. Nonetheless, the Exposure Draft will contain guidance on when the rate implicit in the lease might be indicative of the lessee's incremental borrowing rate. Moreover, some Board members said the definition of the rate implicit in the lease should be revised to conform to the right-of-use model. The staff will provide additional analysis of the definition on a future meeting.

The Boards also agreed that initial measurement of the lessee's right-of-use asset should be at cost, which is equal to the present value of the lease payments discounted using the lessee's incremental borrowing rate.

Finally, the Boards agreed that any initial direct costs should be added to the amount recognised as an asset. The Boards asked the staff to investigate any differences in the definition of direct cost between IFRSs and US GAAP, as some Board members expressed concerns that potential differences might exist (direct and incremental cost under IFRSs and direct cost under US GAAP).

Lessee accounting – Subsequent measurement of the obligation to pay rentals

The Boards agreed that the subsequent measurement of the lessee's obligation to pay rentals should be an amortised cost basis.

The Boards then considered the need for re-assessment of the incremental borrowing rate. The Boards first discussed re-assessment of the incremental borrowing rate for simple leases when cash-flows did not change significantly (that is, leases without options and contingent rentals). Most Board members agreed to prohibit incremental borrowing rate reassessment in such cases as they believed it is inconsistent with an amortised cost model.

Nonetheless, the Boards did not extend this analysis for more complex leases. In an indicative vote, both Boards tentatively agreed that if the cash flows changed significantly (for instance, due to options or contingent rentals), the incremental borrowing rate should be reassessed. The staff will provide additional analysis at a future meeting.

The Boards also agreed that there should not be an option to subsequently measure the lessee obligation to pay rentals at fair value. At that point one FASB member noted that such a decision might be reconsidered when scope of the Financial Instruments project is finalised, as he believed that all funding costs should be considered consistently. The IASB chairman also noted that the IASB has not yet considered scope of the Financial Instruments project. Consequently the Boards agreed to specify the required accounting for the lessee's obligation to pay rentals in the Lease standard, subject to modification of scope of the new IFRS 9 (and the FASB equivalent).

Lessee accounting – Subsequent measurement of the right-of-use asset

The Boards reaffirmed their respective decisions to require subsequent measurement of the lessee's right-of-use asset on an amortised cost basis.

The Boards continued their discussions regarding the decrease in value of the right-of-use asset. Some IASB members questioned the nature of the right-of-use asset and its implications. The Boards agreed that the right-of-use asset is an intangible asset and, consistent with this conclusion, they agreed that the decrease in the value of the right-of-use asset should be presented as amortisation rather than rental expense in the statement of comprehensive income. Some IASB members were concerned that such a decision would affect performance indicators (such as EBIDTA) without a change in economic substance. The Boards agreed that separate disclosure of the amortisation of the right-of-use might be warranted to facilitate analysis of underlying economic performance. In response the staff noted that disclosure requirements would be discussed at the December or January Board meeting.

Regarding impairment of the right-of-use asset, the Boards discussed using the existing applicable standards under US GAAP and IFRSs to recognise and measure impairment. The Boards agreed that convergence would be warranted in this area but noted that any potential impairment convergence project could only be part of the post 2011 agenda. The Boards also noted that a separate model for right-of-use asset would be impracticable, and a 'look-through' approach to the underlying assets would be impracticable as well. Therefore, the Boards agreed that the lessee should refer to existing applicable impairment standards to determine whether its right-of-use asset is impaired and a loss should be recognised (IAS 36 for IFRS preparers ASC 360-10-35 for US GAAP preparers).

The Boards continued to discuss the possibilities for revaluation of right-of-use assets. The IASB members discussed several practical issues connected to the revaluation issue:

• revaluation of the more complex lease with options
• identification of the asset that was to be revalued (and possible look-through approach)
• consistency between own and leased property (especially for investment properties)
• interaction with the earlier decision not to allow revaluation of the lessee's liability and scope of IFRS 9.

Finally, the IASB agreed that a lessee should refer to IAS 38 for revaluation of the right-of-use asset even though the conditions for revaluation of intangible assets are strict. The FASB reaffirmed that US GAAP did not permit revaluation of right-of-use assets.

Lessor accounting – Initial and subsequent measurement of the lessor's receivable and lessor's performance obligation

The Boards reaffirmed several past decisions. The Boards agreed to develop a specific approach for the initial and subsequent measurement of the lessor's right to receive rental payments within the Leases project. One FASB member nonetheless urged the staff to ensure consistency with the progress made on the revenue recognition project so as not to duplicate guidance.

The Boards also agreed that the initial measurement of the lessor's right to receive rental payments should be at the present value of the total expected cash flows discounted at the interest rate implicit in the lease. Some Board members noted that definition of the interest rate should be revised to clarify that the effect of contingent rentals and changes in estimated lease terms should be considered in measuring the interest rate implicit in the lease. The staff noted it would address those issues at a later stage.

The Boards agreed that any initial direct costs should be added to the lease receivable. The Boards asked the staff to ensure consistency in the definition of initial direct costs between IFRSs and US GAAP.

The Boards also agreed that the subsequent measurement of the lessor's receivable should be amortised cost using the effective interest rate. Nonetheless, at this point, the Boards noted that this decision depends on the progress on the Financial Instruments project (especially the scope of the FI project and applicability of the impairment model to lease receivables).

The Boards agreed that the initial measurement of the lessor's performance obligation(s) should equal the transaction price (that is, the customer consideration measured at the amount of the receivable).

The Boards also agreed that the subsequent measurement of the lessor's performance obligation should reflect decreases in the entity's obligation to permit the lessee to use the leased items over the lease term. One IASB member asked for further clarification on how this decrease would be articulated.

Lessee accounting – Leases with options to extend or terminate

The Boards discussed several approaches to treatment of options in leases (including component, disclosure, and measurement and recognition approaches). The Boards finally agreed to adopt the recognition approach (IASB split 10:4; FASB unanimous). Under this approach, options would not be recognised separately, and uncertainty about the lease term should be dealt with through recognition, that is, one of the possible lease terms is selected and the accounting is based on that lease term. Some Board members were concerned that this approach failed to capture the benefits of optionality for the lessee.

The Boards also agreed that the lease term should be the longest possible term that is more likely than not to occur. Nonetheless, some IASB members were concerned that such an approach would lead to an appearance of higher leverage than the underlying economic reality. Other IASB members noted that if the required information for alternative approaches (based on inceptive pricing) were available, full fair value of the options could be determined. Nonetheless, those Board members did not believe that these were available.

The Boards agreed that a lessee should consider all relevant factors in determining the lease term. Nonetheless, some Board members were concerned that the lessee-specific considerations were included (such as lessee intentions and past practice).

The Boards also agreed that an option to renew at a market rate should be considered when determining the lease term.

Finally, the Boards agreed that the lease term should be reassessed at each reporting date and that changes in the obligation to pay rentals resulting from such reassessment should be recognised as an adjustment to the carrying amount of the right-of-use asset. The Boards also agreed that a detailed examination of every lease is not required unless there is a change in facts and circumstances that indicates that the lease term needs to be revised.

Lessor accounting – Options to extend or terminate a lease

The Boards extended the agreed lessee approach to options on lessor accounting. Some Board members were concerned with prescribing a symmetrical approach between the lessor and lessee accounting. They noted that symmetry is illusory, as even though symmetrical considerations would be applied, the lessor and lessee might have different information and, thus, final accounting entries would not be symmetrical. Finally both Boards agreed with symmetrical considerations for lessees and lessors on options to extend or terminate (IASB with a bare majority of votes).

The Boards agreed that the lessor would recognise a lease receivable based on the longest term more likely than not to occur. The Boards also agreed that the lessor should be required to reassess the lease term at each reporting date similarly to requirements for lessees.

The Boards also agreed that any change in the lease receivable resulting from a reassessment of the lease term should be recorded as an adjustment to the performance obligation.

In addition, the Boards agreed that if a change in the lease receivable resulted from a decrease in the lease term results in an overstatement of previously recognised revenue, then that revenue should be charged to profit or loss in the current period.

Revenue Recognition

Contracts in which an entity grants a licence to a customer

The Boards discussed identification and satisfaction of performance obligation and the pattern of revenue recognition in contracts in which an entity grants a licence to a customer.

The Boards discussed the staff proposal to base the recognition pattern on the distinction between an exclusive and non-exclusive licence and tested the proposal by applying it to various industries. After a significant debate, the Boards concluded that while an exclusive versus non-exclusive distinction might work for some contracts, it would not work for others. Finally, a consensus emerged on a principle that would ensure that:

• Full revenue is recognised if the customer controls the licence (the contract would be more akin to a sale rather than a licence) or the reporting entity fully satisfies the performance obligation.
• If the performance is to be provided continuously (more akin to a lease), revenue would be recognised ratably.
• Moreover, if the entity is unable to separate the licence from other performance obligations, revenues should be recognised ratably over time.

The Boards asked the project team to better articulate guidance underpinning these principles.

Subsequent measurement of performance obligation

The Boards reaffirmed their preliminary view that all performance obligations in the scope of the revenue recognition standard should be re-measured after contract inception only when they are onerous.

Some FASB Board members were concerned that the Boards might be going too far in scope of the project as this issue relates also to cost, but a majority of both Boards noted that it is part of the project because the project relates to customer contracts.

Onerous performance obligations

The Boards continued their discussions on measurement of onerous contracts. The Boards discussed the unit of account for the 'onerous test' and agreed that a contract segment level was appropriate. Accordingly, the Boards agreed that a contract segment is onerous if the expected costs to satisfy the remaining performance obligations in that segment exceed the amount of the transaction price allocated to those performance obligations. Moreover, the Boards agreed that subsequently, measurement of the obligation for onerous contracts (that is, the liability) should be updated at each reporting date.

Some IASB members were unhappy with this outcome as they believed that its might not be indicative of the economic reality, such as in case of discounts on multiple performance obligations. The staff will analyse the effects the approved principle on various scenarios.

Finally, the Boards discussed at length the proposed measurement of the onerous test. The IASB was split between the margin approach and a cost-based measurement, and the FASB supported the cost-based measurement. In the end, the Boards preferred the cost-based approach, with the cost defined as direct and incremental cost.

Cost guidance associated with contracts with customers

The Boards agreed that revenue recognition project should not address existing guidance outside IAS 11, IAS 18, and ASC Topic 605.

One IASB member noted that if the cost guidance that is in IAS 11 or IAS 18 is useful, it could be retained in another 'carrier' Standard. Nonetheless, the Boards agreed that costs should be recognised as expenses when incurred unless eligible for capitalisation in accordance with other Standards.

The FASB directed the staff to analyse the need for guidance in ASC Topic 605.

Thursday 19 November 2009 (afternoon only)

Amendment to IFRS 1 – Exemption from Comparative IFRS 7 Disclosures

The Board considered and approved a proposed amendment to IFRS 1, Appendix E Short-term Exemptions from IFRSs, to permit entities adopting IFRSs for the first time before 1 January 2010 to apply the transition provisions in paragraph 44G of IFRS 7 in their first IFRS financial statements. The Amendment was distributed in Ballot Draft form later in the meeting and the Exposure Draft (ED) is expected soon.

The Board agreed to amend IFRS 1 to state that an entity need not provide the comparative information required by the March 2009 amendments to IFRS 7 Improving Disclosures about Financial Instruments for first-time adopters adopting before 1 January 2010. As a result, IFRS 1, Appendix E, paragraph E1 will be amended as follows:

E1 A first-time adopter may apply the transitional provisions in paragraph 44G of IFRS 7 to the extent that the entity's first IFRS reporting period commences earlier than 1 January 2010

The Board agreed to propose that this amendment to IFRS 1 be effective for annual periods beginning on or after 1 July 2010 with early adoption permitted.

The ED will be published for a 30-day comment period as soon as possible (most likely during the weeks of 23 or 30 November, given that it has been balloted). The comments will be discussed at the January 2010 meeting, with the intention that the amendment is finalised at that meeting and issued soon thereafter.

Standards Advisory Council (SAC) Chairman's Report

Paul Cherry, SAC Chairman, joined the meeting via video link and reported on the SAC meeting held in London 12-13 November 2009. He noted that the recent reorganisation of the SAC as a 'representative body' continues to mature and should become a very effective means of creating deeper IFRS networks around the world, with associated benefits to the IASB in terms of high-quality input to matters discussed.

Mr Cherry mentioned several sessions and noted that the most useful was probably that on the IASB's strategic agenda priorities post-2011. Though he would not be drawn on specifics, he noted that there was a high level of consensus about the strategic direction of the IASB post-2011 (two or three major projects; completion of the revision of the IASB Framework; and post-implementation reviews of recent significant standards). The SAC will discuss the priorities in greater detail at its meetings in 2010, and is considering bringing forward its November 2010 meeting to September 2010, so that it can have meaningful input to the IASB's agenda setting session expected in December 2010.

There was strong support in principle for a 'disclosure framework' in both IFRSs and US GAAP.

Three areas of the IASCF Trustees' review of the IASCF Constitution were discussed, and the strong consensus of the SAC was expressed in favour of expanding constituent input on setting the IASB's agenda and priorities, and against a 'fast track' process for amending IFRS. On the latter, it was considered that proper due process is 'non-negotiable' in the international context and that, operationally, 30 days for comments is probably the minimum that is acceptable.

Liabilities – Amendments to IAS 37

Application of the measurement guidance to onerous contracts

The Board discussed how to resolve a conflict identified by the staff. Previously, the Board decided to clarify that entities should measure liabilities in the scope of IAS 37 by reference to the value, rather than the cost, of the outflows required to fulfil the obligation. Applying that principle, the attribute of the outflows used to measure an onerous contract (value) would be different from that used to identify the contract as onerous in the first place (cost).

After a short discussion, the Board agreed:

• (a) to create a limited exception to the proposed measurement requirements in the revised IAS 37. The exception will be restricted to onerous contracts arising from transactions in the scope of IAS 18 Revenue and IFRS 4 Insurance Contracts. It should allow entities to measure their contractual obligations to provide goods or services on the basis of the expected cost, rather than the value, of the goods or services; and
• (b) that the Board emphasises in any guidance accompanying the revised IFRS that:
  • (i) the purpose of the exception is to postpone any change in practice for measuring those contracts, pending completion of the revenue and insurance projects; and
  • (ii) when the Board issues its new revenue and insurance standards, it will either confirm the exception (possibly taking the contracts out of the scope of IAS 37) or delete it (bringing the measurement requirements for onerous sales and/or insurance contracts into line with the measurement of other liabilities in the scope of IAS 37).

Measurement guidance – wording

The staff reminded the Board that the measurement attribute for an IAS 37 liability is the amount that an entity would rationally pay at the end of the reporting period to be relieved of an obligation. The Board had decided that this amount is the lowest of:

• (a) the value the entity would gain if it did not have to fulfil the obligation;
• (b) the amount the entity would have to pay to cancel the obligation; and
• (c) the amount the entity would have to pay to transfer the obligation to a third party.

The staff noted that in drafting the proposed measurement guidance, several people had indicated that (a) was unclear. Accordingly, the staff is seeking guidance from the Board about how best to clarify the Board's intention.

Several alternatives were discussed in a wide-ranging debate. The Board eventually agreed that the amount in (a) would be expressed as:

(a) the value the entity would forego gain if it had did not have to fulfil the obligation;

The Board agreed that the staff should work on any further refinements necessary with the Board advisors. Provided the intention of the measurement guidance (namely, measuring value, not cost) did not change, the Board did not need to review the wording further.

A Board member expressed extreme frustration that the Board was about to issue guidance that demonstrated that emission rights were not a liability, and yet the same Board had given direction on 18 November to the staff to develop guidance in a different project that would say that emission rights were a liability. He thought this an unconscionable situation. The Board was thrown into slight disarray by this uncomfortable observation.

The Board seemed to agree that the application guidance accompanying the IAS 37 revision would include an example demonstrating that emission rights were not a liability under the revised proposals. If the Emission Rights project continues to go in the direction indicated by the Board on 18 November (that emission rights give rise to an obligation), this would be subject to the usual due process. Although Board members accepted this approach, it was clear that several, including the Board member who raised the issue, were uncomfortable.

The Chairman asked Board members whether the discussion had undermined support for the Board's conclusions in the proposed revision of IAS 37. The Board confirmed that 9 Board members supported the revisions, just sufficient to issue an IFRS.

IFRIC Matters

Report of the November IFRIC meeting

The Director of IFRIC and Implementation Activities made an oral report of the IFRIC meeting held 5-6 November 2009 (click for Deloitte Observers' Notes of that meeting).

Ratification of IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

The staff introduced the text of the final Interpretation and accompanying Basis for Conclusions as approved by the IFRIC and explained the changes made to the draft Interpretation D25 as a result of comments received from constituents.

The Board discussed several aspects of the Interpretation, but spent most time on the issue of partial settlements and the basis on which the entity would apportion the fair value of equity instruments issued for the debt extinguished. The Board resisted suggestions that the IFRIC provide more definitive guidance, suggesting that there is existing guidance on how to account for modifications of financial liabilities and how to allocate consideration over multiple elements. In addition, a Board member noted that there are 'natural barriers' that would prevent bad accounting.

The Board ratified IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments, which had been exposed as Draft IFRIC Interpretation D25. One Board member was opposed.

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