Monday 15 March 2010 (IASB Meeting)
The IASB and the FASB met in London. FASB members and staff joined the meeting via video link.
Sir David Tweedie had to vacate the chair early, with Mr McGregor assuming the chair. Mr Garnett did not participate. All FASB members were present.
 Insurance Contracts
Release of residual margins and recognition of revenue
The Boards discussed how a residual margin, determined at inception, should be released to profit or loss subsequently. The staff explained that in preparing their recommendations, they had focused on the insurer's performance under the contract by delivering an asset to the policyholder. The staff also reminded the Boards that the proposed insurance model is a hybrid of:
- a direct liability measurement, using current estimates of expected cash flows, time value of money and a risk adjustment; and
- an allocation element (the residual margin) that eliminates a day one gain and is subsequently released as income over an appropriate period. The staff proposed that this 'appropriate periods' was the period over which the insurer performed under the contract.
The residual margin
In outlining their recommendations, the staff suggested that 'for subsequent reporting periods the residual margin...will accrete interest.' This suggestion generated a significant amount of discussion among Board members. Some Board members saw the residual margin as a 'plug' designed to avoid a 'Day 1' gain or loss. As such, it was much the same as deferred income, on which no one usually accretes interest. Others disagreed, seeing the residual margin as part of the larger present value computation that is performed by the insurance company when pricing the contract. As such, accreting interest was totally consistent with the revenue recognition model being developed by the Boards. Still others disagreed with this second analysis, noting that in insurance the premium is received on Day 1 unlike most revenue recognition situations in which the interest accretion acknowledges the implicit financing given by the entity between the time of performance and the receipt of customer consideration.
The Boards and staff attempted to clarify the issue by using the staff examples, but these only added confusion – even to those Board members who had tried to audit the examples.
The Boards agreed that it was vital that the model not be lost for the sake of the disagreement about whether interest is accreted. A Board member noted that he would not like to see the Boards revert to a composite margin approach. The risk and residual margins were related but distinct, and the accounting model proposed by the Boards should recognise this fact.
The staff agreed to withdraw the issue of whether interest was accreted on the residual margin over the period of time that it was released. Revised proposals will be presented either later in this meeting cycle or in April.
Period of release
The Boards then discussed the period over which the risk margin should be released. Board members were again concerned that the staff proposal seemed to be more complicated than was necessary. In particular, they thought that the recommendation sought to frame the principle around the extreme rather than the general (for example, hurricane or winter storm damage, in which the window for claim events is relatively narrow, rather than claims occurring evenly over a period).
A FASB member suggested an alternative approach, which the staff preferred to the formulation of their original recommendation. Consequently, the Boards were asked to vote on a recommendation that the residual margin should be released on a straight-line basis unless another pattern reflected better the exposure to risk over the coverage period.
A comfortable majority of the IASB and FASB separately supported this recommendation.
One FASB member thought that it was premature to commit to this approach. This FASB member thought that the inbound and outbound cash flows and margins were inextricably linked and that using composite margin that is remeasured over the performance period is the best way to portray that.
Tuesday 16 March 2010 (IASB-FASB Joint Meeting)
The IASB and the FASB met in London. FASB members and staff joined the meeting via video link.
Mr McGregor chaired the morning session in the absence of the Chairman, who was attending a meeting of the European Council – Economic and Monetary Affairs (ECOFIN). All other IASB members were present.
Joint Arrangements
The Board discussed matters related to transition and disclosure. Before those issues were addressed the Chairman pro tempore raised an issue noted in the cover note to the papers for the meeting about conflicts identified between IAS 28 and SIC-13. The staff noted that the joint arrangements project would not address the conflicts (at least not now) because the issue reflected a conflict within the equity method itself and whether it was a valuation method (in which case inter-company transactions, etc would not be eliminated) or a form of consolidation (in which case such transactions would be eliminated). The staff was aware of the issue but did not wish to delay finalising the joint arrangements material.
Transitional arrangements
Jointly-controlled entity proportionate consolidated (IAS 31) to be a Joint Venture accounted for using the equity method (IFRS)
The staff noted that ED9 proposed retrospective application: some constituents criticised this but other evidence suggested that moving from proportionate consolidation to the equity method was not overly onerous. However, the staff proposed a 'simplified procedure' that would collapse the proportionate consolidation assets into a 'net investment' number that would form the 'deemed cost' of the investment for equity accounting purposes, subject to the usual impairment tests.
Several Board members were uncomfortable with this proposal. They did not like creating an exception from retrospective application and could not see the difficulty in 'reverse engineering' the equity accounting number for the earliest period presented. The investor/venturer already had the information, so determining the amount at which the x% investment in the joint venture should be recognised would not be difficult. Impairment should be recognised when it fell and should not be buried in the opening adjustment to retained earnings.
Other Board members raised concerns about the effect of partial dispositions in the period between the earliest period presented and the end of the reporting period, and about the effect of a joint venture being in a net liability position and the consequences for the equity method. A Board member noted that if a venturer's interest in a joint venture on a proportionate consolidation basis was a net liability position, it probably indicated that real liabilities existed in the venture.
The Board did not support the staff recommendation. However, they did support (unanimously) a modified retrospective approach, under which the IFRS would be applied retrospectively to all periods presented, with any catch-up adjustments, including the effects of any impairment occurring in periods prior to those presented being recognised in the earliest period presented (that is, not buried in opening retained earnings).
The Board agreed (by majority) to require disclosure of the breakdown of the investment balance of the opening balance of the investment for the period in which the IFRS is first applied. Disclosures should be in aggregate for all Joint Ventures (as defined in the IFRS).
Jointly-controlled entity accounted for using the equity method (IAS 31) to be a Joint Operation for which the entity recognises its (share of) assets and liabilities (IFRS)
Again, the staff recommendations were not supported by the Board. In particular, Board members objected to recognising goodwill on a transaction that was not a business combination.
Some Board members thought that the population of such situations was small enough to be silent and let preparers figure things out on their own; however, having raised the issue, a straight-forward approach was best. Again, full retrospective adjustment was not necessary and the adjustments should be limited to the earliest period presented.
After a lively debate, the Board agreed (unanimously) that in the situation under debate, the equity accounting carrying amount at the date of transition would be allocated to assets and liabilities on a reasonable basis. Although relative fair value might be an appropriate basis, the IFRS should not prescribe any particular basis.
Jointly-controlled entity proportionate consolidated (IAS 31) to be a Joint Operation (IFRS)/Jointly-controlled asset/ operation under both IAS 31 and IFRS
The Board agreed that in this situation no special transitional requirements were necessary.
Separate financial statements
The Board agreed to clarify that the accounting for interests held by an entity in joint operations will be the same in the party's separate, individual and consolidated financial statements. In addition, IAS 27 will be amended such that the requirements for the accounting for investments in joint arrangements in the separate financial statements of the parties refer exclusively to the 'joint ventures' type of arrangement.
Joint Arrangements – Disclosures and transition (for associates as well)
The Board discussed the disclosure requirements for joint arrangements and associates. Those disclosures form part of the comprehensive disclosure standard for a reporting entity's involvement with other entities that is not in the scope of IAS 39/IFRS 9.
Disclosure principle for joint arrangements and associates
The Board agreed to align the disclosures for joint arrangements (especially joint ventures) and associates (since they both use the equity method).
Disclosure of the basis of joint control and significant influence
The Board agreed to carry forward to the IFRS the requirements in IAS 28 paragraphs 37(c) and 37(d); however, those requirements did not need to be aligned by requiring disclosures of the basis of joint control.
A list and description of investments in significant joint ventures, associates, and subsidiaries
The Board agreed (by majority) that:
- the IFRS should require disclosure of a list and description of interests in significant joint arrangements (rather than joint ventures); and
- the consequential amendment restoring the equivalent requirement in relation to significant associates was confirmed.
A Board member objected to the use of the term 'significant' because he thought it was ambiguous (significant to whom?) and preferred the term 'material'. He was a lone voice on this issue.
Commitments
The Board agreed (by majority) to require disclosure of commitments of all types to joint ventures. A proposal to extend this disclosure to associates was not supported by a majority of the Board. In explaining the distinction, it was noted that the existence of the joint arrangement contract gave the entity less freedom with respect to commitments to a joint venture. Users were interested in the degree of financial flexibility of the venture. In the situation of an investor in an associate, it was likely that it would have greater discretion to delay meeting the commitment.
'Contingent' liabilities
The Board agreed to retain the proposal in ED9 paragraph 38 related to 'contingent' liabilities incurred relating to the venturer's interest in the joint venture and the venturer's share of 'contingent' liabilities incurred jointly with other parties. In response to a Board member's question about using antiquated terminology, the staff responded that the wording would be aligned to that used in the IFRS replacing IAS 37.
Disclosure requirements affecting joint operations
Summarised financial information for 'joint operations'
The Board agreed not to require summarised financial information for those arrangements that are 'joint operations' under the IFRS.
Summarised financial information for each individually material joint venture
The Board discussed whether to align the aggregation in the disclosure requirements of summarised financial information for joint ventures and associates, independently from the measurement method both types of investment are accounted for, to be 'either individually or in groups'. Several Board members objected to this recommendation because it provided no real guidance and lacked sufficient rigor to make it operational.
The staff agreed to return at a later session with a better articulated recommendation.
Granularity of disclosure – statement of financial position
The Board agreed to require the following disclosures (in aggregate) related to investments in joint ventures (additions to those required in ED9 are underlined):
- cash;
- current assets;
- non-current assets;
- financial liabilities, excluding trade and other payables and provisions;
- current liabilities;
- non-current liabilities
Some Board members did not support these disclosures at all - noting that they seemed to run contrary to the Board's preference for the equity method in that they were designed to enable a user to construct an artificial 'net debt' number with cash and liabilities that were not the investor's/venturer's.
Granularity of disclosure – statement of comprehensive income
The Board agreed to require the following disclosures (in aggregate) related to investments in joint ventures (additions to those required in ED9 are underlined):
- revenues;
- depreciation and amortisation;
- interest revenue;
- interest expense;
- income tax expense or income; and
- profit or loss.
In addition, disclosure would be required by the venture/ investor of dividends received from the joint venture.
Granularity of disclosure – Associates
The Board discussed but was strongly opposed to a proposal to provide summarised financial information for associates including current and non-current assets; current and non-current liabilities. The staff did not pursue the recommendations and will return with alternative proposals at a later session.
Disclosure requirements for joint ventures held by venture capital organisations, or mutual funds, unit trusts and similar entities including investment-linked insurance funds
The Board decided to reverse a proposal in ED9 and retain the disclosure required by IAS 28.37(i) that requires disclosure of summarised financial information of associates, either individually or in groups, that are not accounted for using the equity method, including the amounts of total assets, total liabilities, revenues, and profit or loss.
The Board agreed that information about the activities of the associate was relevant whatever basis was used for measuring the net investment. In addition, even though the need for similar requirements in the case of joint ventures might be more limited, the Board agreed to align the disclosure requirements for joint ventures and associates.
Fair value of investments in joint ventures for which there are published price quotations
IAS 28 requires an entity to disclose 'the fair value of investments in associates for which there are published price quotations'. The Board agreed to extend this requirement to joint ventures, acknowledging that published price quotations for joint ventures might not be common.
Revenue Recognition
The Boards continued their deliberations on the proposed ED on Revenue Recognition.
Disclosure
Disaggregation
At the January meeting, the Boards expressed some concerns about the proposed disaggregation principles and how it interacts with the requirements in the FSP project. The Boards were also concerned about the volume and usefulness of the disclosure package.
Staff presented the Boards with revised disclosure requirements following consultations with selected Board members. The main changes to the disclosure package presented in the Appendix to the agenda paper include:
- revised disclosure objective;
- streamlined risk disclosures;
- enhanced disclosures on onerous contracts;
- eliminating the requirement to disaggregate revenue; and
- requirement to disclose amount and expected timing of satisfaction of performance obligation.
The Boards considered the requirements of IFRS 8 and ASC Topic 280 which require the disclosure of revenue for each operating segment and to disaggregate the total reported revenue by products/services and geography. Furthermore the FSP project include a core principle that requires disaggregate information that is useful in assessing financial position and performance as well as timing and uncertainty of cash flows. In the light of this, the Boards deliberated whether the exposure draft on revenue recognition should require further disaggregation of revenue.
One Board member made the remark that analysts constantly comment that disaggregation in financial statements are insufficient and that eliminating disaggregation of revenue from the exposure draft would not be a popular decision. Another Board member was of the opinion that as the exposure draft deals with revenue, it should include all aspects dealing with revenue, including disclosure requirements. It was suggested that the requirements on disaggregation of revenue included in IFRS 8 par 32 be incorporated in the exposure draft and removed from IFRS 8. Several Board members objected to the relocation of disclosure requirements between standards.
A Board member suggested that a minimum level of disaggregation is needed in the exposure draft, but noted that it would be a challenge coming up with the right balance.
Another Board member recommended expanding the disclosure objective by including a reference to the future cash flows related to the revenue. Another Board member added that the objective of the disclosures is to help users understand the quantity as well as quality of revenue and was supportive of expanding the proposed objective.
The Boards asked the staff to refine the disclosure objective by considering the comments made by the various Board members. The Boards also tentatively agreed to include a minimum level of disaggregation in the exposure draft, but provide a linkage with revenue information disclosed in accordance with other standards.
Maturity analysis
The Boards tentatively decided at the January meeting to require the disclosure of the amount and expected timing of the satisfaction of the remaining performance obligations. Subsequent feedback from constituents indicated that the information would be more useful for long-term service arrangements and certain industries such as construction. The Boards deliberated whether to limit the requirement to performance obligations:
- expected to be fulfilled after more than one year from reporting date;
- expected to be fulfilled after more than one year from date of contract inception; or
- that expose the entity to significant risk.
The Boards were supportive of limiting the maturity analysis to contracts with an original fulfilment period of more than 12 months.
One Board member asked staff to confirm what will happen with a contract with performance obligations originally expected to be fulfilled after more than a year from the date of contract inception, but is getting close the end of the contract term. Would such a contract be excluded from the maturity analysis because the remaining performance obligations are expected to be fulfilled in less than a year? Staff confirmed that a contract with an original performance period of more than 12 months will be included in the maturity analysis until all performance obligations have been satisfied.
It was agreed that any other comments and corrections will be dealt with off-line by the staff.
Accounting for costs in contracts with customers
The Boards considered the matter separately.
FASB
At the February meeting, the FASB tentatively decided that the costs of obtaining a contract with a customer should be expensed and to develop guidance on when an asset should be recognised for costs incurred to fulfil a contract with a customer.
The staff presented the FASB with two alternatives to provide guidance on the costs of fulfilling a contract; either codify parts of IFRS or develop new guidance. The staff presented an analysis of the advantages and disadvantages of each alternative.
The FASB discuss the codification of IFRSs and was concerned that the limited guidance provided by IAS 2 would not adequately address the lack of guidance in US GAAP. There were also concerns about the risk of unintended consequences by codifying IAS 38 on a piecemeal basis when guidance was developed in a broader context.
The FASB agreed to develop new guidance which would only apply to contracts with customers. One FASB member expressed some concern over being too definitive about the costs that should be expensed. After a short deliberation, the FASB agreed in principle with the staff's proposal for developing new guidance with an impairment model akin to onerous test.
IASB
In accordance with the IASB's previous decision, an entity would evaluate whether the costs incurred in fulfilling a contract have resulted in inventory, an intangible asset or item of property, plant and equipment in accordance with IAS 2, IAS 16 and IAS 38 respectively.
Subsequently, the Board became aware of practical issues with IAS 2 and as the cost guidance in IAS 11 will be withdrawn, entities would have to rely more heavily on the guidance in IAS 2. The Board was presented with three alternatives for addressing the matter:
- confirm the tentative decision to use judgement in determining which standard to apply; or
- improve existing IFRSs by
- incorporate the same guidance proposed for US GAAP in the revenue standard; or
- withdrawing the guidance on service provider inventories from IAS 2 and require entities to apply IAS 38 to such assets.
One Board member acknowledged that there are difficulties for service providers in applying IAS 2, but do not agree that IAS 38 is the appropriate Standard to account for those costs. Although this Board member prefer to incorporate new guidance, it would be better for the Board to focus its efforts on revenue recognition only and address this matter at a later stage.
Another Board member questioned how the incorporation of the new guidance will affect the publication of the exposure draft and whether the guidance will be principle-based. The staff confirmed that the guidance will definitely be principle-based and that the timing of publication will not be adversely affected.
The Board also questioned which impairment model would apply when the new guidance has been incorporated. Staff responded that IAS 36 is the logical model to apply, however several Board members did not share this sentiment. After a short discussion of the various impairment models, the Board tentatively agreed to incorporate the same impairment model (onerous test) as that proposed under the US GAAP guidance.
Consolidation
The Boards started their discussion by assessing consistency of the control model. The staff presented the Boards an overview of the control model and noted that all outstanding issues in the control model should be addressed during two sessions at this joint meeting.
The staff pledged that the next due process document (Exposure draft for the FASB and draft of the Standard for the IASB) was planned to be published in Q2 2010 (most probably in May).
Consistency within the control model
The Boards re-discussed the concept of power in the context of power with less than half of the voting rights in an entity that the Boards discussed at the January 2010 meeting. At the January meeting it was obvious that different Board members held different views, and the Boards asked the staff to provide an analysis which of the four views presented was most internally consistent with the overall control model.
The four discussed views were as follows:
- The 'contractual rights' view that asserts that a reporting entity must have legal or other contractual right to direct in order to have power. As the staff clarified this is a basic view that is embedded in all other views (that is, the most narrow scope of consolidation)
- The 'exercise of power' view that asserts the notion of active managing. The view stated that if a reporting entity was actively directing the activities of the entity, it has the power unless kick-out right prevent the reporting entity from directing the activites.
- The 'ability to' view with evidence that asserts an ability view supported by evidence that the reporting entity directs the activities.
- The 'ability to' view that did not require any evidence or demonstration.
The staff clarified these concepts by a comprehensive set of examples and application of all four views to each of them.
In a replay of the January debate the Boards discussed thoroughly the issue, reflecting multiple arguments for and against each view.
One FASB member noted that the staff should consider a broader definition of contract that would reflect not only control by voting rights but also impact on policies or decisions.
Some IASB and FASB members noted that all facts and circumstances should be considered in assessment of control and judgement would be required in application of any (b) to (d) views to depict the economic reality better. In addition some of the Board members did not see much difference between (b) and (c) and (c) and (d) views.
One IASB member noted that he would be able to support the contractual rights view (that is simple and clear) but only on the condition that equity method accounting was abolished and all interest in non-consolidated entities were measured at fair value through profit or loss.
Some Board members tried to incorporate some refining concepts in the discussion as perpetuation of control and its persistency. Nonetheless, these concepts did not gain widespread support.
Finally, majority of the IASB supported the 'ability to' view with evidence. Nonetheless, the IASB members interpreted the evidence as 'evidence to have the ability' (that is, no demonstration is required). The narrow majority of the FASB was also in the 'ability to' view with evidence. Nonetheless, the FASB members understood the evidence as 'evidence of control' (evidence of what is demonstrated to be done). Remaining two FASB members remained firmly in the contractual rights view.
The IASB Chairman noted that despite remaining differences, the Boards managed to bridge the gap in their two views. He stressed that the remaining difference is relatively narrow. The Boards agreed that the staff would prepare clarification of these two views and its application for the continuation of the discussion the following week.
Insurance Contracts
Acquisition costs
The Boards have consistently held the view that insurers should recognise acquisition costs as an expense when incurred and, at inception, a part of the premium equal to the acquisition costs incurred should not be recognised as revenue. Responses to the field test questionnaire indicated that this proposal would have a significant effect for life insurers and would not give useful information. At the time of the decision, the Boards were still discussing the extent to which the insurance project should be consistent with the revenue recognition project or should focus on the direct measurement of the contract liability. Since then, the Boards have affirmed that the measurement model to be applied is a hybrid of the direct measurement and allocation of a positive difference between expected premiums and cash outflows plus a risk margin. Therefore, the staff requested to explore the question of acquisition costs and presented the Boards with the following four alternatives:
- A. recognise all acquisition costs as an expense when incurred and not recognise a part of the premium as revenue (Boards' current decision);
- B. the direct measurement of contract liability should be calibrated to the premium excluding incremental acquisition costs;
- C. incremental acquisition costs should be included in the contract cash flows to determine the residual margin at inception of contract; or
- D. an intangible asset should be recognised measured at the amount of incremental acquisition costs.
Several Board members were opposed to changing the current decision as it would imply that insurance is being treated in a special way and expressed strong support for alternative A. They were also of the opinion that these costs do not form part of the contract liability and, therefore, should be expensed.
A few other Board members favoured alternative C as they see this as consistent with the building block model developed specifically for insurance, and in that way insurance is special, whereas other Board members indicated that they could support either alternative B or C, depending on how acquisition costs are defined.
One Board member, originally supporting alternative A, suggested a modified alternative A using an example whereby an insurance contract includes a clause stating that if the contract is not renewed, the customer owes an amount to the insurance entity for acquisition costs incurred. This 'debt' of the customer will usually be offset against the settlement value of the contract. In this scenario, the insurer will recover the acquisition costs either through renewal or through a reduced settlement value. The modified alternative A would entail all acquisition costs being expensed and a receivable recognised for the costs expected to be recovered.
The Boards deliberated the matter for some time but could not reach a common view. The majority of Board members requested more time to consider the matter and a further analysis of the mechanics and implications of each alternative. In order to give the staff some direction, the Boards were asked to vote for either alternatives A, B/C, or D. The majority of FASB members supported alternative A, whereas the majority of IASB members supported alternative B/C. The Boards asked the staff to explore these alternatives further including the modified alternative A and bring the issue back for further discussion at a future meeting.
Wednesday 17 March 2010 (IASB Meeting)
Meeting with Representatives of EFRAG on Convergence-related Issues
Representatives of the IASB met with an EFRAG delegation to discuss the convergence-related issues. The IASB Chairman started the meeting by discussing the convergence with the FASB. He noted that the update of the Memorandum of Understanding with the FASB in November 2009 was an important milestone in the convergence process as it stated a deadline for the convergence for the first time and established the process of assessing the progress on the quarterly basis. He stressed that the new format of monthly joint meetings is working well and, in his opinion, helps to overcome or narrow differences between the Boards on a timely basis.
The EFRAG Chairman also welcomed the new arrangement as a positive development that brought more transparency to the convergence process. Nonetheless, he raised the issue of European involvement in these new arrangements. Both parties agreed with the suggestion of having a longer meeting in September that would discuss technical aspects of the major projects and activities.
The EFRAG Chairman also welcomed the increased level of outreach but noted that an increased level of transparency of the outreach activities would be welcomed. The IASB Chairman responded that the result of the outreach was always a public document discussed by the Board that summarised the result of the outreach (a document similar to a 'feedback statement' that is published after a new Standard is published reflecting the comments from comment letters).
The EFRAG raised some concerns about the implications of the 2011 deadline on the quality of the accounting standards and stressed the need to maintain quality before convergence and the fulfilling any deadline.
The EFRAG also expressed concerns about the likely revisions to the IASB workplan that would lead to moving of expected comment periods and renders the planning difficult. In addition, the EFRAG noted that the IASB has, in some cases, cut down the comment period and scoped out several issues from the proposed guidance in order to meet the deadline. The EFRAG representatives expressed concerns that little time, combined with heavy workload and scoping changes, may lead to misunderstandings.
The discussion continued with financial crisis-related issues. The EFRAG expressed some concerns about the proposed guidance on financial liabilities and noted that bifurcation of financial liabilities when assets were not bifurcated might lead to creation of additional accounting mismatches.
The EFRAG representatives expressed their broad support for the expected loss impairment model. Nonetheless, some EFRAG representatives advocated a scope exception for non-financial institutions (rather than a practical expedient). The EFRAG representatives also provided broad support for the idea of a statement of regulatory income and encouraged the IASB to discuss it with the regulators and the Basel Committee as it is more a public policy issue rather than an accounting issue. The IASB Chairman clarified that the IASB would create the statement of regulatory income as a vehicle for providing information but the calculation and enforcement would be responsibility of the regulators.
The EFRAG supported the IASB approach on a comprehensive hedge accounting overhaul but encouraged the Board to gain more insights and input from European companies.
Some EFRAG representatives expressed their concerns about the consolidation project as they believed that the current IFRS guidance worked well in the financial crisis and it might be dangerous to change it.
The EFRAG representatives expressed their grave concerns about the IAS 37 proposals. The EFRAG noted that there is lots of uncertainty about the probability-of-outflow recognition criterion and urged the IASB to expose the whole Standard for a new comment period.
The IASB Chairman noted that the IASB has become aware that recognition rather than measurement is of most concern for constituents and would deliberate the following week how to address those concerns. On measurement, the EFRAG representatives expressed their concerns on the margin used in calculation of fulfilment value.
The EFRAG representatives also expressed some concerns on the proposals of the IASB to require a single statement of comprehensive income and suggested prioritisation of the workload. In the opinion of the EFRAG representatives, this project should not be prioritised.
The EFRAG representatives urged the IASB to undertake more outreach in respect of the Revenue Recognition Standard as many constituents are of the view that the new guidance would not change the practice, which might not be necessarily the case.
Regarding the leases project, the IASB Chairman noted that the IASB would need to consider whether to publish lessee and lessor guidance together, as the FASB plans. The IASB Chairman noted that lessor accounting was not in the original MoU agreement and, thus, guidance for lessees and lessors could be decoupled. Nonetheless, he noted that in any case the IASB would try to speed up lessor accounting guidance, even if it would mean that it would be published three to four months after the lessee guidance.
The IASB Chairman also discussed the question of alignment of effective dates of the new major proposals. The EFRAG noted that sufficient lead time should be provided to facilitate the endorsement process.
Finally, the EFRAG provided some update on the pan-European proactive work on Asset Definition, Common Control Transactions, Income Taxes, Disclosure Framework, Implication of Business Model on Financial Reporting, and Assessing of Effects of Accounting Standards.
Fair Value Measurement (IASB)
Scope considerations regarding IFRS 2 Share-based Payment
The Board decided to exclude IFRS 2 from the measurement and disclosure requirements in the final Standard on Fair Value Measurement.
The Board also agreed to provide a note to IFRS 2 that would clarify that requirements of the Fair Value Measurement Standard do not apply to IFRS 2. As one of the Board members noted in some instances the fair value reference in IFRS 2 relates to fair value as proposed in the Standard (such as fair value of goods and services), whereas in other instances (such as equity settled share based payments), fair value is assessed from a different perspective that is inconsistent with the fair value measurement Standard.
Scope considerations regarding IAS 17 Leases
The Board discussed a possible scope exemption for IAS 17 in the context of using the exit price notion or highest and best use (especially in the context of classification of leases and the timing of recognising gains or losses for sale and leaseback transactions). Some Board members were uncomfortable with a blanket scope exemption in this case and would prefer clarification of the fair value measurement standard to ensure that this is a particular application of fair value for non-financial items (that is, using an entry rather than exit price). The Board agreed that the staff should try to clarify the text of the Standard if possible. If such clarification is impractical, leases should be excluded from the scope of the Fair Value Measurement Standard. The Board also noted that amending IAS 17 would be impractical as new guidance for leases is planned to be finalised by June 2011.
Other scoping considerations
Without much discussion the Board agreed not to replace the term 'fair value' in IFRS 3 Business Combinations when referring to the measure for reacquired rights (as an exception to the measurement principle in IFRS 3).
The Board also decided not describe the measurement of the reimbursement rights in IAS 19 Employee Benefits as the present value of the related obligation as a practical expedient for determining fair value.
The Board discussed the potential scope exemption in IAS 39 for measuring financial liabilities with a demand feature (IAS 39.49). Most Board members agreed that the conclusion from IAS 39 should be confirmed and guidance in IAS 39.49 is 'deemed to be fair value for the purposes of liabilities with demand features'.
One Board member asked the staff how this would influence the convergence with the FASB. The staff responded that FASB is considering to change the guidance for liabilities with demand feature (to remove the demand deposit floor and measure the intangible), in which case there would be differences between IASB and the FASB guidance. Most IASB members noted that the final guidance should precisely describe what the measurement is and what attributes it includes. The Board agreed to retain the term 'fair value' for measuring financial liabilities with a demand feature.
The Board decided that each of the IFRSs that are excluded from the scope of the Fair Value Measurement Standard should state the reasons for that decision and why the term 'fair value' was nevertheless retained in that Standard.
Standards Advisory Council Update
The Chairman of the Advisory Council provided a brief oral update of discussions at the February 2010 Advisory Council meeting.
Insurance Contracts
Educational session: measuring the risk margin
At the request of a FASB member, the FASB staff had prepared a paper that examined and explained the role that risk adjustments play in standard option pricing techniques. The FASB member wished to explore whether the Boards' challenge in attempting to adjust for the risk margins could be accommodated more efficiently using option pricing models as opposed to the alternatives being considered.
The FASB staff also presented a selection of current (and significant historical) academic research on the use of option pricing models in the measurement of liabilities. It was unclear how many of these studies were based on data not based in the United States or on US GAAP (nor was this question asked by any Board members).
The principal paper was being discussed in 'education session' format, and Board decisions were not requested. However, it was apparent that both Boards were split, with some preferring using option-pricing models to measure insurance contracts and others preferring the current staff position.
Members of both Boards expressed concern that using option pricing models to price the risk margin was essentially inviting preparers to use a 'pick a number' approach to measurement. There was no apparent means to limit approaches to measurement or to inputs, so it was difficult to see how using option pricing models would be better than the model currently being developed. In defence, the chief advocate of the FASB model noted that, in some cases, there was less subjectivity in the option pricing model-approach than, for example, value-at-risk approaches.
A FASB member was concerned that the Boards were suggesting a greater rigor for insurance contracts than they require for other [fair value] measurements: was this because the Boards had abandoned the exit price as the measurement objective and had yet to articulate clearly a replacement? The lack of a clear measurement objective was at the root of the Boards' problem.
An IASB member concurred, suggesting that the Boards were trying to achieve an 'exit price', or something very close to it, without using that phrase or 'fair value'. The exit price was, for him, the right answer and the Boards should be honest about using it as the measurement objective. Exit price is well understood by both users and the measurement professionals and would have well-established measurement methods already embedded in IFRSs and US GAAP.
The discussions did not suggest broad support for using option pricing techniques in determining inputs to the measurement of insurance contracts. However, that may change as Board members reflect on the discussions between today and when they debate the paper in technical session in the week of 22 March.
Leases
Disclosure for lessees
The Boards were presented with the proposed package of disclosures to be provided by lessees. The staff explained that the overarching principle on disclosures is to ensure that the information in the notes complements the information presented in the financial statements, so as to provide decision-useful information for users. The Boards were asked to consider the proposed disclosure package in terms of the grouping of disclosures based on the disclosure objective, amounts related to leases, and the assumptions and estimates.
Disclosure objective
The proposed disclosure objective broadly requires the disclosure of quantitative and qualitative information that identifies and explains the amounts recognised in the financial statements and enables users to evaluate the nature and extent of risks to which the leasing activities have exposed the entity. Some Board members were concerned that the term 'risks' is too vague in the context of leasing activities and that they were expecting disclosure around the uncertainty of future cash flows and the flexibility involved in the management of those risks.
Although the Boards agreed in principle with the proposed disclosure objective, it was not considered to be explicit enough and the staff was requested to revise and expand the objective to incorporate Board members' concerns raised during the meeting.
Amounts related to leases
The discussion of proposed disclosures pertaining to the amounts related to leasing activities centred around the general description of leasing activities and the proposed reconciliation between the opening and closing balances for the right-of-use assets and obligations to pay rentals.
One Board member was concerned that the level at which a description of leasing activities are required was too general and will result in boilerplate disclosures. It was suggested that that description should be broken down into certain classes of leases. When questioned how these classes would/should be determined, the Board member responded that it could possibly be linked to the disclosure objective. Another Board member suggested a grouping based on the nature of the underlying assets, for example, real estate, machinery, office equipment. Other Board members agreed that disaggregated information will be more useful to users.
On the requirement to present a reconciliation between the opening and closing balances of the right of use assets and lease obligations, one Board member was opposed to including a roll-forward in the leasing standard when the Financial Statement Presentation (FSP) Standard contain a general principle on when roll-forwards need to be presented. Another Board member remarked that requested the wording of the requirement to be aligned to the wording used in the FSP Standard. The staff commented that they are committed to follow the development of the FSP Standard very closely and ensure that there is alignment in the wording.
Other Board members questioned how leases accounted for using the simplified accounting model will be included in the roll-forward. The Boards concluded that they agree in principle with the proposed disclosures and that comments from individual Board members should be dealt with off-line.
Assumptions and estimates
The Boards mainly discussed whether a lessee should disclose the fair value of lease obligations and a sensitivity analysis to changes in market risks in the notes.
One Board member questioned where else the Boards have required a sensitivity analysis to changes in market risks for liabilities measured on a cost-basis. The Boards entered into a long discussion on whether it would be possible to determine compile a sensitivity analysis for changes in market risks and whether entities would be able to determine the fair value of lease obligations reliably. One Board member asked the staff to clarify that the changes in market risks are only required to assess the impact on future cash flows and not the impact on fair values. Staff confirmed that the intention was to show the sensitivity of future cash flows to changes in market risks. Following this clarification, Board members were more willing to support the proposed disclosure.
Several Board members raised concerns about the practicability to determine the fair value of lease obligations and reminded the Board that the reason why a fair value measurement model was not adopted for lease accounting was the difficulty in determining a reliable measurement. Other Board members responded that the disclosure of the fair values of other financial liabilities is already required in accordance with IFRS 7 and there is no specific reason why lease obligations should be treated differently.
One Board member reminded the Boards that a number of new standards will be published within the next 15 months and that, in each project, new disclosure requirements have been added. This Board member warned that the Boards will be losing their audience if the disclosure burden becomes onerous. Another Board member remarked that the Boards should guard against the perception that a vast volume of disclosures for leases have been added, whereas some of the disclosures are already required under the existing lease accounting models. The chairman responded that it is important to identify which disclosures are already required under existing guidance which requirements are new as a result of the new accounting model.
The Boards concluded the discussion by tentatively agreeing that the fair value of lease obligations should be disclosed and that the sensitivity of market risks should be limited to the impact on future cash flows.
Lessor accounting – Transition
The Boards were presented with the following four alternatives for transitional provisions for lessors:
- A. Full retrospective application as if the new accounting requirements had always been applied;
- B. Modified retrospective application where the new accounting requirements are only applied to arrangements outstanding at the effective date and those entered into after the effective date;
- C. Simplified retrospective application which is applied to all outstanding leases at the effective date, but simplified so that lease receivable is measured using the interest rate implicit in the lease at the effective date; or
- D. Prospective application to new leases entered into after the effective date.
None of the Board members supported alternatives A or D. The FASB supported alternative B as they considered using the interest rate implicit at the effective date may result in the misrepresentation of revenue. The majority of the IASB members initially supported alternative C (which is consistent with the approach proposed for lessees), however after further consideration, some Board members agreed with the FASB view on the implicit interest rate and indicated that they wanted to switch their vote to alternative B. The staff reminded the Boards that alternative B is not consistent with the approached adopted for lessees.
After a short deliberation, the Boards asked the staff whether alternative C could be applied with the implicit interest rate at the date the lease was entered into. Staff confirmed that this could be done. The Boards tentatively agreed to this alternative subject to using the original interest rate implicit in the lease.
The Boards then considered how leased assets capitalised under existing finance leases should be reinstated on the lessor's statement of financial position. It was noted that under US GAAP an option to remeasure at fair value does not exist and therefore the reinstated asset would be recognised at depreciated cost. The IASB agreed with the reinstatement at depreciated cost adjusted for impairment and revaluation in accordance with IAS 16.
Measurement at initial recognition
At the October 2009 meeting, the Board tentatively decided that lease assets and liabilities arise when the lease contract is signed (inception of the lease) and that the net contract position between the signing and delivering should be measured on a cost basis. The Boards were then asked to consider whether initial measurement of the assets and liabilities should be determined at the inception date or at the commencement date.
Without any discussion, the Boards tentatively agreed that an entity should recognise the gross value of assets and liabilities at the commencement of the lease term, and that those assets and liabilities should be measured at the inception of the lease and that the discount rate to be used will be fixed at lease inception.
Lessor accounting – Residual value guarantees
The Boards considered how residual value guarantees (RVG) held by lessors should be accounted for. The majority of Board members were supportive of the staff's proposal to account for amounts to be paid by a lessee under an RVG consistent with the accounting for contingent rentals. As a result any change in the receivable arising from a change in the amounts payable under an RVG would be treated as an adjustment to the lessor's receivable and performance obligation.
One Board member questioned why a lessor needs to recognise an increase in the performance obligation when the amount to be paid by a lessee increases. The Board member was of the opinion that such an adjustment should be recognised as a gain. The staff responded by clarifying that the accounting by the lessee has been mirrored by the lessor's accounting.
It was further pointed out that the definitions of residual value under IFRSs and US GAAP are different, and the impact on the accounting treatment has not yet been explored in the context of lessor accounting. The Boards agreed to explore the differences further and consider aligning the definitions.
Wednesday 17 March 2010 (IASB-FASB Joint Meeting)
Meeting with Representatives of EFRAG on Convergence-related Issues
Representatives of the IASB met with an EFRAG delegation to discuss the convergence-related issues. The IASB Chairman started the meeting by discussing the convergence with the FASB. He noted that the update of the Memorandum of Understanding with the FASB in November 2009 was an important milestone in the convergence process as it stated a deadline for the convergence for the first time and established the process of assessing the progress on the quarterly basis. He stressed that the new format of monthly joint meetings is working well and, in his opinion, helps to overcome or narrow differences between the Boards on a timely basis.
The EFRAG Chairman also welcomed the new arrangement as a positive development that brought more transparency to the convergence process. Nonetheless, he raised the issue of European involvement in these new arrangements. Both parties agreed with the suggestion of having a longer meeting in September that would discuss technical aspects of the major projects and activities.
The EFRAG Chairman also welcomed the increased level of outreach but noted that an increased level of transparency of the outreach activities would be welcomed. The IASB Chairman responded that the result of the outreach was always a public document discussed by the Board that summarised the result of the outreach (a document similar to a 'feedback statement' that is published after a new Standard is published reflecting the comments from comment letters).
The EFRAG raised some concerns about the implications of the 2011 deadline on the quality of the accounting standards and stressed the need to maintain quality before convergence and the fulfilling any deadline.
The EFRAG also expressed concerns about the likely revisions to the IASB workplan that would lead to moving of expected comment periods and renders the planning difficult. In addition, the EFRAG noted that the IASB has, in some cases, cut down the comment period and scoped out several issues from the proposed guidance in order to meet the deadline. The EFRAG representatives expressed concerns that little time, combined with heavy workload and scoping changes, may lead to misunderstandings.
The discussion continued with financial crisis-related issues. The EFRAG expressed some concerns about the proposed guidance on financial liabilities and noted that bifurcation of financial liabilities when assets were not bifurcated might lead to creation of additional accounting mismatches.
The EFRAG representatives expressed their broad support for the expected loss impairment model. Nonetheless, some EFRAG representatives advocated a scope exception for non-financial institutions (rather than a practical expedient). The EFRAG representatives also provided broad support for the idea of a statement of regulatory income and encouraged the IASB to discuss it with the regulators and the Basel Committee as it is more a public policy issue rather than an accounting issue. The IASB Chairman clarified that the IASB would create the statement of regulatory income as a vehicle for providing information but the calculation and enforcement would be responsibility of the regulators.
The EFRAG supported the IASB approach on a comprehensive hedge accounting overhaul but encouraged the Board to gain more insights and input from European companies.
Some EFRAG representatives expressed their concerns about the consolidation project as they believed that the current IFRS guidance worked well in the financial crisis and it might be dangerous to change it.
The EFRAG representatives expressed their grave concerns about the IAS 37 proposals. The EFRAG noted that there is lots of uncertainty about the probability-of-outflow recognition criterion and urged the IASB to expose the whole Standard for a new comment period.
The IASB Chairman noted that the IASB has become aware that recognition rather than measurement is of most concern for constituents and would deliberate the following week how to address those concerns. On measurement, the EFRAG representatives expressed their concerns on the margin used in calculation of fulfilment value.
The EFRAG representatives also expressed some concerns on the proposals of the IASB to require a single statement of comprehensive income and suggested prioritisation of the workload. In the opinion of the EFRAG representatives, this project should not be prioritised.
The EFRAG representatives urged the IASB to undertake more outreach in respect of the Revenue Recognition Standard as many constituents are of the view that the new guidance would not change the practice, which might not be necessarily the case.
Regarding the leases project, the IASB Chairman noted that the IASB would need to consider whether to publish lessee and lessor guidance together, as the FASB plans. The IASB Chairman noted that lessor accounting was not in the original MoU agreement and, thus, guidance for lessees and lessors could be decoupled. Nonetheless, he noted that in any case the IASB would try to speed up lessor accounting guidance, even if it would mean that it would be published three to four months after the lessee guidance.
The IASB Chairman also discussed the question of alignment of effective dates of the new major proposals. The EFRAG noted that sufficient lead time should be provided to facilitate the endorsement process.
Finally, the EFRAG provided some update on the pan-European proactive work on Asset Definition, Common Control Transactions, Income Taxes, Disclosure Framework, Implication of Business Model on Financial Reporting, and Assessing of Effects of Accounting Standards.
Fair Value Measurement (IASB)
Scope considerations regarding IFRS 2 Share-based Payment
The Board decided to exclude IFRS 2 from the measurement and disclosure requirements in the final Standard on Fair Value Measurement.
The Board also agreed to provide a note to IFRS 2 that would clarify that requirements of the Fair Value Measurement Standard do not apply to IFRS 2. As one of the Board members noted in some instances the fair value reference in IFRS 2 relates to fair value as proposed in the Standard (such as fair value of goods and services), whereas in other instances (such as equity settled share based payments), fair value is assessed from a different perspective that is inconsistent with the fair value measurement Standard.
Scope considerations regarding IAS 17 Leases
The Board discussed a possible scope exemption for IAS 17 in the context of using the exit price notion or highest and best use (especially in the context of classification of leases and the timing of recognising gains or losses for sale and leaseback transactions). Some Board members were uncomfortable with a blanket scope exemption in this case and would prefer clarification of the fair value measurement standard to ensure that this is a particular application of fair value for non-financial items (that is, using an entry rather than exit price). The Board agreed that the staff should try to clarify the text of the Standard if possible. If such clarification is impractical, leases should be excluded from the scope of the Fair Value Measurement Standard. The Board also noted that amending IAS 17 would be impractical as new guidance for leases is planned to be finalised by June 2011.
Other scoping considerations
Without much discussion the Board agreed not to replace the term 'fair value' in IFRS 3 Business Combinations when referring to the measure for reacquired rights (as an exception to the measurement principle in IFRS 3).
The Board also decided not describe the measurement of the reimbursement rights in IAS 19 Employee Benefits as the present value of the related obligation as a practical expedient for determining fair value.
The Board discussed the potential scope exemption in IAS 39 for measuring financial liabilities with a demand feature (IAS 39.49). Most Board members agreed that the conclusion from IAS 39 should be confirmed and guidance in IAS 39.49 is 'deemed to be fair value for the purposes of liabilities with demand features'.
One Board member asked the staff how this would influence the convergence with the FASB. The staff responded that FASB is considering to change the guidance for liabilities with demand feature (to remove the demand deposit floor and measure the intangible), in which case there would be differences between IASB and the FASB guidance. Most IASB members noted that the final guidance should precisely describe what the measurement is and what attributes it includes. The Board agreed to retain the term 'fair value' for measuring financial liabilities with a demand feature.
The Board decided that each of the IFRSs that are excluded from the scope of the Fair Value Measurement Standard should state the reasons for that decision and why the term 'fair value' was nevertheless retained in that Standard.
Standards Advisory Council Update
The Chairman of the Advisory Council provided a brief oral update of discussions at the February 2010 Advisory Council meeting.
Insurance Contracts
Educational session: measuring the risk margin
At the request of a FASB member, the FASB staff had prepared a paper that examined and explained the role that risk adjustments play in standard option pricing techniques. The FASB member wished to explore whether the Boards' challenge in attempting to adjust for the risk margins could be accommodated more efficiently using option pricing models as opposed to the alternatives being considered.
The FASB staff also presented a selection of current (and significant historical) academic research on the use of option pricing models in the measurement of liabilities. It was unclear how many of these studies were based on data not based in the United States or on US GAAP (nor was this question asked by any Board members).
The principal paper was being discussed in 'education session' format, and Board decisions were not requested. However, it was apparent that both Boards were split, with some preferring using option-pricing models to measure insurance contracts and others preferring the current staff position.
Members of both Boards expressed concern that using option pricing models to price the risk margin was essentially inviting preparers to use a 'pick a number' approach to measurement. There was no apparent means to limit approaches to measurement or to inputs, so it was difficult to see how using option pricing models would be better than the model currently being developed. In defence, the chief advocate of the FASB model noted that, in some cases, there was less subjectivity in the option pricing model-approach than, for example, value-at-risk approaches.
A FASB member was concerned that the Boards were suggesting a greater rigor for insurance contracts than they require for other [fair value] measurements: was this because the Boards had abandoned the exit price as the measurement objective and had yet to articulate clearly a replacement? The lack of a clear measurement objective was at the root of the Boards' problem.
An IASB member concurred, suggesting that the Boards were trying to achieve an 'exit price', or something very close to it, without using that phrase or 'fair value'. The exit price was, for him, the right answer and the Boards should be honest about using it as the measurement objective. Exit price is well understood by both users and the measurement professionals and would have well-established measurement methods already embedded in IFRSs and US GAAP.
The discussions did not suggest broad support for using option pricing techniques in determining inputs to the measurement of insurance contracts. However, that may change as Board members reflect on the discussions between today and when they debate the paper in technical session in the week of 22 March.
Leases
Disclosure for lessees
The Boards were presented with the proposed package of disclosures to be provided by lessees. The staff explained that the overarching principle on disclosures is to ensure that the information in the notes complements the information presented in the financial statements, so as to provide decision-useful information for users. The Boards were asked to consider the proposed disclosure package in terms of the grouping of disclosures based on the disclosure objective, amounts related to leases, and the assumptions and estimates.
Disclosure objective
The proposed disclosure objective broadly requires the disclosure of quantitative and qualitative information that identifies and explains the amounts recognised in the financial statements and enables users to evaluate the nature and extent of risks to which the leasing activities have exposed the entity. Some Board members were concerned that the term 'risks' is too vague in the context of leasing activities and that they were expecting disclosure around the uncertainty of future cash flows and the flexibility involved in the management of those risks.
Although the Boards agreed in principle with the proposed disclosure objective, it was not considered to be explicit enough and the staff was requested to revise and expand the objective to incorporate Board members' concerns raised during the meeting.
Amounts related to leases
The discussion of proposed disclosures pertaining to the amounts related to leasing activities centred around the general description of leasing activities and the proposed reconciliation between the opening and closing balances for the right-of-use assets and obligations to pay rentals.
One Board member was concerned that the level at which a description of leasing activities are required was too general and will result in boilerplate disclosures. It was suggested that that description should be broken down into certain classes of leases. When questioned how these classes would/should be determined, the Board member responded that it could possibly be linked to the disclosure objective. Another Board member suggested a grouping based on the nature of the underlying assets, for example, real estate, machinery, office equipment. Other Board members agreed that disaggregated information will be more useful to users.
On the requirement to present a reconciliation between the opening and closing balances of the right of use assets and lease obligations, one Board member was opposed to including a roll-forward in the leasing standard when the Financial Statement Presentation (FSP) Standard contain a general principle on when roll-forwards need to be presented. Another Board member remarked that requested the wording of the requirement to be aligned to the wording used in the FSP Standard. The staff commented that they are committed to follow the development of the FSP Standard very closely and ensure that there is alignment in the wording.
Other Board members questioned how leases accounted for using the simplified accounting model will be included in the roll-forward. The Boards concluded that they agree in principle with the proposed disclosures and that comments from individual Board members should be dealt with off-line.
Assumptions and estimates
The Boards mainly discussed whether a lessee should disclose the fair value of lease obligations and a sensitivity analysis to changes in market risks in the notes.
One Board member questioned where else the Boards have required a sensitivity analysis to changes in market risks for liabilities measured on a cost-basis. The Boards entered into a long discussion on whether it would be possible to determine compile a sensitivity analysis for changes in market risks and whether entities would be able to determine the fair value of lease obligations reliably. One Board member asked the staff to clarify that the changes in market risks are only required to assess the impact on future cash flows and not the impact on fair values. Staff confirmed that the intention was to show the sensitivity of future cash flows to changes in market risks. Following this clarification, Board members were more willing to support the proposed disclosure.
Several Board members raised concerns about the practicability to determine the fair value of lease obligations and reminded the Board that the reason why a fair value measurement model was not adopted for lease accounting was the difficulty in determining a reliable measurement. Other Board members responded that the disclosure of the fair values of other financial liabilities is already required in accordance with IFRS 7 and there is no specific reason why lease obligations should be treated differently.
One Board member reminded the Boards that a number of new standards will be published within the next 15 months and that, in each project, new disclosure requirements have been added. This Board member warned that the Boards will be losing their audience if the disclosure burden becomes onerous. Another Board member remarked that the Boards should guard against the perception that a vast volume of disclosures for leases have been added, whereas some of the disclosures are already required under the existing lease accounting models. The chairman responded that it is important to identify which disclosures are already required under existing guidance which requirements are new as a result of the new accounting model.
The Boards concluded the discussion by tentatively agreeing that the fair value of lease obligations should be disclosed and that the sensitivity of market risks should be limited to the impact on future cash flows.
Lessor accounting – Transition
The Boards were presented with the following four alternatives for transitional provisions for lessors:
- A. Full retrospective application as if the new accounting requirements had always been applied;
- B. Modified retrospective application where the new accounting requirements are only applied to arrangements outstanding at the effective date and those entered into after the effective date;
- C. Simplified retrospective application which is applied to all outstanding leases at the effective date, but simplified so that lease receivable is measured using the interest rate implicit in the lease at the effective date; or
- D. Prospective application to new leases entered into after the effective date.
None of the Board members supported alternatives A or D. The FASB supported alternative B as they considered using the interest rate implicit at the effective date may result in the misrepresentation of revenue. The majority of the IASB members initially supported alternative C (which is consistent with the approach proposed for lessees), however after further consideration, some Board members agreed with the FASB view on the implicit interest rate and indicated that they wanted to switch their vote to alternative B. The staff reminded the Boards that alternative B is not consistent with the approached adopted for lessees.
After a short deliberation, the Boards asked the staff whether alternative C could be applied with the implicit interest rate at the date the lease was entered into. Staff confirmed that this could be done. The Boards tentatively agreed to this alternative subject to using the original interest rate implicit in the lease.
The Boards then considered how leased assets capitalised under existing finance leases should be reinstated on the lessor's statement of financial position. It was noted that under US GAAP an option to remeasure at fair value does not exist and therefore the reinstated asset would be recognised at depreciated cost. The IASB agreed with the reinstatement at depreciated cost adjusted for impairment and revaluation in accordance with IAS 16.
Measurement at initial recognition
At the October 2009 meeting, the Board tentatively decided that lease assets and liabilities arise when the lease contract is signed (inception of the lease) and that the net contract position between the signing and delivering should be measured on a cost basis. The Boards were then asked to consider whether initial measurement of the assets and liabilities should be determined at the inception date or at the commencement date.
Without any discussion, the Boards tentatively agreed that an entity should recognise the gross value of assets and liabilities at the commencement of the lease term, and that those assets and liabilities should be measured at the inception of the lease and that the discount rate to be used will be fixed at lease inception.
Lessor accounting – Residual value guarantees
The Boards considered how residual value guarantees (RVG) held by lessors should be accounted for. The majority of Board members were supportive of the staff's proposal to account for amounts to be paid by a lessee under an RVG consistent with the accounting for contingent rentals. As a result any change in the receivable arising from a change in the amounts payable under an RVG would be treated as an adjustment to the lessor's receivable and performance obligation.
One Board member questioned why a lessor needs to recognise an increase in the performance obligation when the amount to be paid by a lessee increases. The Board member was of the opinion that such an adjustment should be recognised as a gain. The staff responded by clarifying that the accounting by the lessee has been mirrored by the lessor's accounting.
It was further pointed out that the definitions of residual value under IFRSs and US GAAP are different, and the impact on the accounting treatment has not yet been explored in the context of lessor accounting. The Boards agreed to explore the differences further and consider aligning the definitions.
Thursday 18 March 2010 (IASB-FASB Joint Meeting)
Fair Value Measurement – Scope
The Board considered whether an IFRS on fair value measurement should exclude IFRIC 13 Customer Loyalty Programmes from its scope. After the IFRIC meeting in March, After the IFRIC meeting the staff became aware of a potential conflict between IFRIC 13 and the proposed fair value measurement guidance. This issue was not raised in any of the comment letters on the exposure draft ED/2009/5 Fair Value Measurement.
For various reasons, the staff had concluded that the use of the term 'fair value' in IFRIC 13 was consistent with the proposed fair value measurement guidance in the forthcoming IFRS on fair value measurement. Consequently, they recommended that the fair value measurement IFRS exclude IFRIC 13 from its scope. This approach would result in IFRIC 13 using the term 'fair value' and retaining the current definition of fair value. However, even though IFRIC 13 refers to 'fair value', transactions within the scope of IFRIC 13 would not be subject to the measurement and disclosure requirements of the IFRS on fair value measurement.
The Board disagreed with the staff on a number of levels. Board members were unconvinced by the staff's analysis and the suggestion that the revenue recognition project would address the issues in IFRIC 13 satisfactorily. To exempt IFRIC 13 from the fair value measurement IFRS would send the wrong message and could lead to regressive practices. The last thing the Board needed to do when it issued the IFRS was to send incoherent signals along with it.
The staff recommendation was defeated. IFRIC 13 will be within the scope of the IFRS on fair value measurement.
Annual Improvements
Amendments recommended for finalisation
The Board ratified the IFRIC's recommendation to finalise amendments to the following IFRSs:
- IFRS 1 – Accounting policy changes in the year of adoption
- IAS 1 – Clarification of paragraph 106(d)
- IAS 27 – Transition requirements for amendments made to IAS 21, IAS 28 and IAS 31 as a result of IAS 27 (as amended in 2008)
- IFRIC 13 – Fair value of award credit
Other issues
IFRS 3: Un-replaced and voluntarily replaced share-based payment transactions
The Board ratified the IFRIC's recommendations on finalising the proposed amendment to IFRS 3 paragraph 30, and related material in IFRS 3.B56, B62A and B62B. IFRS 3.30 will refer to 'share-based payment transactions' rather than 'share-based payment awards'. This approach was adopted to keep the alignment between IFRS and US GAAP on this issue as close as possible, while also clarifying the issue identified in the annual improvements process.
The Board also noted that the IFRIC had declined to take three further issues related to modifications (rather than replacements) of share-based payment awards; subsequent accounting for un-replaced share-based payment awards; and situations in which the replacement award has a lower value than the original market-based measure allocated to the pre-combination value. The staff assured Board members that these issues would be considered in due course either for inclusion in the next cycle of annual improvements or as part of the planned post-implementation review of IFRS 2.
IFRS 3: Measurement of non-controlling interests-Illustrative examples
The Board declined to finalise proposed illustrative examples designed to illustrate the application of IFRS 3.19. Some Board members did not think that Board time was required to agree non-authoritative illustrations. Some also disagreed with the illustrations themselves.
The staff agreed to address Board members' concerns out of session and return to the Board only if necessary.
IAS 8: Change in terminology to the qualitative characteristics
The Board ratified the IFRIC's recommendation to finalise the proposed changes to IAS 8 that would conform the terminology in the IFRS with that in the forthcoming final Chapters of the revised IASB Framework with respect to qualitative characteristics. This decision was subject to the caveat that the changes to IAS 8 should not be issued before the Chapters of the Framework are issued. The staff noted that the post-ballot draft of those Chapters would be circulated to the IASB later in March, suggesting that the Chapters could be issued by the end of March or very early April 2010.
Items to be discontinued without finalisation
IFRS 5-Loss of significant influence over an associate or loss of joint control over a joint venture
The Board agreed to discontinue and to remove from the Annual Improvements project the proposed amendment to IFRS 5: Application of IFRS 5 to loss of significant influence over an associate or loss of joint control over a jointly controlled entity. The IFRIC was concerned that clarity was needed on the application of IFRS 5 in circumstances in which a highly probable sale transaction is expected to result in the loss of significant influence or loss of joint control they considered that the issue was best addressed in the forthcoming Joint Arrangements IFRS. The staff confirmed that this was in hand.
Any problems encountered would be treated as a sweep issue.
IAS 40: Change from fair value model to the cost model.
ED 2009/11 included proposals designed to remove a potential inconsistency between IAS 40, IFRS 5, and IAS 2 when an entity determines there is a change in use of an investment property. The responses to the exposure draft demonstrated mixed views in favour of and opposed to the proposals. In addition, several respondents thought that the issue required further and more detailed analysis and/or was a more significant change than should be within the Annual Improvements project.
The Board declined to discontinue the project and referred it back to the IFRIC. The Board noted that the problem was more with IFRS 5, especially with respect to entities such as real estate investment trusts, which routinely sell buildings in their portfolio. In this situation, it was 'nonsensical' to move from a fair value model to a cost model.
Amendment to IFRS 1: Entities Adopting IFRSs Prior to the Issue of IFRS 1
The Board agreed to an amendment to IFRS 1.39C [the effective date of the 'deemed cost exemptions approved in February 2010] that would permit entities that had adopted IFRS in periods before the effective date of IFRS 1 to use the cost base established by an event-driven revaluation as deemed cost in the entity's 'first IFRS financial statements'. The situation arises most obviously in China, where many companies moved to IFRS/ IAS prior to the issue of IFRS 1 and consequently used SIC-8 to accomplish the move.
The Board agreed that the sort of event-driven revaluations described in the amendment approved in February 2010 had occurred, but (without the amendment now under discussion) would not be within the scope of IFRS 1. The Board also clarified that the amendment only applied to establishing deemed cost in the first IAS/IFRS financial statements: it was not an invitation to revisit IFRS elections made subsequent to adoption of IFRS.
Income Taxes - limited amendments to IAS 12
The Board discussed several practice issues that might be considered as part of a limited scope project to amend IAS 12 Income Taxes.
Objective of such a limited scope project
The Board agreed that it would undertake a limited scope project to amend IAS 12. The objective of the project would be to resolve problems in practice under IAS 12, without changing the fundamental approach under IAS 12 and preferably without increasing divergence from US GAAP.
While many Board members were unhappy with adding yet another project to its already heavy workload, there was also an acknowledgement that the project would be attempting to address a market need, even if some of the likely conclusions would create further divergence from US GAAP. In particular, the accounting for uncertain tax positions was a significant issue in the assessment of IFRS for use in the US.
Board members noted that a full reconsideration of income tax accounting would take years and was something that would need to be considered and prioritised after June 2011.
The Board agreed to include the following topics in the project:
Practice issues (these would require an exposure draft)
- Uncertain tax positions (awaiting the final revision of IAS 37)
- Deferred tax on property revaluation
- Distributed vs. undistributed tax rate in real estate investment trusts and similar entities
Improvements proposed in ED/2009/2
- Introduction of an initial step to consider whether recovery of an asset or settlement of liability will affect taxable profit
- Recognising a deferred tax asset in full and an offsetting valuation allowance to the extent necessary
- Guidance on assessing the need for a valuation allowance
- Guidance on substantive enactment
- Allocation of current and deferred taxes within a group that files a consolidated tax return
In agreeing this list, several Board members were concerned that, while some of the matters could be addressed and finalised easily, others were more difficult. Board members thought that they might be able to complete the amendments proposed in ED/2009/2 quickly: the Board had invited comments on the proposals, there was a high degree of agreement on the proposals and the Board would be in a position to proceed to final amendments. The staff was split on this: one thought that the improvements exposed in ED/2009/2 could be finalised quickly; another senior member of staff did not advise that approach and thought that re-exposure would be a more cautious approach. In any event, the staff will bring proposals to the Board in the third quarter 2010. It was thought possible to discuss all the issues and issue an exposure draft containing those issues that required exposure by the end of 2010.
Property revaluation
The Board discussed but did not approve a proposal that would have added an exception to IAS 12 such that an entity would not recognise deferred tax on temporary differences on assets and liabilities if:
- the assets and liabilities were measured at fair value; and
- a market participant acquiring the asset or assuming the liability for its fair value would have the same temporary differences.
Several Board members were highly critical of the staff proposal. The proposal addressed a problem in some, but not all, IFRS jurisdictions. If the Board proceeded with this proposal, it would unleash a torrent of comments from other jurisdictions asking for their circumstances to be addressed. In addition, the proposal sought to address the wrong issue: the real problem was the definition of 'tax basis.' In addition, the confusion created by IAS 12.51 (measurement of deferred taxes reflects the tax consequences of the expected manner of recovery [assets] or settlement [liabilities]) was as much a culprit in the IAS 40 situation.
A Board member suggested an alternative approach that would restrict any exception to the requirement to recognise deferred tax on temporary differences on assets and liabilities to investment property accounted for at fair value through profit and loss under IAS 40. In addition, the rate to be applied to those temporary differences would reflect the 'least cost' approach. Such an approach would be limited to assets for which the voluntary election in IAS 40 has been made. It would not apply to the initial recognition of investment property acquired in a business combination. It was acknowledged that this approach would put significant strain on IFRS 3, but (in the absence of addressing the definition of tax basis) that could not be avoided.
The staff was asked to develop this approach and return to the Board with proposals that reflected it.
Derecognition (IASB)
Accounting for repurchase agreements (repos) and similar transactions
The staff started the discussion by pointing out that they were still analysing the effects of the 'Repo 105' issue on the proposed guidance and would present the result of this analysis to the Board at one of the following meetings.
At the February meeting the Board agreed to treat repurchase agreements as secured borrowings (financing), rather than sales of the asset (as proposed in the ED/2009/3 Derecognition). This decision would present an exception from the overall derecognition model being developed. At the February meeting the Board agreed that all three following conditions must be fulfilled for repurchase transactions to be treated as financing:
- The financial assets to be repurchased or redeemed are the same or substantially the same as those transferred
- The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price
- The agreement is entered into contemporaneously with, or in contemplation of, the transfer
The Board started the discussion with assessment whether the proposed guidance (similar to that which exist under U.S. GAAP) should be provided specifying what constitutes 'substantially the same'.
After a brief discussion the Board agreed to incorporate the basic characteristics of the assets specified in the U.S. guidance related to 'substantially the same', namely:
- The same primary obligor
- Identical form and type so as to provide the same risks and rights
- The same maturity
- Identical contractual interest rates
- Similar assets as collateral
- The same aggregate unpaid principal amount or principal amounts within accepted 'good delivery' standards for the type of security involved
The Board also agreed to provide application guidance for some of these characteristics (inspired by the guidance in the US GAAP).
One Board member suggested that the wording of some of the guidance should be clarified and definition tightened, for example, to reflect credit risk and position in the waterfall structure in determination of substantially the same. In his view, the US guidance was useful but since its publication substantial development in the securitisation market made some amendments and clarifications necessary. The staff agreed to incorporate these suggestions and discuss them with the FASB (the FASB will held an educational session on derecognition the following week).
The Board continued its discussion by assessing the need for an additional 'collateral maintenance' criterion to be required for classification of a repo as secured borrowing (as required by the U.S. GAAP). One Board member suggested introducing such a provision into the proposed guidance. In their opinion the argument that collateral maintenance criterion is closely related to the legal isolation test was not a strong one, as default could happen not only as a result of bankruptcy but, for instance, illiquidity of the market. In the view of this Board member there should be an additional criterion that would distinguish between repos classified as financing and those derecognised as sales. Other Board members did not believe that such additional criterion was operational.
Some Board members suggested that the issue of collateral in repo transactions is dependent on jurisdiction and is not accounting but predominantly a regulatory issue.
Finally, the Board agreed not to add the collateral maintenance criterion to the proposed guidance on repos.
Pass-through arrangements, nonrecourse loans and accounting for assets and liabilities of SPEs
The Board continued its discussion whether the pass through criteria in IAS 39.19 were still relevant for the determining whether an asset should be derecognised.
The Board discussed the first condition (no obligation to pay amounts to the eventual recipients unless equivalent amounts were collected from the original assets). The staff noted that the real issue was not whether payments would have to be made but rather whether the transferor has passed or agreed to pass the cash flows to the other party. The staff thus proposed that if the transferor agreed to pass some or all of the economic benefits of the asset to the transferee, irrespective of any explicit or implicit guarantee, the asset should be derecognised.
One Board member noted that even though application of the model was theoretically sound, he felt uncomfortable with the outcome as such guidance might perpetuate perverse incentives for earnings management. This Board member was particularly concerned with the recognition of the gain on derecognition of financial assets measured at amortised cost. As such, he suggested that this pursued approach is suitable only to financial asset measured at fair value and not for those measured at amortised cost. In response, another Board member stated that this is the natural consequence of the mixed measurement model that results from the guidance in IFRS 9 Financial Instruments. Another Board member suggested that comprehensive set of disclosures might alleviate some of these concerns.
Another Board member was concerned with application of such guidance to structured entities and expressed his doubts, whether this guidance would not lead to structuring opportunities. The staff responded that the guidance takes a symmetrical view on recognition and derecognition of financial assets (that is, no stickiness).
The Board briefly discussed the remaining two criteria of the IAS 39 pass-through test (prohibition of selling or pledging the original asset, obligation to remit any cash flows without material delay). One Board member noted that the last condition is closely related to the overall agent principal issue that the Board is addressing in several projects. As such he suggested that the Board revisits this issue once the guidance on agent/principal relationship is finalised in other projects.
Finally, the Board agreed that the pass through test in IAS 39 does not need to be included in the proposed derecognition requirements as the proposed guidance addresses the issues that were intended to be captured by the pass through test. Nonetheless, the Board agreed to provide illustration of these conditions in the application guidance.
The Board continued with the discussion of 'empty SPEs'. Some Board members expressed their concerns that the proposed derecognition approach would lead to almost all SPEs to be empty.
Most of the Board members did not share these concerns. In their opinion, even though the proposed guidance would increase the prevalence of 'empty SPEs', the application of the derecognition principle would depend on the nature of the beneficial interest issued. Moreover, some of the 'empty SPEs' would be treated in the same way under IAS 39 requirements. For these Board members this was not an issue and conceptual derecognition principle would bring more clarity and transparency in the conditions.
Finally, the Board agreed not to introduce any additional criteria that would address the issue of 'empty SPEs'.
The Board discussed the nonrecourse loans issue. In the discussion the Board tried to clarify the difference between overcollateralization and nonrecourse provisions.
After a considerable discussion, the Board agreed that the proposed treatment of recourse and nonrecourse transactions should not differ.
Some Board members were concerned with potential valuation of the continuing involvement. Nonetheless, it they agreed that it was more a recognition rather than a derecognition issue.
Disclosures
The Board continued its discussion by considering the feedback from constituents on disclosure requirements related to derecognition.
Based on the analysis of comment letters constituents generally supported the proposed disclosures objectives, but expressed some concerns related to specific disclosures proposed.
The Board reaffirmed the derecognition objectives as proposed in the ED/2009/3. With regards to the specific disclosures, the Board agreed with the disclosures related to transactions that do not result in derecognition of financial assets.
Nonetheless, as one Board member pointed out, the wording of the guidance have to be tightened to avoid disclosure of non-relevant information.
The Board agreed with the proposed disclosures on transactions that result in derecognition of financial assets. The Board asked the staff to consider whether the disclosure of fair value of derecognised financial assets in which an entity has continuing involvement is always necessary and can be ascertained (for example, fair value of guaranteed receivables, when the entity guarantees nominal amount, that is, guarantees credit risk but not market risk). The Board also agreed to aggregate disclosure when an entity has more than one category of continuing involvement with the same derecognised financial asset.
The Board decided not to provide further guidance around the aggregation of gains and losses resulting from derecognition and from continuing involvement.
In the light of the 'Repo 105' controversy the Board decided to retain the requirement to disclose the level of transfer activity not evenly distributed throughout the reporting period.
With regards to the disclosures regarding modification to liabilities that does not result in extinguishment and modification the terms of a financial asset for a borrower in financial difficulties, the Board asked the staff to determine a suitable threshold for disclosures. Many Board members expressed their concerns that without such threshold trivial disclosures would be provided. Moreover, some Board members expressed their concerns that collection of data in the circumstances would be difficult what would make these disclosures non-operational.
Support for the package of decisions
The Chairman noted that the majority of the derecognition approach has been deliberated and therefore asked Board members to indicate their dissent. Mr. Smith indicated he would dissent to the publication of the guidance as he does not consider it to be improvement over the current guidance in IAS 39. He expressed his concerns that the proposed guidance would lead to free choice on derecognition of financial assets with no discipline with regards to cash flow remittance. Therefore, in his view this guidance would be more appropriate for a fair value model of financial instruments rather than mixed-measurement model. Mr. Finnegan indicated he might dissent on the same basis.
Financial Instruments: Outreach Activities Update (IASB)
Hedge accounting
The staff provided a summary of user outreach feedback with regards to the hedge accounting guidance. Based on this outreach most users exclude the fair value changes arising from derivatives used for hedging when analysing the entity's performance. Rather the effects of forecasted transactions are reflected in adjustments to hedged items based on the contractual terms of the derivatives. In addition, users have indicated that ineffectiveness is not perceived as problem that should constitute a hurdle in applying hedge accounting.
The majority of users consider the hedge accounting guidance as overly complicated. The staff also noted that users rely on management risk reports rather than on GAAP measures that are audited as they perceived that the risk reports are more aligned to the risk management strategy of the entity. Moreover, the risk reports address the issue based on the risk facing the entity (FX risk, interest rate risk, etc.) rather than using the accounting jargon that many analysts do not understand (cash-flow hedges, fair value hedges).
Based on the outreach activities, most users support retaining hedge accounting. Moreover, most of the users would prefer a more fundamental revisiting of hedge accounting rather than minor tweaks, even if that would mean delay of the publication of the hedge accounting guidance.
Amortised cost and Impairment
The staff provided a brief overview of the Expert Advisory Panel on impairment (EAP) discussions. The EAP discussed possible simplifications of the allocation of the initial expected losses and decided to explore several of the approaches (e.g. based on adjustment of the contractual interest revenue in the accounting system using an allocation profile for expected credit losses derived from expected loss data in risk systems).
The EAP also discussed possible usage of Basel II expected losses data and required adjustments to these data in order for them to be used for the proposed expected loss model.
The staff clarified that the EAP would discuss 3 additional models; FASB model, the Basel Committee model and the model proposed by the European Banking Federation.
The staff summarised that even though preparers continue to be concerned by operational concerns and implementation costs, there seems to be overall broad agreement that any model should address frontloading of the interest revenue by the incurred loss model.
The staff also noted that some constituents perceive the overall amortised cost model as complicated as it includes the present value calculation and is based on discounted cash flows. Nonetheless, these are the features of the current Amortised cost model as well.
Friday 19 March 2010 (IASB Meeting)
IFRIC Update
Report of the March IFRIC meeting
The Director of IFRIC and Implementation Activities made an oral report of the IFRIC meeting held 4-5 March 2010 (see Our Notes of that meeting).
In particular the Board discussed the amount of items related to IFRS 2 and noted that elimination of potential differences with US GAAP with regards to vesting conditions was the right way to proceed.
Some Board members challenged the IFRIC decision to suggest annual improvement regarding the 'Tax effect of distribution to equity holders'. Nonetheless, the Chairman stressed that this issue would be addressed separately when Annual Improvements' Cycle 2009-2011 are deliberated.
Financial Instruments: Classification and Measurement – Liabilities
The fair value option
The Board discussed the tentative decisions reached at the February Board meeting regarding the fair value option, that is, to recognise the total fair value change in profit or loss and recognise the portion attributable to changes in own credit risk in other comprehensive income with an offsetting entry to profit or loss.
The staff noted that all the decisions on various issues related to fair value option were split and therefore suggested that the Board asked in the Exposure Draft constituents questions on alternative views related to these issues.
The Board agreed to describe in the Exposure Draft an alternative view that would require to recognise changes in own credit in equity. Some Board members disagreed as in their view such question would suggest that other comprehensive income and equity are interchangeable. Moreover, they questioned why such solution is proposed for financial liabilities to which fair value option was applied and not to, for example, convertible debt.
The Board agreed to ask the constituents whether they preferred the two-step approach (to recognise the total fair value change in profit or loss and recognise the portion attributable to changes in own credit risk in other comprehensive income with an offsetting entry to profit or loss) or a direct entry of the credit risk element in other comprehensive income.
The Board also agreed to ask constituents a question whether such tentative decision would create a mismatch in cases where an entity is matching a liability with a non-derivative asset. The Board agreed to suggest an alternative solution that would require the entity to recognise the liability's entire fair value change in profit or loss if the proposed approach created a mismatch with related assets.
One Board member also suggested that the ED should seek feedback on whether the credit risk component should include both change of credit standing and price of credit. He explained that the FASB has tentatively agreed that the amount separately presented in the performance statement would reflect only the change of entity's creditworthiness and not a change in the price of credit. The Board agreed.
Cost exception for some derivative contracts over unquoted equity instruments
Without much discussion the Board confirmed its previous tentative decision that there should not be a cost exception for any derivatives.
Other issues
The Board discussed whether to allow reclassification of financial liabilities between amortised cost and fair value. The majority of Board members agreed that no reclassification should be allowed as the guidance reflects the IAS 39 requirements (where reclassifications were prohibited) and there were no requests to allow reclassification of financial liabilities.
Some Board members suggested that as some of the liabilities are directly linked to financial assets, when those assets are reclassified in line with IFRS 9 (as the business model changes), this reclassification would have potential to create accounting mismatch without an equivalent guidance for financial liabilities.
Other Board members disagreed. Some expressed the view that the Board is trying to address a problem that does not exist and urged the Board to address the real issues.
Finally, the Board agreed not to allow reclassifications of financial liabilities and to carryforward the requirements in IAS 39. Nonetheless, given the discussion, the Board decided to include in the Basis for Conclusion a reasoning why this question was not addressed at this point (IAS 39 carryforward, limited project to address the issue of own credit). The Board also agreed to re-discuss the issue when the overall financial instruments accounting is discussed with the FASB.
Without much discussion the Board agreed to carryforward the subsequent measurement requirements in IAS 39 for loan commitments and financial guarantee contracts.
Transition
The Board considered transition requirements for the following two items that represent changes to requirements in IAS 39 Financial Instruments: Recognition and Measurement - fair value option guidance and elimination cost exception.
The Board agreed to require full retrospective application of the new approach to account for financial liabilities to which the FVO has been applied.
The Board also agreed that the transition requirements for the elimination of the cost exception for financial liabilities should follow the requirements of IFRS 9:8.2.11 (for elimination of the cost exception for financial assets). That requirement would mean that any difference between fair value at the date of initial application and the previous carrying amount shall be recognised in the opening retained earnings of the reporting period that includes the date of initial application.
Liabilities: Replacement of IAS 37
Exposure draft comment period
The Board considered requests from constituents to extend the comment period for the exposure draft Measurement of Liabilities in IAS 37. Many Board members were supportive of such extension as they believed that would provide the Board the necessary time for outreach and explanation of misunderstanding of the recognition criteria.
Other Board members disagreed. In their view, constituents just disagree with recognition guidance and no extension would help it. One Board member noted that some practitioners misapply the current IAS 37 criteria and that misapplication would not change by extension of comment period.
On balance, majority of the Board agreed to extent the comment period until 19 May 2010 (three months after working draft was published) to give respondents more time to understand the recognition requirements of the IFRS before they finalise their comments on the revised measurement proposals.
Monday 22 March 2010
Fair Value Measurement
Disclosures about fair value measurements
The Boards discussed the disclosure requirements of a converged fair value measurement Standard. The staff presented the Boards a comprehensive comparison of disclosure requirements under U.S. GAAP and proposed IFRS guidance. The staff noted that most of the differences resulting from different wording could be addressed by the drafting process and the Boards would discuss only the substantial differences.
The Boards considered the difference in the definition of 'class' (as the proposed guidance requires disclosure by 'class' of assets or liabilities. The Boards agreed that the 'class' should be defined in the Standard and the definition should consider the following principles:
- an entity should determine the appropriate classes of assets and liabilities based on the nature, characteristics and risks of the assets and liabilities and their classification in the fair value hierarchy.
- a class of assets and liabilities often will require greater disaggregation than the entity's line items in the statement of financial position
- judgment is needed to determine the appropriate classes of assets and liabilities.
Although all Board members supported this guidance, some Board members expressed their preference for a wording that would emphasize disaggregation based on nature of assets or liabilities, risks and their concentrations in order to be truly useful. The staff will consider this input in drafting of the Standard.
Without much discussion the Boards agreed not to require disclosure of information about the change in fair value in the non-performance risk of a liability in the fair value measurement Standard, i.e. the disclosure should remain in IFRS 7 and ASC 825.
The Boards agreed to require disclosure of the policy for determining when transfers between levels of fair value hierarchy are recognised.
The IASB affirmed the proposed amendment to IAS 34 Interim Financial Reporting to require disclosures about fair value measurement for financial instruments in an entity's interim financial statements.
The Boards continued their discussion about the requirement of Topic 820 that requires disclosure about fair value measurement only in periods after initial recognition. The IASB members did not agree with such requirement as they believed that movement of fair value in the period of initial recognition can be significant and should be disclosed. FASB members also noted that the FASB should also clarify the meaning of the requirement of Topic 820 as it might not be appropriate. Finally, both Boards agreed that disclosures about fair value measurements should be required for all the assets and liabilities that are subject to subsequent re-measurement (whether or not fair value at the reporting date is different from fair value at initial recognition).
The Boards also agreed to require the same disclosures for both recurring and nonrecurring fair value measurements, except for the Level 3 rollforward and information about transfers between Levels 1 and 2 that would be required for recurring measurements only. One IASB member expressed his concerns about the language used as the IFRSs do not define the recurring/non-recurring notion and asked the staff whether it planned to introduce such notions into the fair value measurement Standard. The staff clarified that the concept would be described in full (that is, when assets and liabilities are measured and recognised at fair value on the statement of financial position on a regular basis) rather than introducing the concept of recurring/non-recurring. The Board agreed.
Finally, the Boards agreed to require entities to disclose fair value information by level in the fair value hierarchy even for items that were not measured at fair value in the statement of financial position (consistent with current IFRS 7 requirements for financial instruments). Most Board members argued that these information are useful for the users of financial statements as they pointed out to the significance of judgement about the fair value (especially in the context of the allegations that disclosures in the notes are audited much less rigorously than the information provided on the face of primary statements). In addition, the Boards agreed that the cost/benefit argument not to require such disclosure was not persuasive as the entities have to ascertain (calculate) the fair value and thus must know which inputs or assumptions they used in the calculation.
The Boards discussed the requirement proposed by the IASB ED/2009/05 Fair Value Measurement to disclose sensitivity analysis for Level 3 fair value measurements for all assets and liabilities measured at fair value.
The feedback from constituents on this required was mixed. Users on one hand supported this requirement as they considered it to be helpful in indentifying and assessing the degree of subjectivity in Level 3 fair value measurement as well as in understanding company's valuation processes and assumptions. Preparers, on the other hand, considered these proposals to be burdensome and impracticable.
The Boards were split on these requirements. Although a clear majority of both Boards supported retaining of the sensitivity requirements in some form, a great variety of views were presented, indicating no apparent consensus on details of such requirements.
One FASB member suggested that the requirements on sensitivity analysis should not be included in the fair value measurement Standard in their entirety. He suggested that the fair value measurement Standard should include only general guidelines on Level 3 fair value sensitivity analysis, whereas the decision whether to require the Level 3 fair value sensitivity analysis disclosure should be made in individual standards (that is, financial instruments, investment property etc.). This suggestion initiated a considerable debate that included the discussion whether to require Level 3 fair value sensitivity analysis for financial instrument only or to all asset and liabilities measured at fair value.
Some Board members were particularly concerned that by limiting the sensitivity analysis to financial instruments only, the guidance would miss investment properties, certain commodity derivative contracts or biological assets. Finally, the Boards agreed that the 'how to' perform a sensitivity analysis would be included in the fair value measurement Standard, whereas the decision whether to require sensitivity analysis as well as more detailed requirements for sensitivity analysis would be included in the individual Standards. The Boards asked the staff to explore an alternative suggestion, proposing that the fair value measurement Standard would require a Level 3 sensitivity analysis for all assets and liabilities measured at fair value and individual Standards would provide exemptions from this requirement when necessary.
Although some Board members in principle supported the staff recommendation to specify that the sensitivity analysis disclosure should consider the effects of interdependencies or correlations between inputs, where practicable, they expressed their concerns how operational would be these requirements, especially in the context of a smaller financial institution. Instead, they suggested a requirement based on the most significant input and qualitative disclosures about other inputs and potential interdependencies. Moreover, some Board members felt that the nation of interdependence should be defined more rigorously (i.e. joint effects of two or more inputs or effects of changing one input on other inputs). One Board member noted that such requirement on interdependency would lead to more entities using Value at Risk rather than sensitivity analysis.
Some Board members also noted that the whole reason behind sensitivity analysis is to provide disclosures about measurement uncertainty at the reporting date and not variability of fair value measurement. The Boards also clarified that sensitivity analysis disclosure was not based on a worst-case scenario and it was not forward looking but related to the measurement date.
Another set of concerns were expressed about the frequency of presenting this sensitivity analysis. Some Board members were concerned that quarterly disclosure of sensitivity analysis was not operational, given the tight reporting deadlines and filing requirements.
The Boards expressed also concerns about the consistency of the disclosures and asked the staff to consider providing tighter wording that would establish more consistency of disclosures.
The Boards will reconsider details of the requirement to provide Level 3 fair value sensitivity analysis.
Finally, the Boards agreed not to provide any additional guidance for assessing the significance of an input or significant changes in fair value (in addition to those already in IFRS 7 and Topic 820). One Board member suggested deleting the discussion on assessing of significance currently in IFRS 7 as in his view materiality and significance is matter of judgement that was not always assessed in reference to profit or loss, total assets or total liabilities.
The staff noted that the IASB would discuss the recognition of day 1 gains or losses for financial instruments at a future meeting.
Insurance Contracts - Cross-cutting issues
Definition of an Insurance Contract
The Boards agreed to retain the definition of insurance contract in IFRS 4. This definition contains both the concepts of compensation accompanied by the requirement for significant risk and a specified uncertain future event that adversely affects the policyholder. (US GAAP uses the terms indemnification and compensation.)
Insurance risk and financial risk
After some debate, the Boards agreed that the description of 'significant insurance risk' (IFRS 4.B22-B28) be carried forward to the exposure draft. The Boards were concerned about the practical application of 'commercial substance', but were ultimately convinced that the Application Guidance in IFRS 4 had proved operational.
The role of timing in insurance risk
The Board analysed the role of timing risk in the definition of insurance risk. Currently, the FASB's definition of insurance risk requires the presence of both underwriting and timing risk. The definition in IFRS 4 contains both elements, but does not require both to be present. The staff analysis suggested that the 'equal prominence' requirements contained in US GAAP led to inappropriate results at the margins; however IFRS 4 would produce more logical results.
After discussion, the Boards agreed that the role of timing risk in the definition should be a disqualifying, rather than a primary condition for judging insurance risk in a contract. The role of timing risk should be emphasised by:
- Adding the following (or very similar words) to IFRS 4 paragraph B2:
- Contractual provisions that delay timely reimbursement to the policyholder can eliminate or significantly reduce uncertainty because they prevent the insurer's payments from directly varying with the claims.
- Changing the evaluation of insurance risk from absolute amounts to present values.
The Boards subsequently debated the application of these decisions by using a simple example. A majority of the IASB and a minority of the FASB accepted that in applying the analysis of insurance risk to possible outcomes under a contract, should the focus be on the range of possible outcomes and the significance of reasonably possible outcomes relative to the mean. A majority of the FASB thought that the focus should be on the existence of a possible outcome in which the present value of the net cash flows is negative (although it was acknowledged that this might be a subset of the first alternative).
Scope
The background to this discussion is a key difference in the scope of existing IFRS and US GAAP for insurance contracts. IFRS 4 addresses insurance contracts; US GAAP addresses insurance entities.
Warranties
The Board noted that IFRS 4 takes the position that all product warranties meet the definition of an insurance contract, but distinguishes two categories:
- Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of IFRS 4.
- Product warranties issued directly by a manufacturer, dealer or retailer are outside the scope of IFRS 4.
After a tortured debate, the Boards agreed that product warranties issued directly by a manufacturer, dealer or retailer should remain outside the scope of the Insurance Contracts IFRS.
Fixed-fee service contracts
The Boards were not in favour of including fixed-fee service contracts within the scope of the Insurance Contracts exposure draft. Some Board members thought that this type of contract was often very difficult to classify and judgement was required, consequently the IFRS should not be explicit. Some Board members were concerned that to scope such arrangements into the IFRS would be to separate normal business from insurance on an arbitrary basis.
Residual guarantees
The Board agreed that the following contracts should be excluded from the scope of the insurance contracts exposure draft:
- residual value guarantees embedded in a lease*;
- employers' assets and liabilities under employee benefit plans and retirement benefit obligations reported by defined benefit retirement plans;
- contingent consideration payable or receivable in a business combination.
*If the residual value guarantee was issued by a third party and was specific to the property leased, that would be an insurance contract; if the residual guarantee was issued by a third party and was a guarantee of the price of a generic item of property (for example, a car of that model and year), that would be a derivative.
Tuesday 23 March 2010
Revenue Recognition
Scope
The Boards discussed how an entity should account for a contract that includes some performance obligations that are within the scope of the revenue model and other performance obligations that are within the scope of other standards (e.g. leases, insurance contracts, financial instruments and guarantees).
After a brief discussion both Boards agreed that that an entity should apply the following hierarchy to separate and measure a component of a contract that is within the scope of another standard:
- (a) Level A-If the other standard addresses both separation and measurement of a component of a contract, apply that standard to separate the contract and measure that component.
- (b) Level B-If the other standard addresses only separation but not measurement, apply that standard to identify the separate component within that contract and use the revenue model to measure that component (ie by allocating transaction price to it on the basis of relative standalone selling prices).
- (c) Level C-If the other standard does not address separation or measurement, apply the revenue model.
This hierarchy is consistent with the guidance currently in US GAAP and based on feedback from constituents is working relatively well.
Consolidation
Control model
The Boards continued their deliberations of control in the context of power with less than half of the voting rights in an entity that the Boards discussed at their meeting on 15 March 2010.
The Boards discussed the remaining two views that were supported by the respective majorities of the IASB and FASB. The staff clarified that the for the 'Ability view' the analysis of the situation is sufficient for determining the power element of control. On the other hand the 'Evidence view' (or 'Ability view with evidence') would require evidence of directing of activities in addition to the requirements of the 'Ability view'.
Despite improved articulation of views and discussion of examples the Boards remained split along the lines established in January and the previous Tuesday.
As one Board member described it, the main difference was whether or not to consolidate a 49% interest in an entity that the company did not actively direct.
One IASB member was concerned by the impact of each of these views on consolidation of structured entities. The staff clarified that as structured entities are usually not governed by voting rights and rights and obligations of all the parties are usually contractually defined narrowly, this discussion should have only limited impact on structured entities. Moreover, the structured entities would be assessed based on the control over the most significant activity rather than based on voting rights.
Another Board member was concerned by the issue of control in a transition stage (when a control shifted from one party to another). The staff responded that such issue is not unique for power with less than half of the voting rights in an entity (but is the same when a majority stake is transferred but the Board of Directors remain the same in a transition stage). As such the Boards did not decide to address this issue.
The Boards also discussed the nature of kick-out rights, noting that these might be assessed at the same time for determining who is not in control and in some circumstances also help to identify who is in control.
Some IASB members were concerned by the structuring opportunities when there was a need to evidence direction in case of a 49%-owned entity but not in case of a 51%-owned entity. The staff suggested that the level of the evidence should be viewed as operationalising the power element of control definition given the uncertainty of the below 50% voting rights in the entity. As such the staff suggested that the evidence need to be more detailed the lower was the ownership interest of the dominant shareholder.
Some FASB members expressed their concerns by the presentation of large non-controlling interest in the statement of financial position in case of interest of the dominant shareholder below 30%.
On voting the IASB supported the 'Ability view' and the FASB voted for the 'Evidence view'. The FASB then suggested that it would discuss both proposals in the Exposure draft.
The Boards continued the discussion with the aim to reconcile their positions. One IASB member suggested that the ability should be defined as a probable inaction of the shareholders (i.e. not just attendance at the meeting as some issues might increase their willingness to participate). Other IASB members disagreed as they believed that such guidance would be not operational (that is, would lead to consolidation only in over 50% situations). As one Board member noted, for some decisions supermajority (such asw 75%) is required and that did not mean that 51% shareholder would not consolidate.
One FASB member suggested including specific consideration of other contractual and non-contractual arrangements and not only voting rights (e.g. level of vertical integration etc.).
The Boards would re-discuss the issue at the end of the Consolidation debate.
The Boards continued their discussion with the assessment of the potential voting rights on the control model. Most of the Board members agreed that judgement was needed to be applied to assess whether potential voting rights are substantive by considering whether there are barriers that would prevent the holder from exercising its rights on the basis of current facts and circumstances.
One Board member suggested that the assessment should include the consideration of whether the entity does the decisions as soon as substantive decisions need to be made.
Some Board members suggested that the assessment of options should consider whether they are in the money or out of the money. The staff clarified that judgement would have to be applied as sometimes the assessment is not that clear (the assessment would not capture the expected synergies or specific value). In their opinion, all circumstances (and not just the options) have to be assessed to determine control as there is a great variety of different economic circumstances which might be interpreted differently.
The staff also clarified that the assessment of potential voting right would be further integrated in the model (and did not constitute a standalone criterion).
One IASB member discussed a fact pattern in which a company obtained an option to get 100% of another company (option deeply in the money) and asked the staff to assess whether to consolidate. Based on the discussion the Boards noted that the answer to this question would not be straightforward. One FASB followed up and asked how such a transaction would be accounted for under the Business Combinations guidance. The Boards agreed that they would need to consider the application of the purchase method to such scenario at a future meeting.
Agency relationship
The Boards followed up the discussion of the agency relationship from the January 2010 meeting.
The Boards agreed that the evaluation whether a decision maker is an agent or a principal should be made on the basis of the following four factors that focus on the nature and design of the relationship:
- decision-making authority
- rights held by other parties
- remuneration of the decision maker
- the decision maker's exposure to variability of returns because of other interests that it holds in the entity.
The Boards noted that both power and risk and rewards (benefits) elements have to be fulfilled in the control model. The staff also clarified that all these four conditions for assessment of the agency relationship have to be considered as a whole package and not assessing separately fulfilment of the power and benefits elements of control.
Most of the further discussion of the Boards focused on detailed concerns of the individual Board members about the wording of the guidance. In particular, several Board members disagreed with the assumption that constraint of power within a narrowly defined remit (by contract, statue or law) does not necessarily mean to the entity acted as an agent. The staff clarified that it tried to capture the influence of the entity over the strategic policies and designed on the structure.
Some FASB members were concerned by incorporation of the notion of probability or expectations into the model (for example, probability of fulfilment of the obligation, expected returns etc.).
Most of the Board members agreed that to conclude that an entity acts as an agent the fee structure must be aligned between the entities and variability of returns does not necessarily mean that the entity acts as a principal. They also agreed that one of the considerations in the fees structure would be whether or not it is market based.
Finally, the Boards confirmed that the all facts and circumstances must be considered in assessment of the agent/principal relationship (e.g. explicit as well as implicit guarantees, risks etc.).
One IASB member asked how these conditions on agent/principal relationship fit into the decisions made within the insurance project. The Boards decided to address this issue at a following meeting.
Related parties
Without much discussion the Boards agreed that:
- when assessing control, the involvement and interests of a related party should be considered to be those of the reporting entity when the nature of the reporting entity's relationship with that related party is such that the related party is acting on behalf of the reporting entity (that is, when the relationship is such that the reporting entity, or those that direct the activities of the reporting entity, have the ability to direct the related party to act on behalf of the reporting entity in relation to its involvement with the other entity).
- the list of potential related parties should include an entity for which the majority of the members of its governing body is the same as that of the reporting entity.
The IASB agreed that a party would often act for the reporting entity only if it cannot finance its operations without subordinated financial support from the reporting entity. It also agreed that 'a party that has a close business relationship like the relationship between a professional service provider and one of its significant clients' is a de facto agent. The IASB agreed to include these parties as related parties in the new consolidation standard.
Finally, the IASB agreed to include in the Standard the guidance on what to do when a related party is deemed to act for the reporting entity (similar to that in Topic 810 in the U.S. GAAP).
Guidance for Structured Entities
The Boards considered whether to provide a specific guidance for structured entities, what should be status of such guidance and how much level of detail it should provide.
Some Board members acknowledged the need for some sort of guidance but noticed that detailed guidance that would include bright lines would serve as a 'roadmap for structuring opportunities'.
The IASB members were concerned that by providing a specific guidance for structured entities might undermine the perception of the single control model for consolidation. The staff clarified that the additional guidance for structured entities would be a supplemental guidance that would just apply the control model in a particular situation (similar to voting rights guidance for entities with voting rights) rather than compete with it.
In general, the Boards were vary of providing too detailed guidance and asked the staff to incorporate only some of the ideas of the proposed separate guidance (that was inspired by the current guidance in the U.S. GAAP) in the overall control model. The Boards asked the staff to shorten the guidance that would fit into the overall control model, would avoid any rules or bright lines and supplement the generic guidance with a list of examples how this guidance would be applied.
Leases
Lessee accounting - Presentation
The Boards considered how a lessee's assets, liabilities, expenses and cash flows arising should be presented in the financial statements, first in accordance with the existing presentation requirements and then in accordance with the proposals of the Financial Statement Presentation (FSP) project.
Considering the existing financial statement presentation requirements, the Boards agreed in principle with the staff proposal to present the right-of-use asset and lease obligation on the face of the statement of financial position but to ask a specific question in the exposure draft on whether separate presentation in the notes would be appropriate in certain circumstances.
One Board member questioned why the classification of the right-of-use asset should be based on the use of the underlying asset as opposed to the nature of the asset. This classification will determine whether the revaluation of the right-of-use asset is allowed. The IASB members seemed a little confused as to what was previously decided on whether the right-of-use asset should be accounted for in accordance with IAS 16 or IAS 38. A lively discussion followed, where after the staff was instructed to bring the matter back for discussion at a later stage.
The Boards then considered whether to require the separate presentation of amortisation and interest expense from other amortisation and interest expenses either on the face of the statement of comprehensive income or in the notes. After a short discussion, the Boards agreed that judgement should be applied to determine whether the amortisation and interest expense are presented separately on the face or in the notes.
The Boards also considered whether the cash repayments of the capital amount and interest payments should be classified as financing activities in the statement of cash flows. One Board member questioned which cash amount the Boards want to present - the total cash payment or separate payments of interest and capital amounts, as that will determine the classification in the statement of cash flows. By a narrow majority the Boards tentatively decided that the cash repayment of leases should be separately identified in the statement of cash flows.
For information purposes, the Boards considered how the proposed presentation principles of the FSP project would apply to lessee accounting. In general, the Boards agreed with the proposal that the right-of-use asset should be presented as an operating asset in the business section with the amortisation as an operating expense. The interest expense should be presented as financing costs from operating obligations and cash rental payments in the operating category of the business section in the statement of cash flows. On the proposal to present the lease obligation as a liability in the financing arising from operating activities sub-category, one Board member noted that the definition of that category will need to be amended to achieve that. The staff acknowledged the point and undertook to liaise with the FSP project staff on the definition. The Boards asked the staff to provide feedback at a later stage.
Lessor accounting - Presentation
The Boards considered how a lessor's assets, liabilities, expenses and cash flows should be presented in the financial statements. The Boards were presented with the following four alternatives:
- A. Gross presentation of the leased asset, lease receivable and performance obligation;
- B. Present the lease receivable net of the performance obligation;
- C. Present the leased asset net of the performance obligation;
- D. Net presentation of all three items as a distinct item in the SFP.
Some Board members indicated strong support for alternative A as this is the only alternative that is consistent with the proposed lease accounting model and that captures the economics of the lease arrangement. Another Board member questioned how lessors would present leases for investment property in accordance with IAS 40, since the Boards have scoped out these leases from the proposed leasing standard. This Board member is not comfortable with a difference in presentation between leases for investment property and other leases. The staff pointed out that since the accounting basis for investment property is different from other leases there will inevitably be a difference in presentation.
Other Board members indicated that they prefer some form of net presentation, although they were evenly split between alternatives B, C and D. When initially put to a vote, the FASB strongly supported alternative D, whereas a very narrow majority of IASB members indicated that they can accept alternative D.
One Board member made the remark that alternatives B, C and D appear to be consistent with the derecognition approach. Another Board member felt that the Boards have not deliberated the derecognition approach sufficiently to disregard it as the most appropriate approach for lessor accounting. The Boards entered into a very lively and extended discussion on the merits of the derecognition approach. Several Board members asked for the debate on the derecognition vs. performance obligation approach to be re-opened. The chairman put it to vote and the majority of Board members indicated their support to develop the derecognition approach further.
The Boards were asked how this decision would impact the expected timing of the publication of the exposure draft and how the derecognition approach will be presented to constituents. The Boards agreed to think the matter over for a while and discuss the various alternatives on taking the project forward on the following day.
Insurance Contracts
Risk adjustment
The staff noted that in the Boards' educational session on this topic on 17 March 2010 the risk adjustment included in the proposed measurement for insurance contracts. The discussion in that session focused on:
- the objective for a risk adjustment under the proposed measurement.
- the numerous methods that could be used to calculate a risk adjustment.
- the connection between these two; that is, the degree to which available methods could or should be narrowed down as a result of the objective for the risk adjustment.
The debate that followed was as testy as that in the education session. The Boards were not in favour of the original staff recommendation (not requiring a particular method for determining a risk adjustment), nor did they wish to limit the alternatives in an artificial way. Hence, they were faced with developing an objective for the risk margin or abandoning the idea totally and adopting a composite margin.
After a long debate, the Boards remained divided. The IASB voted 8 in favour of developing an Objective for the risk adjustment; 7 in favour of adopting a composite margin approach. The FASB voted the opposite way: 1 in favour of developing an Objective and 4 in favour of adopting the composite margin approach.
In a follow-on vote, a majority of the IASB voted that the refined objective should be the amount the insurer would rationally pay to be relieved of the risk (i.e., the objective of the risk adjustment used in the revised IAS 37).
Participating contracts
This topic was revisited in an attempt to achieve consensus between the Boards. Like the Boards, staff on the project were split, some viewing payments arising from the participating feature as contractual cash flows as any other cash flows arising under the contract; and some would recognise the liability up to amount of the legal or constructive obligation and regard the remaining part as equity.
Another energetic debate ensued. Some Board members were concerned that participation features should be limited to the insurance risk element and should not extend to pools of investment risk. Were investment risks to be included, the conclusions reached in the Liabilities and Equity project might have to be revisited-for example with respect to cumulative preferred shares.
The Boards' views on what constituted a constructive obligation were tested and explored. Many Board members suggested that they wanted to support the view that payments arising from the participating feature as contractual cash flows as any other cash flows arising under the contract, but were concerned that this allowed too much discretion. Others thought that the notion of a constructive obligation applied correctly and intelligently would get you to the correct answer.
Ultimately, the IASB Chairman called the vote. The IASB were strongly in favour of the view that payments arising from the participating feature as contractual cash flows as any other cash flows arising under the contract; the FASB were evenly split between the two views until one FASB member, professing agnosticism on this topic, switched to support the IASB majority.
Possible disclosure requirements
The Board agreed in principle that the insurer should describe and explain its participating contracts and the conditions impacting amount and timing of payments. Details should be given regarding in which pool policyholders participate, this may be a specific pool of contracts or assets or the overall performance of the entity.
Information about which amounts would eventually flow to shareholders and which to policyholders is important information to users of the financial statements. Users would also be interested in any loss-absorbing characteristics of liability components.
The Board agreed that a starting point would be the disclosures required in IFRS 4 IG32(g), IG64 (c) and IG65F. The Board had some specific comments on proposed disclosure of asset risk and risk mitigation through participating policies - in particular about the practicability of the disclosures - that the staff shall address in drafting.
Wednesday 24 March 2010
Fair Value Measurement
Sensitivity disclosure
The staff noted that this discussion was in direct response to a direction on 22 March that they address sensitivity analysis for Level 3 fair value measurement. The issue for discussion was how to do this:
- One way is to include in fair value measurement IFRS (and equivalent US GAAP) general guidance about how to perform a sensitivity analysis. Specific requirements would be included in other IFRSs.
- Alternatively, a sensitivity analysis disclosure requirement about all Level 3 fair value measurements could be included in the fair value measurement standard, with specific exemptions from such a disclosure in other individual IFRSs.
The staff did not want to pursue either approach. They proposed that the fair value measurement standards should:
- require a sensitivity analysis disclosure only for Level 3 fair value measurements of financial instruments and derivatives
- change the term 'reasonably possible alternative assumptions' to another term that more clearly conveys the objective, ie:
- emphasise that it is meant to provide information about measurement uncertainty and
- clarify that it is not a worst-case scenario and is not forward looking
- specify that the sensitivity analysis disclosure should consider the effect of interdependencies or correlation when relevant.
As an alternative, if this recommendation was not accepted, the staff proposed that
- the IASB retains the sensitivity analysis disclosure in IFRS 7, with the modifications described above; and
- the FASB considers whether to require a sensitivity analysis disclosure in its Accounting for Financial Instruments project.
There was little support for the staff's preferred approach. The Boards also discussed an approach put forward by a FASB member that would not include any disclosure requirements in the fair value measurement standards at all – keeping the standards strictly about 'how to do fair value'. In addition, there was no obvious reason to single out financial instruments over other assets and liabilities for which fair value was required.
An IASB member offered a variation on this approach, suggesting that all assets and liabilities for which a fair value measure was required on a recurring basis should be subject to the sensitivity analysis requirement (for IFRSs, this would include biological assets and investment properties and commodities measured at fair value).
The staff also clarified that their proposal (and that in ED 2009/5) was that all fair value disclosures in IFRS 7 would move to the Fair Value Measurement IFRS. IASB members were concerned about moving disclosure requirements for financial instruments out of IFRS 7, which addressed disclosure for financial instruments generally. However, the staff did not want to fragment the fair value disclosure requirements for assets and liabilities generally; nor did they wish to duplicate them.
Board members debated these ideas and a variety of views were expressed. The FASB chairman called for preferences: the FASB were more or less evenly split across all alternatives, the IASB had a moderately strong preference for requiring a sensitivity analysis for all assets and liabilities remeasured at fair value on a recurring basis. The FASB chairman then asked who could accept this approach: 10 IASB members and 4 FASB members voted in favour.
An IASB member noted that the revised disclosure package would trigger re-exposure, since it presumes assessment of interdependency – the ED explicitly did not. Staff refused to be drawn on this issue, saying that the assessment of the re-exposure criteria would be placed before the Boards at a subsequent meeting.
Insurance Contracts
Disclosure
The Boards discussed an overall approach to disclosure for insurance contracts. The staff had proposed the following general principle:
An entity shall disclose information that:
- explains the characteristics of its insurance contracts;
- identifies and explains the amounts in its financial statements arising from insurance contracts; and
- helps users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts.
As elsewhere in IFRSs, specific disclosures would be required to meet this overall principle. The staff did present possible disclosures – building on those required in IFRS 4 – but with a couple of exceptions these were not discussed in depth. In addition, the staff had prepared a comparison of current US GAAP disclosure requirements and IFRS 4.
The Boards encouraged the staff to work with the revenue recognition team to develop consistent disclosure principles that would rephrase objective (c) to concentrate on helping users 'to evaluate the amount, timing and uncertainty of cash flows': this was seen as less ambiguous than the current phrasing. Coordinating with the revenue recognition team was necessary as they face the same challenge, and the Board wished to avoid covering the same territory twice.
Disaggregation was also an issue that was not addressed in the disclosure principle. Some Board members saw disaggregation as vital to insurance contract disclosure given the amount of netting that accompanies the recognition and measurement of insurance contracts.
Other Board members were concerned that, without a clear understanding of the presentation of insurance contracts in the financial statements, deciding what else needs to be disclosed was challenging. However, any disclosure must help the user to identify how the insurer makes money, what types of contracts it writes, in what jurisdiction it writes them, how much discretion management has in measurement, where the risks are in the business, and how those risks are reflected in measurement, among other things. Another issue raised was that of operational risk – where the entity operates, the regulatory environment, and any restrictions place by operation of law or prudential supervisors on the types of business an insurer was permitted to underwrite. In general, Board members agreed that the disclosure principle and accompanying proposed disclosures were a good start, but needed more specificity before they could be commented on with any degree of comfort.
An IASB member suggested that the disclosures required in Australia, Canada, and New Zealand (that is, those jurisdictions that require a model similar to that being proposed by the forthcoming ED) should be studied and incorporated as appropriate in the ED's disclosure package.
The Boards agreed in principle on the approach to disclosure (no formal vote was taken).
The Boards reviewed briefly possible disclosures. No formal views were expressed, but several Board members thought that it was premature to consider specific disclosures before the accounting requirements had been concluded.
Consolidation
Control model
The Boards revisited the issue of control in the context of power with less than half of the voting rights in an entity that the Boards discussed at their meeting earlier that week.
After a brief discussion, the majority of FASB members agreed to proceed with the ability view but suggested that an alternative view shall be described in the FASB Exposure Draft.
The Board members were concerned by implications of the model but supported it as they believed that if appropriately worded (specifically stating that all facts and circumstances and not only voting rights are to be considered), they might be able to support it.
The IASB Chairman noted that the discussed views are not that far apart (they render a different answer only in one of the 13 illustrative examples, and both are based on ability model) and the remaining difference might be addressed by drafting.
Some Board members disagreed and voiced their previously stated objections – shareholder activism, potential for frequent changes of control, lack of operationality, and potentially large balances of non-controlling interest on the statement of financial position.
Disclosures
The Boards started to discuss the disclosure package for the consolidation Standard (even though that disclosure package would be merged to a single standard with disclosures related to associates and joint ventures).
Principles and Objectives
The staff presented a proposal for articulation of concise disclosure objectives that would require a reporting entity to disclose information that enables users of financial statements to understand:
- the composition (and changes in the composition) of the group;
- the effect of legal structures within the group, and changes to those structures, on the reporting entity's ability to access and use assets and resources of consolidated entities; and
- the nature of, changes in, the risks associated with the reporting entity's involvement with structured entities.
The Board agreed in principle with proposed disclosure objectives. Nonetheless, several Board members expressed concerns with the wording of the principle: they considered it to be, on one hand, too general, but in some circumstances too restrictive (for example, focused only on legal structure and not covering also contractual and regulatory limitations).
One Board member was concerned about a separate set of disclosures of structured entities and suggested requiring them for all entities as they are mostly risk disclosures (rather than specific disclosures for structured entities).
Finally, the Board asked the staff to better articulate those objectives in the drafting of the Standard/Exposure Draft.
The Boards also agreed with a aggregation principle that would allow the reporting entity to aggregate disclosure for similar items but would not allow it to combine disclosures for consolidated entities with those for unconsolidated entities.
Disclosures for Subsidiaries
After a brief discussion in which several Board members questioned the relevance and usefulness of the disclosures, the Boards agreed that a reporting entity should disclose:
- all significant judgements and assumptions in determining whether it controls another entity; and
- any changes in its control assessments that require significant judgement and the reasons for those changes.
The Boards also agreed not to require the reporting entity to disclose accounting consequences of its significant judgements and assumptions in determining whether it controls another entity.
The Boards continued to discuss the requirement to disclose the interest that the non-controlling interests have in the performance, cash flows, and net assets. After a brief discussion, the Boards concluded that the proposed disclosures would be too vague and asked the staff to provide more specific disclosures (that is, cash flows from dividends that would go to non-controlling interests).
Subject to drafting suggestions and concerns about exact wording, the Boards agreed that a reporting entity should disclose the nature of restrictions that are a consequence of assets and liabilities being held by the parent or its subsidiaries. As part of those disclosures the reporting entity should disclose the nature of rights held by the NCIs that go beyond typical protective rights set out in legislation.
Finally, the Boards agreed that a reporting entity should be required to disclose the lack of recourse of creditors (or beneficial interest holders) to the general credit of other entities within the group.
The Boards were split on the requirement to disclose a list of significant subsidiaries including the name, country of incorporation, proportion of ownership interest, proportion of voting rights held, and summarised financial information about the subsidiary. Many Board members thought that these requirements were onerous and might be meaningless and confusing, as many subsidiaries are created for tax reasons and this legal structure is not the same as business structure.
The Boards asked the staff to narrow down the required disclosures to significant subsidiaries and consider the level of information required.
The Board also asked the staff to reconsider and specify the requirement to disclose qualitative and quantitative information about its involvement with a consolidated structured entity and related explicit financial support arrangements.
Implicit obligations to provide support
The Board agreed to require disclosure of support provided by the reporting entity to structured entities to ensure structured entities continue operating as designed. In particular, the reporting entity should disclose:
- the type and amount of support provided, including situations in which the reporting entity assisted the structured entity in obtaining another type of support;
- an explanation of why the support was provided; and
- an explanation of how the provision of support resulted in the reporting entity controlling the structured entity, if applicable.
The Boards were split on the requirement to disclose information about the reporting entity's current intention to provide non-contractual support in the future. Some Board members were concerned that such disclosure could trigger various legal arrangements that in effect might make the implicit support enforceable. In their opinion, only an actual decision should create disclosure (and potentially even liability). The Boards briefly discussed the tie between this requirement and the disclosure requirements of IAS 37. Some Board members were concerned that the decision on classification and measurement of financial liabilities could be based on intent whereas this disclosure could not.
Finally, the FASB agreed to present both views in the forthcoming Exposure Draft. The IASB would discuss the issue at a future meeting.
This concluded the March Joint IASB/FASB meeting.
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.
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