The IASB considered the recent activities of the IFRIC, particularly focussing on the project dealing with the effect of a minimum funding requirement on the IAS 19 asset ceiling. The IFRIC recognised that they would be unable to produce anything before the end of this year, and so published some guidance in the September 2005 IFRIC Update. The Board considered this guidance, and noted that it was similar to guidance that was considered in developing the amendments to IAS 19. The majority of the Board had no problem with the guidance, although several Board members believed it was unnecessary for the IFRIC to proceed with this project on the basis that the answers given were readily determinable from IAS 19. However, the Board agreed that the extent of the debate around what a reduction in future premiums means is indicative that IFRIC guidance was required.

In further consideration of the IFRIC's activities, one Board member noted a fundamental objection to the statements made in the August 2005 IFRIC Update in respect of regulatory assets. Particularly, he objected to the assertion that certain assets that would be recognised under SFAS 71 Accounting for the Effects of Certain Types of Regulation did not meet the criteria for recognition as assets under IFRSs. The Board member noted that he had yet to be presented with any valid examples of this phenomenon, and believed that all of the examples that had been suggested to date were in fact items that did not fall within the scope of SFAS 71. The Board noted that the more important point is that if you have an asset that falls within the scope of IAS 38, consideration of SFAS 71 is inappropriate because intangible assets are adequately dealt with under IFRSs.

The Chairman of the IFRIC said that the items published in the IFRIC Update are not authoritative guidance, but rather are intended to be helpful without forming IFRS interpretations.

(Education session)

This session was educational and no decisions were taken.

IFRIC staff presented an update on IFRIC's project on service concession arrangements. Staff outlined how the IFRIC intends to deal with the following issues raised by commentators:

• Scope of the interpretations.
• Partly-regulated assets.
• Accounting by the grantor.
• Accounting for sale and lease back arrangements.
• Dividing line between the intangible asset and the financial asset model.
• Double recognition of revenue under the intangible asset model.

One Board member noted that the IFRIC should be described as 'heroic' for exposing the intangible asset model in IFRIC D14 including the double counting of revenue, which that Board member considered to be a direct function of the correct application of IFRS.

The session was educational and no decisions were taken.

Insurance experts from two international public accounting firms made a presentation to the Board relating to the characteristics of renewals and their impact on accounting for insurance contracts. The Board considered a range of different types of contracts, and particularly considered the issue of whether the entity could control future premiums in certain situations.

The Board noted that such decisions would need to be made on a portfolio basis, based on the terms of the product, rather than in respect of each individual policy holder. The Board also noted that completing the insurance project would result in significant thought about certain elements of the financial statements, and the outcomes of that research and discussion would be very useful in considering the Framework for the Preparation and Presentation of Financial Statements.

The Board considered a staff proposal for a Technical Correction arising on the interaction of IFRS 1 First-time Adoption of IFRSs, IFRS 3 Business Combinations, and IAS 12 Income Taxes. The problem apparently arises if an entity elects not to apply IFRS 3 Business Combinations retrospectively to past business combinations (ie business combinations that occurred before the date of transition to IFRSs). The problem for such an entity is as follows:

• (a) Before the date of transition to IFRSs, the entity entered into a business combination. In accordance with its previous GAAP, it determined and allocated fair value to identifiable intangibles.
• (b) Assume that the tax base of the intangible asset recognised in the business combination is zero, but applying the previous GAAP, the entity did not recognise the deferred tax liability.
• (c) IAS 12 requires a liability to be recognised for all deductible temporary differences so in preparing its opening IFRS balance sheet the entity will recognise the deferred tax liability. However, under IFRS 1, the entity must debit the deferred tax liability to opening retained earnings instead of increasing recognised goodwill.

Board Members noted that this was not seen as a problem in practice and that the larger accounting firms had been taking the line that the standards involved were clear. There were choices in IFRS 1 to be made and these choices had consequences on other areas of accounting and reporting.

Some Board Members were concerned that the Technical Correction route was in danger of being abused and that, before the Board agreed to amend a Standard or Standards in this manner, there should be a high degree of support for the correction suggested.

After discussion, the Board decided not to proceed with a Technical Correction (7 against; 6 in favour; 1 abstained).

No decisions were taken during this session. This was essentially a preparatory session prior to the forthcoming public round-tables on the proposed changes to IFRS 3 and the equivalent FASB standards to be held on 27 October in Norwalk and 9 November in London.

The staff also presented the preliminary plan for redeliberating and finalising the standards. The Board generally agreed that the timetable set out in the agenda paper (and given in summary in the Observer Notes), which suggests that final standards could be issued in the fourth quarter of 2006, was unreasonable given the likely opposition to some of the Boards' proposals and that coordinating two Boards will inevitably add time to the project. This date would potentially also be affected by any delay on the finalisation of the proposed changes to IAS 37. One Board member stated the importance of communicating that the timetable is unreasonable to constituents.

The Board decided to take this debate further on to the joint meeting with the FASB.

Convergence Issues

The Board considered whether and how to amend IAS 23 Borrowing Costs. IAS 23 and FAS 34 Capitalization of Interest Cost, prescribe the accounting treatment for borrowing costs:

• IAS 23 permits two possible treatments, either the capitalisation of borrowing costs, to the extent that are directly attributable to the acquisition, construction or production of a qualifying asset (as defined), or alternatively, immediately expensing the borrowing costs.
• FAS 34 requires the capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (as defined). Immediate expensing is not an option.

Not only is the fundamental approach different between IFRS and US GAAP, how the two sets of standards define a 'qualifying asset' is quite different.

The staff paper explored whether the Board should require capitalisation of interest on qualifying assets using what was termed an 'economic cost' model. In essence, this would result in an entity using the same discount rate as that used for testing for impairment in under the requirements of IAS 36 (a rate that reflects current market assessments of the risks specific to the asset being constructed). However, moving to this measurement approach would not result in convergence with US GAAP, unless the FASB agreed to adopt the same approach.

Some Board members welcomed the staff paper, saying that it was conceptually better than either IAS 23 or FAS 34. Others preferred expensing all interest costs as incurred, citing concerns about manipulation of profit or loss. A few Board members preferred an approach that would see constructed assets recognised on completion at fair value, with the gain or loss compared to costs of construction recognised (they did not say where, but probably in profit or loss).

The Board was reminded that this was a proposal related to a short-term convergence project and that such projects usually concentrated on eliminating alternatives. Some Board members noted that even eliminating the expensing option in IAS 23 would not achieve convergence with US GAAP because the definition of qualifying asset was different between the two sets of standards. One possibility would be to work on the capitalising approach based on economic cost, seeing whether there was any appetite on behalf of the FASB for change to their standard.

Conclusion

After a rather difficult debate, the Board agreed to proceed with a short-term convergence project on IAS 23 that would eliminate the alternative of immediate expense (as set out in IAS 23.7-9) (12 in favour; 2 opposed). It was noted that eliminating this alternative would not eliminate the SEC reconciling item for US registrants.

The staff was asked to return with an analysis of the definitions of 'qualifying assets' in IFRSs and US GAAP before the Board makes a decision on whether to seek convergence on this topic.

Process for assessing qualitative characteristics

The Board continued its discussion of a staff proposal on the process for assessing the qualitative characteristics of financial statements. A revised schematic of the process was presented and discussed. Some Board members were critical of the revised schematic and challenged various assertions made in the supporting material. At least one Board member preferred a hierarchical approach to the assessment of the characteristics, fearing that the process approach would become a means to achieve an excuse to avoid the consequences of the process (such as reporting assets or liabilities at fair value). Another Board member saw the process as an aid for standard-setters in setting accounting standards rather than preparers in developing accounting policies in the absence of an accounting standard.

The staff will develop their thoughts further as a result of the Board's input and reactions.

Will one set of objectives and qualitative characteristics meet the needs of all entities?

The Board discussed whether the objectives of financial reporting and the qualitative characteristics of financial statements were (or should be) the same for all types of entities. For example, should they be the same for both publicly-listed entities and SMEs?

Board members noted that the staff seemed to have confused comparability and consistency in some places and suggested that these areas be clarified. In addition, stewardship was (perhaps) more noticeable in the SME context than in the publicly-listed entity context.

Objectives of financial reporting

The Board held a brief discussion on the objectives of financial reporting. Much of the paper was not reproduced in the Observer Notes as it represents the draft Basis for Conclusions. Board members were asked whether they had any serious concerns with the material presented as the staff would prefer to be prepared for these when the topic is discussed at the joint IASB-FASB meeting next week.

Project status and plan

The Board held a brief discussion of the proposed project plan.

No decisions on the Conceptual Framework documents were made at this meeting, which was essentially a preparatory session for the joint IASB/ FASB meeting 24-25 October 2005.

In preparation for the joint meeting with the FASB and future discussion on the topic, the Board held a preliminary discussion to clarify certain matters in advance of the joint meeting. Three main issues were discussed:

• Identification and initial measurement of performance obligations.
• Illustrative application examples for a range of revenue transactions.
• Definition of revenues.

The Board discussed the identification and initial measurement of performance obligations, including staff proposals to clarify the appropriate unit of account, the meaning of the term 'customer's reference market' and the definition of a performance obligation. The Board also discussed a proposed change in terminology - ceasing to use the term 'customer-based value' in favour of 'allocated consideration amount' when describing the measurement and measurement objective associated with using an allocation methodology.

The Board discussed various aspects of the measurement of stand-ready obligations. Board members expressed varying degrees of discomfort with the proposals, in particular the measurement of items using methods with few or no market inputs.

The staff noted that the IASB and the FASB were likely to reach different conclusions on the use of allocated customer amount and fair value when measuring unconditional stand ready obligations and that the staff proposal would be that the discussion document would include both alternatives.

The Board discussed several illustrative examples. Only a few comments were made.

Finally, the Board discussed the definition of revenue. Some Board members expressed concern that the proposed definition of revenue encompassed 'enhancement of assets', and that 'revenue' should arise only from actual sales; changes in the value assets were components of profit or loss, but were not 'revenue.'

No decisions were made. The Board will discuss this topic during the joint IASB-FASB meeting on 24/-5 October 2005.

This session covered preliminary discussions ahead of the joint meeting with FASB to clarify objectives and status for the potential work program and a work trough of a paper that consider issues related to disaggregation of fair value. Board members discuss the IASB-FASB convergence project, and there seem to be agreement that this should be done by a long term convergence project, were the result should be to issue a new standard (not a revision of IAS 39 and the equivalent FASB standards) that is based on a 'full fair value model.' Board members stressed that this goal was a long way ahead. However, that long-term goal would not preclude standards being developed in the shorter-term on discrete aspects of financial instrument accounting. These short-term projects would only be undertaken if they were seen as consistent with the long-term project.

The paper on disaggregation of fair value was discussed very briefly as most members agreed on what the staff had proposed. In particular, the identification of those fair values derived with few or no market inputs ('mark-to-model') was seen as critical.

The Board agreed that there was a significant learning exercise underway between users and preparers of financial statements, with IAS 39 information being presented for the first time in many areas. This progressive education exercise needed to be built into the staff's plan to this topic. This would help the staff to work with users to determine the users' requirements for disaggregated information. Once these had been determined, whether it would be possible to provide this information would be investigated. This iterative process would be repeated as necessary. The staff were encouraged to use the national standard-setters as a means through which users could be engaged in this process.

Five issues were tabled for the Board to consider and on which the staff recommended that:

1. The term 'comprehensive income' is replaced with 'recognised income and expense'.

A lengthy debate took place over this issue and the Board eventually agreed to use the term 'total recognised income and expense' in its literature although preparers would be allowed to use any other description.

2. The titles of the four primary financial statements are:

• statement of financial position,
• statement of changes in equity,
• statement of profit and other recognised income and expense; and
• statement of cash flows.

The Board agreed with the staff recommendation provided the FASB concurs.

3. The term 'profit or loss' is used to describe the mandatory subtotal in the statement of profit and other recognised income and expense (subject to the decision on issue 1 above).

The Board agreed with the staff recommendation on the basis that this issue will be revisited and considered as part of the concepts project.

4. Accumulated other recognised income and expense is presented on the face of the statement of changes in equity, and represents items that have been initially recognised in other recognised income and expense (that is, outside profit or loss) and will be recognised in retained earnings in the future.

The Board agreed with the staff recommendation.

5. The tax effects associated with each component of other recognised income and expense is not required to be disclosed in the financial statements.

The Board agreed to follow the FASB approach which is to require disclosure of tax effects associated with each component of other comprehensive income, either on the face of the statement or in the notes to the financial statements. Joint issues (that is, IASB and FASB)

The Board was asked to consider a memorandum addressing Segment A issues that are common to both the IASB and the FASB with regard to finalising work on Segment A.

Questions asked of the IASB were as follows:

Does the IASB agree that the IASB's Amendment to IAS 1 should be effective for annual periods beginning on or after January 1, 2007, with earlier application encouraged?

The Board agreed.

Do the Boards agree that transitional provisions are not necessary for the forthcoming Statement or Amendment?

The IASB agreed. The FASB will be asked to consider this issue at the forthcoming joint meeting of the two Boards. Do the Boards agree that the comment period should be 120 days? The IASB agreed. The FASB will be asked to consider this issue at the forthcoming joint meeting of the two Boards.

Single statement or two?

The Board was informed of the resistance that seems to be prevalent amongst constituencies about the move to a single statement of profit and other recognised income and expense as opposed to a two statement approach. Board members discussed this issue with many questioning the source of the resistance as there appeared to be no conceptual arguments for a two statement approach besides 'paranoia'. Some Board members indicated that they still had a preference for a single statement and some indicated that they would allow either a single or a two statement approach, whichever route the FASB would find acceptable in order to achieve convergence. The issue was deferred to the forthcoming joint meeting of the two Boards.

'De facto' control

The staff introduced a topic that had emerged recently. The issue being whether one party that holds a substantial interest in another entity (but not a majority interest) and the remaining shares are held by a large number of other shareholders controls the investee. The other shareholders are typically dispersed, both demographically and geographically.

The question was whether the 'power to appoint' in paragraph 13(c) of IAS 27 requires that the entity has the legal power to exercise more than half the votes available or whether the 'power to appoint' is a matter of fact? That is to say, does the fact that an entity is able to dominate the voting because the remaining shares are held by parties who are not organised together and are unlikely to be able to be organised together, constitute the power to appoint?

It was noted, that most preparers do not consider the above to be a control relationship and hence were not consolidating. The majority of Board members indicated that their intention in IAS 27 was to include the notion of de facto control (that is, control in the above circumstances would exist and therefore consolidation would be required). Board members acknowledged how constituents had arrived at their understanding of IAS 27 given the wording of that Standard.

The Board decided to make a statement via the IASB Update and its website indicating that it is aware of this divergence in practice and acknowledge the different interpretations until such time that the Board clarifies the control notion in its broader project on this issue.

Autopilots - control versus risks and rewards

The Board has asked the staff to develop consistent control criteria and a single comprehensive IFRS (to replace IAS 27 and SIC-12) for all entities, including SPEs. The Board discussed at this meeting one characteristic common to many SPE's: the setting onto autopilot of its operating and financing policies.

The Board discussed some of the tensions between the control model in IAS 27 and the risk and reward emphasis implicit in SIC-12.

In discussing the objective of presenting group accounts, which was suggested to be the presentation of the results of the operations and the financial position as if any legal boundaries did not exist; some Board members questioned the focus on legalities, as trusts and partnerships are generally not considered to be legal entities in many jurisdictions. Consequently, the guidance in ARB 51 was offered as supplementary material in developing the objective.

It was suggested that consolidated financial statements should reflect the activities and position of an economic entity. The Board discussed the concept of an 'economic entity' in the context of single source supplier and customer relationships which invariably result in a close association between the reporting entity and the supplier / customer. Board members indicated that they did not envisage the control notion capturing such relationships. On the issue of autopilot mechanisms, the Board made the following points:

• If management decisions have to be made on an ongoing basis, it is not an autopilot mechanism (otherwise any entity could be put onto an 'autopilot' mechanism)
• In a pure autopilot mechanism, the power criteria can in most cases be assessed as immaterial in assessing whether an entity is a subsidiary of another entity (versus the notion that power has already been exercised by setting up the autopilot mechanism).
• In the context of an example presented to the Board (paragraph 37 of the Observer Notes), it was noted that generally, certain autopilot mechanisms will represent interests in undivided assets, consequently the Board may require legal assistance in order to explore that further, noting that global applicability of that legal guidance will be problematic. However, Board members indicated that the example did not have the full facts and did not explore whether the arrangement is in fact a joint venture.

The Board noted that given the tensions between the control model in IAS 27 and the risk and reward emphasis implicit in SIC-12 it was difficult to envisage moving away from a risks and rewards model.

Further observations on the accounting for potential voting rights

The Board was asked to provide input on additional examples of the accounting for the consequences of consolidating an entity on the basis of potential voting rights. The staff indicated that they had found these examples helpful in the development of the control project, because they reflect the application of the concepts agreed to by the Board to date. It is important that the accounting for effective control is intuitive and consistent with the Framework. Working through examples also highlights potential inconsistencies with other standards that may require decisions by the Board.

A dual purpose of tabling these examples was to place them in the public domain via the Observer notes. Board members indicated that comments had been sent to the staff.

The Boards had previously agreed that performance obligations in revenue contracts should be disaggregated from the customer's perspective based on whether the deliverable has utility to the customer. In this meeting the Boards considered the following revised criteria for determining whether the deliverable has utility to the customer:

A good, service, or other right has utility to the customer if either:

• a. It is sold separately or as an optional extra by any vendor in the customer's reference market or it could be resold separately by the customer in that reference market, or
• b. It gives the customer an unconditional right that obligates the reporting entity to stand ready to provide goods, services, rights, or other consideration if specified events occur.

The Boards agreed that this definition was an improvement from that which had previously been considered. However, the Boards did not believe the requirement in (a) that the customer could resell it in that same reference market was necessary. The Boards agreed that the customer reference market is ordinarily the market that the customer buys in, that is, the market in which the entity and the customer transacted with each other. That being the case, measurement is normally appropriate at the price negotiated between the entity and the customer. It was agreed that practical guidance regarding the identification of customer reference markets will need to be provided.

Staff noted that the existing definition of 'performance obligation', which refers to an obligation to deliver goods or services, is inadequate, because it does not make reference to other rights which can be sold (for example a refund right.) Staff proposed the following revised definition:

A performance obligation is a legally enforceable obligation of a reporting entity to its customer, under which the entity is obligated to provide good, services or other rights.

The Boards agreed that this definition appeared appropriate. However the need for the word 'legally' to be included was debated, as 'legally' means different things in different jurisdictions, and if an obligation is enforceable, it is ordinarily legally enforceable, so that word might be superfluous and potentially confusing. The Boards agreed to delete 'legally' from the working definition at this time, but noted this decision might need to be revisited once the accounting for executory contracts had been considered.

Several Board members had expressed concern about the use of the term 'customer based value' in the revenue recognition project. The Boards agreed to rather use the term 'allocated consideration amount' which better describes what the Board was trying to identify by the term.

At previous meetings the Boards had agreed that the estimated sales price of a performance obligation should be measured using the most reliable available evidence, and agreed a hierarchy of reliability. In that hierarchy 'Level-4' was estimated current sales prices based on entity inputs that reflect the reporting entity's own internal assumptions and data. Staff proposed that this could be clarified by requiring entities to use average costs in their data, and requiring that items be assessed on a portfolio basis rather than on an individual contract basis (where such homogenous portfolios exist.) The Boards disagreed, believing that they should not be prescriptive in determining how to arrive at a Level-4 estimate.

Both Boards had considered the measurement of unconditional stand-ready obligations. The IASB had determined that these should be measured at fair value, for the purposes of consistency with the proposed amendments to IAS 37. The FASB had concluded that these should be measured at the allocated consideration amount for consistency with the remainder of the revenue recognition project. The Boards agreed that the allocated consideration amount approach should be considered first before the fair value alternative was developed. It was acknowledged that in developing fully the customer allocation approach, the IASB might be persuaded that the fair value approach did not need to be pursued. If both approaches are pursued the Boards will decide at a later date whether a preference should be expressed in the public consultation documents.

The Boards considered the effects of extinguishment of unconditional stand ready obligations, and confirmed their earlier decision that this would be presented as a credit to the income statement rather than as a reduction of any expense category. The Boards noted that all warranties (whether statutory, express, or implied) arise from revenue contracts (directly or indirectly), and their extinguishment is a revenue earning activity.

The Boards considered a range of examples the staff had prepared illustrating the implications of their decisions to date, and the differences between the allocated consideration amount and fair value approaches, and provided staff with feedback to assist them in further developing the model.

The Board considered the issues surrounding distinguishing transactions that give rise to revenues from those that give rise to gains. The Boards considered whether there might be a better criterion than 'ordinary activities' (IFRS) or 'major or central operations' (US GAAP). The Boards noted that in this context they did not see the notion of comparability as key. The staff proposed some new definitions that would focus this distinction on the provision by the entity of goods, services, or other rights to the customer. The Boards agreed to proceed with this work.