• Agenda decision: At the July 2006 Meeting the Board approved an ongoing process for annual improvements to IFRSs
• Discussed at September 2008 IASB Meeting
• Discussed at October 2008 IASB Meeting
• Discussed at December 2008 IASB Meeting
• Discussed at January 2009 IASB Meeting
• Discussed at February 2009 IASB Meeting
• Final improvements issued for 12 IFRSs on 16 April 2009. Click for More Information.
• Discussed at May 2009 IASB Meeting
• Discussed at June 2009 IASB Meeting
• Discussed at July 2009 IASB Meeting
• Exposure Draft issued 26 August 2009. Click for More Information.
• Discussed at January 2010 IFRIC Meeting
• Discussed at 10 February 2010 Special IASB-FASB Joint Meeting

Timetable

• Click for IASB Project Timetable

Background

Each year the Board considers minor amendments to IFRSs in an annual improvements project. The amendments are proposed in an omnibus Exposure Draft.

Discussion at the September 2008 IASB Meeting

The staff presented an item it proposed to be included in the annual improvements process 2009. IFRIC 13 requires consideration received or receivable to be allocated between award credits and other components of a sale. The allocation must be done by reference to fair value. If fair value for the awards credits is not directly observable, it must be estimated. This could be done by reference to the awards redeemable. As fair value both refers to the value of the award credits and the value of the awards to be redeemed, this could be interpreted to mean that both fair values are equal. To avoid any confusion the staff recommended addressing this issue via the annual improvements process and proposed some wording that was omitted from the observer notes. The Board agreed. One Board member asked to avoid using the term 'redemption value' as this is in some jurisdictions, for legal reasons, a cash amount close to zero.

Discussion at the October 2008 IASB Meeting

IAS 39 – Application of the Effective Interest Rate Method

The staff presented the Board with a proposal to amend the Application Guidance in IAS 39.AG6-8 regarding the application of the effective interest rate method. The issue was originally raised with the IFRIC, but it decided not to add the issue to the agenda and refer it to the Board for clarification. Two questions arise in this context:

• What is a floating rate instrument?
• How is the effective interest rate calculated for such instruments?

What is a floating rate instrument?

The guidance in IFRS is not sufficiently clear on what a floating rate is - is it market interest rate only or could it be other market factors or possibly entity-specific factors? The staff agreed that the guidance is not clear and proposed three alternatives:

• Alternative 1: Provide no clarification
• Alternative 2: Define floating rate instruments as any instruments with contractual variable cash flows amounts arising from changes in market variables
• Alternative 3: Define floating rate instruments some other way

The Board agreed with this proposal adding the word 'observable'.

How is the effective interest rate calculated for such instruments?

The issue regarding calculation is whether to include expectations about future cash flows when determining the EIR? The staff proposed to clarify IAS 39 that expectations should not be considered when determining the EIR of a floating rate instruments as defined above, that is apply IAS 39.AG7.

The Board agreed

Way Forward

The staff then asked the Board whether the amendments should be proposed via the annual improvements project.

The Board agreed.

Discussion at the December 2008 IASB Meeting

IAS 39: Treating loan prepayment penalties as closely related embedded derivatives (2007 AIP issue)

The Board agreed to replace paragraph IAS 39.AG30(g) along the following lines:

(g) A call, put, or prepayment option embedded in a host debt contract or host insurance contract is not closely related to the host contract unless:

(i) the option's exercise price is approximately equal on each exercise date to the amortized cost of the host debt instrument or the carrying amount of the host insurance contract; or

(ii) the exercise price of a prepayment option [is approximately equal to an amount that would]* reimburse the lender for the present value of lost interest for the remaining term of the host debt contract. Lost interest is the excess of the effective interest rate of the original contract and the effective interest rate for a contract with the same terms as the host debt contract.

The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument under IAS 32.

The staff paper used the phrase 'no more than reimburses the lender' in sub-paragraph (g)(ii). Board members thought that this was inconsistent with sib-paragraph (i) and implied a level of precision that the Board probably did not intend. The Board agreed and instructed the staff to make sub-paragraph (g)(ii) consistent with (g)(i).

IAS 1: Classification of the liability component of a convertible instrument (2007 AIP issue)

The Board noted that in the 2007 AIP they had concluded that classifying the liability on the basis of the requirements to transfer cash or other assets rather than on settlement better reflects the liquidity and solvency position of an entity, and it proposed to amend IAS 1 accordingly. However, it acknowledged that the wording proposed in the ED had not reflected the Board's intent.

The Board agreed that IAS 1 paragraph 69 should be amended as follows:

69 An entity shall classify a liability as current when: [...] (d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). The potential settlement of a liability by the issue of equity instruments [when the terms of the liability instrument permits settlement in shares does not affect]* its classification as current.

The staff paper used the phrase 'is not relevant' to the classification. Board members noted that the potential settlement through the issue of equity instruments must be a feature of the instrument and not a matter of management intent.

IAS 17: Classification of leases of land and buildings (2007 AIP issue)

The Board did not agree with a staff recommendation that this issue should be subsumed in the forthcoming Leases Discussion Paper. Board members acknowledged that they had caused the problem when the IASB had amended IAS 17 in 2003 and they had an obligation to constituents to make IAS 17 operational.

After discussion, the Board agreed to amend IAS 17 but revise the amendment proposed in the 2007 Annual Improvements ED to address various consequential amendments identified in the comment letters, to expand the Basis for Conclusions to set out the Board's rationales underlying the change from its previous decision in 2003 and explain why it is imperative to do so at this time outside of the Board's active project on leases. No amendments will be made to IAS 40.

Transitional relief will be made, so that if an entity had a 'previously published fair value' of a lease, it could use that as the transitional fair value rather than attempting a 'with hindsight' exercise.

Next steps: All 2007 AIP issues discussed

The staff will prepare ballot drafts of the three 2007 AIP issues. These issues will be included in the 2008 Annual Improvement Amendments document, rather than as a separate document. The effective date for these amendments will be 1 January 2010.

New issues for 2009 AIP

Guidance inconsistency in Appendix to IAS 18

The Board considered whether paragraph 17 of the Appendix to IAS 18 (dealing with initiation, entrance, and membership fees) was inconsistent with the general principles in IAS 18 and in particular with IAS 18.13, which addresses multiple element transactions.

The Board agreed that the first sentence of paragraph 17 of the Appendix to IAS 18 should not be read in isolation – the paragraph goes on to give examples of situations in which revenue from identifiable components of a single transaction should be identified.

For this, and other reasons highlighted by the staff, the Board did not add this issue to the 2009 AIP.

IAS 40: Transfers from Investment Property (to Inventory (IAS 2) or Held for Sale (IFRS 5))

The Board discussed a potential inconsistency between IAS 40 Investment Property, IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and IAS 2 Inventories in situations when an investment property is now being held for sale.

The staff explained that there was confusion around the operation of IAS 40 paragraphs 56 and 58 regarding reclassifications out of investment property when management determines that it will sell a non-current asset. In addition, there was the anomaly that when an entity transferred an investment property to inventory (IAS 40.57(b)), it ceased to be remeasured at fair value, but reverted to the cost method under IAS 2.

The Board discussed these issues for some time. Several expressed dissatisfaction with the relatively permissive nature of the fair value alternative in IAS 40 and were in favour of keeping investment properties for which the fair value model had been chosen in that model until disposal. The Board noted that the measurement provisions of IFRS 5 do not apply to investment property measured using the IAS 40 fair value model (IFRS 5.5(d).

The Board agreed:

• To amend IAS 40 paragraph 60 to remove the reference to 'inventories' and 'IAS 2' (i.e., IAS 40.60 will address transfers from investment property to owner-occupied property only) [that is, restricting transfers from the fair value model];
• To amend IAS 40 to require investment property accounted for under the fair value model to be analysed between 'investment property' and 'investment property held for sale'; and
• To require disclosures similar to those required for non-current assets held for sale in IFRS 5 whenever investment property is held for sale.

A majority of the Board were in favour of including this issue in the Annual Improvements Project. The staff stated that this decision could be reviewed once the Board had seen the proposed changes.

Customer-related Intangible Assets

The Board noted that in light of the explicit guidance in IFRS 3R, the IFRIC had decided at its November 2008 meeting that the issue of customer-related intangible assets could be best resolved by referring it to the IASB and the FASB with a recommendation to review and amend their respective business combination standards by:

• removing the distinction between 'contractual' and 'non-contractual' customer-related intangible assets recognised in a business combination and focusing on the nature of the relationship rather than how it is established; and
• reviewing the indicators that identify the existence of a customer relationship in paragraph IE28 of IFRS 3 and including them in the standard (IASB only).

Because IFRS 3R is a converged standard, the staff asked if the Board would like to consider this amendment proposal made by the IFRIC as a joint project with the FASB. The Board asked the staff to discuss the extent of such a project with the staff of the FASB and return to the Board with more specific proposals.

Discussion at the January 2009 IASB Meeting

The Board received but did not discuss the Staff's 'Summary of preliminary comment letter analysis, deliberation objective and provisional project plan'. Under the project plan, the staff expects to complete all redeliberations, including any sweep issues, by the March 2009 IASB meeting, allowing the Improvements IFRS to be issued in April 2009.

Comment analysis – Minor issues

The Board agreed the staff's proposed disposition of the following proposals. A majority of respondents concurred with the Board's proposals:

• Scope of IFRS 2 and revised IFRS 3 (IFRS 2)
• Disclosures of non-current assets (or disposal groups) classified as held for sale or discontinued operations (IFRS 5)
• Unit of accounting for goodwill impairment (IAS 36)
• Additional consequential amendments arising from revised IFRS 3 (IAS 38)
• Measuring the fair value of an intangible asset acquired in a business combination (IAS 38)

A Board member objected to the staff's proposed amendments to the implementation guidance in IAS 18 with respect to determining whether an entity is acting as a principal or as an agent. The Board member was concerned that the IASB would introduce jurisdictional bias in to its guidance that was neither necessary nor desirable at the level of (non-mandatory) implementation guidance. The Board member would not amend the IG at all. It was unclear whether the Board as a whole concurred with this view.

IAS 7 – Classification of expenditures on unrecognised assets

The Board agreed to modify the amendment to IAS 7 paragraph 16, such that it would state:

16 The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources that are recognised as long-term assets and other investments not included in cash equivalents in the statement of financial position. Examples of cash flows arising from investing activities are: (a) ...

A proposal to amend IAS 7 paragraph 32 (not included in the ED) was not approved.

Scope of IFRIC 9 and Revised IFRS 3 (new issue)

The Board agreed that an amendment to paragraph 5 of IFRIC 9 Reassessment of Embedded Derivatives was necessary to clarify that the scope of IFRIC 9 excludes contracts with embedded derivatives acquired in a combination between entities under common control or in the formation of a joint venture. With the revised definition of a 'business' in IFRS 3 (2008), the formation of a joint venture was brought within the scope of IFRIC 9, something that the Board had not addressed specifically as it developed IFRS 3 (2008).

The Board agreed that the scope of IFRIC 9 should be amended to read as follows:

5 This interpretation does not apply to the acquisition of contracts with embedded derivatives in:

• a. a business combination;
• b. a combination of entities or businesses under common control as described in paragraphs B1-B4 of IFRS 3 Business Combinations (as revised in 2008); or
• c. the formation of a joint venture as defined in IAS 31 Interests in Joint Ventures

nor their possible reassessment at the date of acquisition.

So this amendment can be in place in time for the effective date of IFRS 3 (2008) – 1 July 2009 – the Board agreed that it should issue an exposure draft of the proposals for a 30-day comment period (the minimum permitted by the IASB's Due Process Handbook). (See also Hedges of a Net Investment, below).

Discussion at the February 2009 IASB Meeting

IAS 1 Presentation of Financial Statements: Presentation of the statement of changes in equity

The Board agreed to propose an amendment to IAS 1 paragraphs 106 and 107 to allow the reconciliation for each class of accumulated other comprehensive income either on the face or in the notes to the financial statements. The proposed effective date is 1 January 2011.

In addition, the Board agreed that it should not modify the Implementation Guidance accompanying IAS 1.

April 2009: IASB Issues Final Improvements to 12 IFRSs

On 16 April 2009, the IASB issued Improvements to IFRSs – a collection of amendments to twelve International Financial Reporting Standards – as part of its program of annual improvements to its standards. The IASB uses the annual improvements project to make necessary, but non-urgent, amendments to IFRSs that will not be included as part of another major project. The latest amendments were included in exposure drafts of proposed amendments to IFRSs published in October 2007, August 2008, and January 2009. Most of the amendments are effective for annual periods beginning on or after 1 January 2010, although entities are permitted to adopt them earlier. During its deliberations of comments received on the exposure draft of Proposed Improvements to IFRSs published in August 2008, the IASB decided to postpone reconsideration of two IAS 39 issues (relating to the fair value option and bifurcation of an embedded foreign currency derivative) until more analysis could be completed. Consequently, with the document published today, all the other issues included in the three exposure drafts have been finalised or removed from the IASB's agenda. The following table lists the IFRSs and topics addressed by the amendments. Click for IASB Press Release (PDF 45k).

Discussion at the May 2009 IASB Meeting

The Board discussed several proposed amendments relating to the revisions to IFRS 3 and IAS 27.

The Board considered the following proposed amendments to the revised IFRS 3 and IAS 27:

1. the transition requirement to apply retrospectively some of the consequential amendments to other standards
2. the transition requirements for losses attributable to the non-controlling interest that have previously been allocated to the controlling interest
3. the transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised standard
4. the treatment of pre-existing contingent consideration of the acquiree
5. the IFRIC recommendation to amend the standard to include the indicators that identify the existence of a customer relationship in the implementation the Board tentatively agreed to in December 2008
6. the allocation of other comprehensive income in a transaction with the on-controlling interest that does not result in loss of control
7. the interaction of the effective date of IFRS 3 with the requirements in IFRS 1
8. the application of IFRS 5 in a step acquisition and in loss of significant influence over an associate or a jointly controlled entity

The Board also considered FASB deliberations on the scope of SFAS 160 Noncontrolling Interests in Consolidated Financial Statements, as well as a list of other issues.

The transition requirement to apply retrospectively some of the consequential amendments to other standards

The first issue the Board considered was whether the consequential amendments from phase II of the business combinations project be applied prospectively or retrospectively?

One Board member said that they thought that it was obvious. IFRS 3 is prospective. Others agreed. One other Board member was not sure it was so clear. Following some discussion, the Board agreed that the consequential amendments should be applied prospectively. The majority of the Board thought, however, that this was already clear from the existing guidance in the standards, and voted not to make any amendments as part of the Annual Improvements Process.

The transition requirements for losses attributable to the non-controlling interest that have previously been allocated to the controlling interest

The second issue the Board considered was how an entity should account for losses in excess of the NCI in the subsidiary's equity that were previously absorbed by the owners of the parent (a) at the day of transition and (b) when the subsidiary reports subsequently profits.

The Board considered two questions:

• Question 1: At the day of transition should an entity reallocate losses attributable to NCI that were previously allocated against the equity of the owners of the parent to NCI?
• Question 2: If reallocation is not required, how should the subsidiary allocate future profits? Should it be allocated to the owners of the parent until the previously absorbed losses have been reversed? Or should an entity allocate future profits on the basis of the present ownership interests of the owners of the parent and NCI, ignoring the losses that have been previously absorbed by the owners of the parent?

The staff outlined three alternatives to address those questions:

• Alternative 1: Upon transition, the entity does not reallocate previously absorbed losses from equity of the owners of the parent to NCI. In addition, future profits are allocated in proportion to the respective interests of the owners of the parent and NCI; thus ignoring the losses that have been previously absorbed by the owners of the parent.
• Alternative 2: Upon transition, the entity does not reallocate previously absorbed losses from equity of the owners of the parent to NCI. However, future profits will be allocated first to the owners of the parent until the previously absorbed losses are reversed. Subsequently profits are attributed to the owners of the parent and NCI.
• Alternative 3: Upon transition, the entity reallocates previously absorbed losses from the equity of the owners of the parent to NCI without restating prior years' comparatives. If the Board adopts this alternative, it is not necessary to provide further guidance on the subsequent accounting.

The staff views were divided between Alternative 1 (view 1) and Alternative 3 (view 2).

The Board were asked if they would like to add the issue to the annual improvements project. The Board voted to not add this issue to the annual improvements project. They noted that the original intention of the Board when developing the standard was Alternative 1.

The transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised standard

The next issue the Board considered was whether transitional guidance should be added to IAS 39 to exempt pre-adoption contingent consideration from the scope of IAS 39. The Board agreed with the staff recommendation to add the issue to the annual improvements project. The proposal would amend the effective date paragraph for the consequential amendment to IAS 39 to clarify that IAS 39 does not apply to pre-adoption contingent consideration.

The treatment of pre-existing contingent consideration of the acquiree

The next issue the Board considered was how to account for pre-existing contingent consideration. Specifically, the IASB were asked to clarify the treatment of contingent consideration of the acquiree that an acquirer assumes in a business combination. The staff were of two views in considering this question. Some staff believe that pre-existing contingent consideration retains its nature as contingent consideration in a subsequent business combination (view 1) and other staff believe that pre-existing contingent consideration does not meet the definition of contingent consideration in IFRS 3 and cannot be analogised as such (view 2). The Board were asked if they agreed that they issue should be added to the annual improvements project (they did), and whether they supported view 1 or 2. There was significant confusion amongst the Board members as to what view 1 and 2 were trying to convey. For example, Board members queried whether view 1 meant you would be accounting for the contingent consideration under the old IFRS 3 or the new. The staff clarified that they thought it would be the new. Following discussion, the staff were requested by the (acting) Chair to reconsider the views and clarify the paper, including some example. The staff were also requested to come back to the Board with a recommendation as part of the revised paper.

The IFRIC recommendation to amend the standard to include the indicators that identify the existence of a customer relationship in the implementation the Board tentatively agreed to in December 2008

At its December 2008 meeting, the Board tentatively concurred with the IFRIC's recommendations to consider proposed amendments to IFRS 3 Business Combinations that clarify the guidance on non-contractual customer relationships acquired in a business combination. The Board also directed the staff to liaise with the FASB to prepare additional analysis for a future meeting.

The first recommendation the staff presented to the Board was to remove the distinction between the treatments of 'contractual' and 'non-contractual' customer-related intangible assets in a business combination and focus on the nature of the relationship rather than how it is established. The Board agreed that this issue should be addressed as part of the post-implementation review of the revised standard.

The staff then proposed to review the indicators that identify the existence of a customer relationship in paragraph IE28 of illustrative examples of IFRS 3 and include them in the standard. The board did not support this change and voted against the staff recommendation to move the indicators.

The third staff recommendation was to amend IFRS 3 to delete a depositor relationship example from the section that illustrates 'separate intangibles'. The staff indicated that this request was made to eliminate confusion. One Board member asked the staff why it was confusing? The staff responded by noting that the example implies that depositors were non-contractual as we only consider separable if something is non-contractual. Other Board members did not think that the example was confusing. In response to a vote 5 Board members were in favour of removing the example and 5 were against, so the Chair indicated that the example should stay as is.

The allocation of other comprehensive income in a transaction with the on-controlling interest that does not result in loss of control

The Board then considered whether IAS 27 should include additional requirements to specify the accounting treatment of OCI when a change in ownership interest in a subsidiary occurs that does not result in the loss of control. The Board thought that this was already clear from the standard and therefore disagreed with the staff recommendation to provide additional explicit requirements in IAS 27.

The interaction of the effective date of IFRS 3 with the requirements in IFRS 1

The Board then considered whether the IASB should remove the date limitation on early application of IFRS 3 and IAS 27 to be consistent with the requirements in IFRS 1. A number of Board members noted that they did not see what there was to clarify. If you apply a standard on first time adoption you apply it for all years. The Board unanimously agreed not to amend the standard.

The application of IFRS 5 in a step acquisition and in loss of significant influence over an associate or a jointly controlled entity

The Board then considered two issues relating to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations:

• Issue 1: Should an entity classify as held for sale an associate or a jointly controlled entity in accordance with IFRS 5 when it is highly probable that the entity will lose significant influence or joint control (step-down)?
• Issue 2: Should an entity classify as held for sale an associate or a jointly controlled entity in accordance with IFRS 5 when it is highly probable that control will be obtained (step-up)?

The staff noted that in Improvements to IFRSs issued in May 2008, the Board amended IFRS 5 to clarify that an entity that is committed to a sale plan involving loss of control of a subsidiary shall classify all the assets and liabilities of that subsidiary as held for sale when the criteria set out in paragraphs 6-8 of IFRS 5 are met, regardless of whether the entity will retain a non-controlling interest in its former subsidiary after the sale. The IASB has been asked to clarify the applicability of IFRS 5 to an associate or jointly controlled entity when it is highly probable that control will be obtained and/or significant influence or joint control will be lost.

In relation to Issue 1 the board agreed that this issue should be addressed in the annual improvements project. A new paragraph should be included in IFRS to clarify that the entity classifies as held for sale an associate or a jointly controlled entity when it is highly probable that significant influence or joint control will be lost.

In relation to Issue 2 one Board member noted that it was not the intention in IFRS 5 to classify things not for sale as held for sale. The Board agreed that IFRS 5 did not apply to such transactions and agreed to add discussion on the issue to the basis for conclusions.

FASB deliberations on the scope of SFAS 160 Noncontrolling Interests in Consolidated Financial Statements, as well as a list of other issues

The final issue considered by the Board was whether to amend the scope of the requirements in IAS 27 that deal (a) with transactions with non-controlling interest that do not result in the loss of control and (b) the loss of control of an entity following FASB deliberations on these issues. The staff recommended not to add the issue to the annual improvements project. The Board agreed.

Finally, the Board considered how to progress a list issues relating to IFRS 3 and IAS 27 that were not covered by the 2009 annual improvements project. These issues were not available to observers. These issues will be considered as part of the post implementation review.

Discussion at the June 2009 IASB Meeting

IAS 28 Investments in Associates – Venture capital consolidations and partial use of fair value through profit or loss

The issue under discussion was one in which an investor, at a consolidated level, has an investment in an associate, a part of which is held by a subsidiary that is an investment-linked insurance fund (or any entity potentially included within the scope exemption of paragraph 1 of IAS 28). The question raised was whether that part of the investment held by a subsidiary that is an investment-linked insurance fund is able to be designated at initial recognition as at fair value through profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement, while another part of the investment held by another group entity is accounted for in accordance with IAS 28.

The Board determined that there were 2 steps to this question:

• first to determine whether, at a consolidated level, there was significant influence; and then
• to conclude on the appropriate accounting.

The Board agreed with the staff recommendation that all direct and indirect interests held in the associate should be identified, but that the scope criteria in IAS 28 should be used to determine the allowed accounting treatments for the investment (or a portion of the investment). Therefore the scope of IAS 28 should be used to group the investment holdings into one of potentially two valuation models (equity method or fair value through profit or loss, or both).

IAS 28 Investments in Associates – Impairment of investments in associates

The issue under discussion was whether the Board agreed with the staff recommendation that impairment testing of investments in associates should be performed:

• for the consolidated financial statements in accordance with IAS 36 Impairment of Assets; and
• for the separate financial statements of the investor in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

In respect of the consolidated financial statements, the staff believed that the guidance in IAS 28.31-33 is clear. In respect of the separate financial statements, the staff believed that paragraph BC66 of IAS 27 clearly explains the Board's intent that, in the separate financial statements of the investor, investments in associates should be accounted for consistent with the accounting for financial instruments. Given the Board's underlying rationale for separate financial statements, in the staff's opinion, in the separate financial statements of the investor, impairment testing of investments in associates should be performed in accordance with the provisions of IAS 39 for both investments 'at cost' and 'in accordance with IAS 39'. The Board agreed with the staff recommendation.

Contingent consideration of an Acquiree ('pre-existing contingent consideration')

The issue under discussion was to clarify the treatment of contingent consideration of an acquiree that an acquirer assumes in a business combination ('pre-existing contingent consideration' or 'PCC').

The staff presented 2 views:

1. Although PCC does not meet the definition of contingent consideration, it retains its nature in the subsequent acquisition. Accordingly, it should be accounted for in the same way as any contingent consideration in the subsequent business combination.
2. PCC does not meet the definition of contingent consideration in the subsequent business combination. Therefore, it should be accounted for as part of the acquired identifiable assets and liabilities in the subsequent acquisition.

The staff recommended the second view and the Board agreed.

IFRS 1 First-time Adoption of International Financial Reporting Standards - Accounting for privatisation

The issue under discussion was to clarify the accounting guidance for a continuing business restructured in connection with privatisation and subsequent initial public offering (IPO).

The first scenario presented was where an entity is about to undergo an IPO and its revaluation occurs at about the same time as the restructuring for privatisation and during the periods covered by its first IFRS financial statements.

The staff provided two views to support a possible conclusion that a privatisation-triggered revaluation would qualify for 'deemed cost' under IFRS 1, as follows:

• View A – The revaluation date falls within the periods covered by Newco's first set of IFRS financial statements even though that period includes predecessor periods of the restructured or carved-out business; or
• View B – The date of transition is Year 3 when Newco is formed because Newco cannot adopt IFRS before it was legally formed.

The Board agreed with the staff recommendation that the Board adopt View A and amend IFRS 1 to permit an entity to use the revaluation basis as deemed cost when the revaluation for a privatisation occurs during the period covered by its first set of IFRS financial statements, even if that revaluation date is after the entity's date of transition to IFRSs and before the entity's legal date of formation.

The rationale for this decision is that an SOE whose assets and liabilities are revalued contemporaneously with a privatisation and IPO is similar to a first-time adopter that established a deemed cost under previous GAAP. The similarity is also the same when such an SOE presents 'carved-out' financial statements because those financial statements related to a continuing business that was previously a portion of its predecessor's, was subsequently revalued by its predecessor, and is now transferred to be held by Newco. The staff therefore recommended that the Board should broaden the current exemption in paragraph D8 of IFRS 1 to cover such an SOE even though its revaluation was obtained during the period covered by its first set of IFRS financial statements and not prior to its date of transition to IFRS.

Comparative Period

The Board then discussed how, under View A above, comparative information should be presented. The staff had considered two alternatives:

• Option A – establish the deemed cost on the date of transition to IFRSs using the revaluation amounts obtained in Year 3, adjusted to exclude any depreciation, amortisation or impairment between the date of transition to IFRSs and the date of that revaluation; or
• Option B – establish the deemed cost on the date of revaluation, present historical costs or previous GAAP amounts as permitted by IFRS 1 for the comparative periods prior to revaluation date.

Some Board members supported option B on the basis that it would be impossible to apply option A without employing hindsight. Other Board members supported option A on the basis that they believed that option B did not provide meaningful information. Overall the majority of the Board agreed with the staff recommendation of option B.

Transition

The Board agreed with the staff recommendation that retrospective application of these proposed amendments to IFRS 1 should be permitted but not required.

Existing IFRS Preparer

The Board agreed not to address how an existing IFRS preparer should account for a one-off restructuring for a privatisation or whether the revaluation in relation to that restructuring results in a change in accounting policy.

IFRS 1 – Accounting policy changes in the year of adoption

The issue under discussion was to clarify whether a first-time adopter is exempt from all the requirements of IAS 8 for the interim and annual periods presented in its first IFRS financial statements. If IAS 8 does not apply, what, if any, requirements apply if an entity changes its accounting policies between the first interim financial statements it presents in accordance with IFRSs and the first annual financial statements? In addition, although this was not part of the clarification requested, a similar question arises with respect to changes an entity might make in the IFRS 1 exemptions it chooses to apply.

The staff recommended that:

• IFRS 1 should continue to specify the required disclosures relating to first-time adoption and an entity's transition to IFRSs rather than referring to IAS 8. IFRS 1.27 should be amended to explicitly state that:
  • (a) IAS 8 does not apply both to the entity's selection of accounting policies at the date of transition to IFRSs and to any changes to those policies made up to the date of the first annual IFRS financial statements, and
  • (b) all of IAS 8's requirements related to changes in accounting policies do not apply (rather than only its disclosure requirements); and
• that the reconciliations required by paragraphs IFRS 1.27 and 32 must be updated for changes the entity makes during the year of first time adoption in accounting policies and in transitional choices made in accordance with IFRS 1.

The Board agreed with the staff recommendation.

Discussion at the July 2009 IASB Meeting

The IFRIC Coordinator reported that the July 2009 IFRIC meeting had been a relatively full day and had resulted in a number of Agenda Decisions being issued in final, the most significant of which was perhaps on related to IAS 39 and the meaning of 'significant or prolonged' in IAS 39.61 (see the IAS Plus report of the July 2009 IFRIC Meeting for further information).

Write-down of a disposal group (IFRS 5)

The Board agreed that the staff should prepare a full agenda proposal to address an issue identified by the IFRIC to resolve a conflict between IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and IAS 36 Impairment of Assets. In addition, the proposal should include the solution suggested by the staff together with the proposed Basis for Conclusions. The solution suggested was to align the presentation of disposal groups in IFRS 5 with that for associates - this results in displaying the disposal group as a single line, measured at fair value less costs to sell. This would be included in the next round of annual improvements (2010-2011).

Debt-to-equity swap in a restructuring (IAS 32 and IAS 39)

The Board noted that the IFRIC, noting the significance and pervasiveness of the issue, had decided to develop an Interpretation with respect to the application of IAS 39 when an entity issues its own equity instruments in settlement of its existing debt instruments in a restructuring. The IFRIC had reached a tentative consensus at its July meeting and would meet by teleconference on 4 August at 1200 London time, with the intention of confirming its draft consensus. The Draft Interpretation would be issued as soon as possible thereafter with the usual 60 day comment period. The IFRIC would seek to confirm the consensus in November 2009, if possible, or in January 2010. The Board approved the approach and commended the IFRIC for acting as swiftly as it was.

Some Board members were concerned that the exchange of debt for equity resulted in a gain being recognised in profit and loss, but other Board members defended this result noting that it was the only logical result of the extinguishment of a liability for no cash outlay. The IFRIC was likely to conclude that the equity instruments issued should be measured at the fair value of the equity instruments issued or the fair value of the liability extinguished, whichever provides the most relevant measure.

A Board member asked what would be the accounting if the debt was held by a majority shareholder. The IFRIC Coordinator noted that IFRS had no measurement guidance for related party transactions. Judgement would be required and the transaction would need to be assessed to determine whether the shareholder was acting in their capacity as an owner before the appropriate accounting could be determined.

Measurement of Non-controlling Interest (IFRS 3)

The staff noted that IFRS 3 and IAS 27 (as issued in 2008) amend the definition of non-controlling interest (NCI) to 'the equity in a subsidiary not attributable, directly or indirectly to a parent'. They also noted that some constituents had suggested that the amended definition of NCI widened the scope of instruments to include, for example, the equity components of convertible bonds, warrants, options over own shares and options under share-based payment plans (not held by the parent). IFRS 3.9 (2008) permits a measurement choice of acquisition date fair value or the proportionate share of the acquired entity's identifiable net assets. There are differing interpretations of how the latter measurement should be applied.

The Board agreed that components of NCI other than the present ownership instruments that entitle the owners to a proportionate share of the net assets of the subsidiary should be measured at fair value or using the measurement basis required by IFRS. For example, a stock option under share-based payment awards should be measured in accordance with the method in IFRS 2 and the equity component of a convertible bond should be measured in accordance with IAS 32.

This item will be included in the 2009-2010 Annual Improvements.

Un-replaced and voluntarily replaced share-based payment awards

The Board agreed that un-replaced awards are non-controlling interests and are measured at a market-based measure in accordance with IFRS 2 on the date of acquisition; and that the application guidance in IFRS 3 paragraphs B57 to B61 [the split between consideration and post-combination compensation expense] should be adopted for the apportionment of the market-based measure of the un-replaced awards to the consideration transferred and post-combination expenses.

This item will be included in the 2009-2010 Annual Improvements.

Meaning of 'general borrowings' (IAS 23)

One Board member noted that in his opinion it is not appropriate to exactly match the qualifying asset with the liability. Another Board member acknowledged the apparent inconsistency between IAS 23.10 and IAS 23.14 and supported the staff in proposing amendment to IAS 23 to limit the capitalisation to general borrowings taken for an unspecified purpose.

Nonetheless, the majority of the Board was of the opinion that the standard is clear enough, any further allocation criteria would be rule-based and this amendment would not lead to improvement of financial reporting. Moreover, the Board was concerned that any amendment could lead to the need for further amendments to this standard that are of nature of application guidance.

The Board finally decided not to include this issue in annual improvements process.

Classification of rights issues (IAS 32)

Finally, the Board considered the urgent issue arising from the IFRIC meeting regarding classification of rights denominated in a foreign currency. The staff proposed a fast-tracked amendment to IAS 32 to deal with a narrow issue of classification of rights denominated in foreign currency distributed pro rata to all the shareholders as an exception to the principle developed in IAS 32. The Board agreed that as the issue is urgent and widespread, urgent amendment of IAS 32 is necessary.

One Board member noted that the issue shall be not limited to the narrow issue, but to all the instruments for all instruments where the price is defined in the fixed amount in a foreign currency. This proposal received a mixed reaction.

While many members would be prepared to support such proposal under normal circumstances, they felt that it would be such a significant change for a fast-tracked ED that not all the consequences of the change could be carefully assessed by the Board and the constituents. Moreover, as director of the capital markets pointed out, broadening of the issue could cause problems in developing of the liabilities and equity project. Even with the narrow amendment some conclusions in this project has to be revisited in order to link these two conclusions together. Moreover, some of the Board members were concerned that broadening of the scope could also lead to structuring opportunities. The Board finally agreed that the amendment should be extremely narrow; limited to rights denominated in foreign currency distributed pro rata to all shareholders.

The Board discussed the transition and effective date and agreed on the staff proposals that the amendment should be applied retrospectively and that the intended effective date should be included in the ED (90 days after it is published with early adoption permitted).

The Board agreed the timetable for the project, with ballot to be circulated during the week commencing 27 July, ED issued in the week commencing 3 August with a 30 days comment period (as the issue is narrow and matter urgent). The Board intends to analyse the comment letters at the September meeting where it also plans to finalise the amendment. Final amendment would be issued in late September or early October.

The Board approved the ED, subject to drafting and balloting, with one member dissenting.

August 2009 – Exposure Draft Issued

On 26 August 2009, the IASB published for comment an exposure draft proposing improvements to the following eleven IFRSs:

• IFRS 1 First-time Adoption of International Financial Reporting Standards
• IFRS 3 Business Combinations
• IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
• IFRS 7 Financial Instruments: Disclosures
• IAS 1 Presentation of Financial Statements
• IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
• IAS 27 Consolidated and Separate Financial Statements
• IAS 28 Investments in Associates
• IAS 34 Interim Financial Reporting
• IAS 40 Investment Property
• IFRIC 13 Customer Loyalty Programmes

The most significant proposals address:

• measurement of non-controlling interests under IFRS 3 Business Combinations;
• impairment of investments in subsidiaries, associates and jointly controlled entities in the separate financial statements of the parent/investor/joint venturer;
• amendments to the disclosure principles for interim reporting under IAS 34 Interim Financial Reporting; and
• removal of the requirements in IAS 40 Investment Property to transfer investment property carried at fair value to inventories when it will be developed for sale.

The proposed effective date for most of the amendments is for annual periods beginning on or after 1 January 2011, although entities would be permitted to adopt them earlier. The proposed effective date for the amendments arising from IFRS 3 Business Combinations and the consequential amendments to the transition requirements of IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) is 1 July 2010. Comments on the exposure draft are due by 24 November 2009. Click for Press Release (PDF 100k).

Discussion at the January 2010 IFRIC Meeting

The IFRIC has assumed responsibility for making recommendations to the Board on the Annual Improvements to IFRSs.

Annual Improvements 2009-2010

IFRS 1 First-time Adoption of IFRSs – Fair value or revaluation basis as deemed cost

The IFRIC considered the comment letters received to the proposed amendments to IFRS 1 related to event-driven revaluations after the transition date but before the end of the entity's first IFRS reporting period.

The IFRIC discussed several specific issues raised by the constituents. The IFRIC reconfirmed the earlier Board decision that did not allow roll-back adjustment for comparative data. Even though some IFRIC members saw merit in a roll-back approach (data more useful than other deemed costs), the staff noted that no new arguments had been presented that would justify the change of the decision made by the Board at the June 2009 Board meeting.

The IFRIC agreed with the staff to clarify the wording of the amendment to better capture the rationale behind the amendment.

The IFRIC also agreed to specify that adjustments related to event-driven revaluation should be recognised directly in retained earnings (or a specific category of equity).

The IFRIC also agreed to amend the transition requirements to better reflect the intention of the Board – to allow existing IFRS preparers, whose restructuring for a privatisation occurred in the past, but within the period covered by the first set of IFRS financial statement prepared in accordance with IFRS 1 to apply the proposed amendment retrospectively.

Some IFRIC members did not feel comfortable with the decrease in consistency and comparability of the financial statements. On the other hand, a majority of IFRIC members acknowledged IFRS 1 already contains exemptions intended to facilitate first time adoption of IFRSs.

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

IAS 27 – Impairment of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements of the investor

The IFRIC considered the comment letters received to the proposed amendments to IAS 27. After a short discussion the IFRIC decided not to finalise the amendments. The amendments would have been relevant if equity instruments are measured at cost. However, the recently-issued IFRS 9 requires that all equity instruments must be measured at fair value.

Some IFRIC members expressed their view that IAS 36 would be the most appropriate standard on which to base impairment of investments in associates in the separate financial statements of the investor. Other IFRIC members disagreed. The IFRIC asked the staff to analyse the issue and provide additional analysis at a future IFRIC meeting with the aim to include the issue in the next year's annual improvements process. Finally, in a preliminary indicative vote, a slight majority of the IFRIC members expressed their preference for the new guidance to be based on IAS 36 requirements.

Some IFRIC members noted that this issue was too broad for an annual improvement and might be accommodated better by a separate Board project that would encompass the whole remit of accounting in the separate financial statements.

IFRS 3 Business Combinations – Measurement of non-controlling interests (NCI)

The IFRIC considered the comment letters received to the proposed amendments of IFRS 3 to clarify that the option to measure NCI at the proportionate share of the acquiree's identifiable net assets should be applied only to those NCI components that are present ownership instruments and entitle their holders to a pro-rata share on the entity's net assets.

Some IFRIC members felt that the amendment should be broader, considering not only this issue but the interplay of NCI with goodwill, impairment, and potentially even definition of equity. Nonetheless, the Chairman noted that this was a narrow amendment that should only clarify an inconsistency and not address all concerns and implications IFRS 3 might have created. He warned that IFRIC should not try to address all the known issues with IFRS 3 within that amendment. Two IFRIC members disagreed with this assessment and continued to support a broader project considering wider implications.

After a short discussion, in which several IFRIC members noted that this improvement might change the current practice and could have further implications, the IFRIC finally supported the staff proposal to proceed with the amendments. The IFRIC agreed with drafting suggestions making the amendment more clear and and agreed to resolve several remaining inconsistencies between the proposed Basis for Conclusions and the amendment itself.

The discussion continued with identification of instruments to which the 'present ownership instruments representing proportional share in net assets' definition applied. The IFRIC agreed that it would be predominantly ordinary shares, with possible inclusion of specific types of preference shares in a limited number of jurisdictions.

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

IFRS 3 – Transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised IFRS

The IFRIC discussed the comment letters to the Board proposals. The IFRIC agreed with the concerns of some constituents that the new guidance referred to the superseded requirements of IFRS 3 (2004) and agreed to reproduce the guidance within the transitional requirements of this amendment.

On application, the IFRIC agreed that the proposed amendment be applied from the application of IFRS 3 (2008). The IFRIC acknowledged that early adopted of IFRS 3 (2008) that had applied IAS 39 to contingent considerations balances from earlier business combinations would have to restate the balances (revert to original IFRS 3 (2004) treatment). The IFRIC noted that this requirement would provide better comparability.

On the other hand, a majority of the IFRIC agreed that first-time adopters should account for subsequent changes in these balances in accordance with IAS 39 if they relate to financial assets or financial liabilities.

Some IFRIC members expressed their view that such approach was overly burdensome for early adopters and were concerned that the IFRIC would send a wrong signal regarding early adoption of new standards.

After a short discussion the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC also asked the Board to consider whether it would be more efficient to have all the related guidance to contingent considerations within one Standard.

IFRS 7 Financial Instruments: Disclosures – Disclosures about the nature and extent of risks arising from financial instruments

The IFRIC discussed the comment letters received in response to the Board proposal to enhance the disclosures for financial instruments. Without much discussion, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

IAS 28 Investments in Associates – Partial use of fair value for measurement of associates

The IFRIC discussed the comment letters received in response to the Board proposals to allow partial use of fair value for measurement of associates in consolidated financial statements. Most IFRIC members supported the amendment subject to drafting and editorial amendments that would better explain the amendment in the proposed Basis for Conclusions.

The IFRIC considered a comment that an implication of the proposal might be that a 1% share in a 30%-owned associate would be accounted for using the equity method and remaining 29% using the fair value exemption. The IFRIC noted that it would be the consequence of the model used (split accounting). Several IFRIC members challenged the economic sense and usefulness of such accounting. Nonetheless, no different proposal how to solve this issue was proposed.

The IFRIC briefly discussed consistency of this proposal with the requirements of IFRS 5 and agreed that IFRS 5 served a different purpose.

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

The IFRIC also discussed the possible amendment of IAS 31 (as a similar provision currently applies for Joint Ventures). The Technical Director explained that the new Joint Ventures Standard is scheduled for publication in March, so amendment to IAS 31 would not be practicable (as it would have to be re-exposed in any case). The staff would analyse the requirements of the new Standard and this amendment to IAS 28 and analyse how a similar requirement could be incorporated in the new Joint Venture Standard requirements.

IAS 34 Interim Financial Reporting – Significant events and transactions

The IFRIC discussed the comment letters received in response to the Board proposals to amend IAS 34 to emphasise the disclosure principle and to add further guidance.

The IFRIC in principle agreed with the amendments, subject to clarifications of the terminology used and subject to specifying which disclosure requirements were required (what the principle was and which generic and specific events should be disclosed).

On that basis, the IFRIC recommended to the Board to finalise the amendments subject to editorial drafting suggestions.

Discussion at the Joint IASB-FASB Special Meeting 10 February 2010

The IASB deliberated the IFRIC's recommendations on the annual improvements project issues the IFRIC discussed at its Meeting in January 2010.

IFRS 1 - Fair value or revaluation as deemed cost exemption

The Board deliberated whether to require that any adjustments resulting from an event-driven revaluation after the date of the transition to IFRSs (but during the period covered by the first IFRS financial statements) be recognised in retained earnings or allow recognition in another category of equity, if deemed appropriate. The Board confirmed that allowing recognition in another category of equity in certain circumstances is consistent with the general guidance in IFRS 1 relating to transition adjustments.

The Board also confirmed the amendment to the effective date paragraph to clarify that entities that applied IFRS 1 in a previous period are permitted to apply the amendment to paragraph D8 retrospectively in the first annual period after the amendment is effective.

IFRS 3 - Transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised IFRS 3

The Board confirmed the proposed amendment to clarify that for existing users of IFRSs, the financial instrument standards do not apply to contingent consideration arising from a business combination for which the acquisition date preceded the application of IFRS 3 (2008). Without much deliberation, the Board further agreed to delete the reference to IFRS 3 (2004) and to reproduce those requirements within the transition section of IFRS 3 (2008).

IFRS 3 - Measurement of non-controlling interests

The Board discussed the clarification that the choice for measuring the non-controlling interest (NCI) in an acquiree applies only to 'components of non-controlling interest that are present ownership instruments and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation'. Without discussing the matter, the Board confirmed the proposed clarification and agreed that other present ownership instruments that are classified as NCI should be measured at fair value unless another measurement basis is required by IFRSs.

IFRS 7 - Clarification of disclosures on the nature and extent of risk arising from financial instruments

The Board confirmed the IFRIC's recommendation to include a paragraph to emphasise the interaction between qualitative and quantitative disclosures and how it contributes to the disclosure of information in a way that enables users to evaluate an entity's exposures to risks.

The Board's discussion then focused on the credit risk disclosures and the proposal to remove the requirements to disclose the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated (par 36(d) of IFRS 7).

Two Board members were opposed to the immediate deletion of the requirement, as the information is very useful for analysts and investors, albeit that it was worded poorly. Those Board members requested the deferral of the decision to delete the requirement and explore possibilities of improving the wording as part of the Impairment or Derecognition projects.

Other Board members did not agree and when put to a vote, the majority of members supported the proposed deletion.

IAS 28 - Partial use of fair value for measurement of associates

The Board confirmed the IFRIC's recommendation to amend IAS 28 in order to clarify that different measurement bases can be applied to portions of an investment in an associate when part of the investment is designated at initial recognition to be measured at fair value through profit or loss in accordance with the scope exclusion in IAS 28. One Board member questioned whether the consequences of subsequent measurement resulting from the proposed amendment have been thought through and noted that it may lead to opportunities for earnings management. Some other Board members had similar concerns but agreed that those concerns do not stem from this proposed amendment and should be addressed somewhere else.

The Board also agreed to include minor modifications to clarify that an entity first determines whether it has significant influence over an entity in accordance with the requirements of IAS 28. Only after significant influence has been evidenced does an entity measures the portion of the investment to which the scope exemption applies at fair value. The remaining interest in the associate should be accounted for using the equity method.

IAS 34 – Significant events and transactions

Without much deliberation the Board confirmed the proposed amendment to emphasise the existing disclosure requirements in IAS 34 and to add guidance to illustrate how those requirements should be applied. The Board also agreed to include an explanation in the Basis for Conclusions setting out the reasons for the removal of paragraph 18 of the current Standard dealing with disclosures required when the interim financial report only includes condensed financial statements.

Other matters