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Discussion at the April 2009 IASB Meeting The Board discussed how to proceed with the comments received on the exposure draft Discontinued Operations: Proposed Amendments to IFRS 5. The Board discussed a staff recommendation that because the disposal of or classification to held for sale of an operating segment may or may not represent a strategic shift in the entity's operations, the Board should adopt a principles-based approach and define a discontinued operation as a component of an entity whose disposal of or classification to held for sale represents a strategic shift in the entity's operations. Many Board members were unhappy about the proposal, not least because the staff were not proposing to define or elaborate significantly on what a 'significant shift' represented. To these Board members, this was an open invitation to 'do what you want' reporting. Others preferred to see the effects of discontinued (and discontinuing) operations reported in the segment disclosure note. However, other Board members had a problem with that approach, primarily because the segment disclosure may be based on non-IFRS measures and lacks discipline. Ultimately, the Board referred itself to a possible approach being developed by the FASB. This approach was described as:
The Board agreed that they owed it to their constituents and to the FASB to explore this possible approach. They undertook to contact their users' forum, the Corporate Reporting Users Forum, as well as representatives in industries for which the issue is significant, such as REITS and retail groups. Board members noted that the FASB approach might not change or conform the definition of discontinued operations, but enhancing the disclosure in a useful way in this area would be a significant improvement. It is likely that, if the FASB approach is developed, it would trigger re-exposure. The Board agreed that the staff should coordinate their constituent outreach activities with those of the FASB staff. Discussion at the July 2009 IASB Meeting Definition of discontinued operations The Board discussed the definition of discontinued operations and the need for the presentation of discontinued operations on the face of the statement of comprehensive income following comments received on the exposure draft published in 2008. Some Board members did not feel that discontinued operations shall be presented on the face of the statement of comprehensive income; they would have preferred alternative disclosure in the notes. One Board member suggested that the most suitable place for such disclosures and accompanying reasons for classification is the management commentary. Nonetheless, most of the Board members defended the current requirements as they did not feel that notes are the right place for such important information (as net income from continuing operations represents input to basic performance metrics). Moreover, some members of the Board were concerned that requiring only disclosure in the notes could open further structuring opportunities. After a prolonged discussion the Board approved (by 10 votes to 5) retaining the requirement for presentation of discontinuing operations on the face of the statement of comprehensive income. Most of the following discussion focused on the appropriate definition of a discontinued operation. The staff presented three alternatives of a definition (component representing strategic shift in operations, operating segment representing strategic shift in operations and significant operating segment). The Board discussed this issue in great detail, with many Board members uneasy about a definition based on operating segment as that definition would on one hand increase the structuring opportunities and on the other hand excessively increase the number of reported discontinued operations. Many Board members were also uneasy about including 'significant' operating segment in the definition, as significant is not defined. After a significant discussion the Board agreed that a definition shall be based on the reportable segments (segment already reported) in order not to have a large number of different operating segments to be reported as discontinuing operation. By aligning the definition in IFRS 5 and IFRS 8 the Board tried to improve consistency between those standards. On disclosures, the Board discussed the proposed enhancement of required disclosures. Many members of the Board felt that the proposal brought by the staff requiring additional separate disclosures on components and rules on their aggregation would place excessive requirements on the preparers without enhancing the quality of the financial statements. Many Board members also raised the issue that these requirements seem to be more prescriptive and detailed that those currently in US GAAP due to difference in requirements for operating segments (difference in definition, required disclosures). As a consequence, the staff was directed to re-visit the US requirements and propose disclosure that would fully converge with US GAAP. OCI items within discontinued operations The staff presented the Board with a potential annual improvement item regarding presentation of OCI items related to discontinued operations in the statement of comprehensive income. In discussion some of the Board members proposed combining presentation of discontinued operations into one line of statement of comprehensive income (income statement and OCI items together), some proposed similar changes for the statement of financial position within equity. Several Board members felt that the disclosure in the statement of financial position would be more informative. Other members believed that the need for separate presentation would create more work for the preparers without any additional benefit to the users. Finally, the Board decided to limit the amendment for statement of comprehensive income and include it in annual improvement process. Discussion at the October 2009 Joint IASB-FASB Meeting What Constitutes a Discontinued Operation The FASB and IASB resumed their discussions around what constitutes a discontinued operation. The staff presented a paper discussing a proposed definition for a discontinued operation, considering:
Several members of both Boards questioned whether discontinued operations should continue to be presented on the face of the financial statements or whether footnote disclosures alone were more appropriate. FASB staff said that users overwhelmingly support showing discontinued operations on the face of the financial statements. Ultimately, both Boards voted to continue to require the presentation of discontinued operations on the face of the financial statements. A few Board members questioned whether the proposed definition of discontinued operations was too arbitrary and would allow different users to reach different conclusions on what meets the definition. This could present opportunities for earnings management. Some members of the IASB questioned whether the current definition under IFRS 5 was more appropriate and suggested amendments were not needed to IFRS 5. The FASB staff noted the proposed definition was similar to IFRS 5 except the staff tried to add some principles where it made sense from an analysis point of view. The IASB indicated that they would like to retain the current definition under IFRS 5. Next Steps in the Project The FASB staff outlined the next steps for this project. The FASB staff will consider differences between their proposed definition and the IFRS 5 definition and determine whether they believe that changing the current definition to the IFRS 5 definition will be an improvement to financial reporting. Further, the FASB staff will perform an analysis of the disclosure requirements under IFRS 5 and determine whether they believe those disclosures are adequate or if additional disclosures may be needed. The FASB indicated that they would like to discuss the staff's findings and considerations during November. Discussion at the December 2009 IASB Meeting Write-down of a disposal group and discontinued operations OCI items In response to a request made by the Board at its July 2009 meeting to work with the FASB to ensure the IFRS 5 remained consistent with US GAAP, the staff presented the outcome of the work performed on the following matters:
One Board member questioned whether there would be any items left to be addressed if these three matters were resolved. The staff responded that the matter relating to the definition of discontinued operations still needs to be resolved. Without much deliberation, the Board unanimously agreed with the proposals in the following way:
Definition of discontinued operation The Boards re-deliberated the proposed amendments to discontinued operations guidance. Without much discussions the Boards agreed the (slightly modified) IASB definition of a discontinued operation:
A discontinued operation is 'a component that either has been disposed, or is classified as held for sale, and Disclosures The Boards also agreed that following disclosures should be included for current and prior periods presented in the financial statements:
In addition, both Boards agreed to require disclosures about disposals of long-lived assets and disclosures about significant components of an entity that did not qualify as discontinued operations but without providing details of the related cash flows. The Boards continued with a lively discussion of additional disclosures regarding the entity's continuing involvement with the disposed component and the continuing cash flows between the ongoing entity and the disposed component. Most Board members were concerned that the proposed disclosures regarding continuing cash flows were excessive and not operational. The Boards clarified that only the disclosures regarding continuing involvement should be provided. Moreover, the Boards agreed that those disclosures should be provided only for the discontinued operations presented in the current financial statements to achieve comparability and avoid 'creating' artificial growth in earnings through classifying operations as discontinued. The Boards agreed to propose a prospective application of the Standard with the effective date of 1 January 2011 (15 December 2010 for the U.S. GAAP). On the need for re-exposure, both Boards tentatively agreed that re-exposure was warranted and agreed to align publication dates and comment periods. Both Boards will revisit that decision in January with a formal staff paper. Discussion at the January 2010 IASB Meeting The Board agreed to re-expose the proposals regarding the definition of discontinued operations and related disclosures for a period of 60 days.
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