- Segment B: project objectives and planning.

Project scope

The Board affirmed and clarified (by a clear majority) the scope of their joint project with the FASB as follows:

• a. This project will address the organisation and presentation of financial information on the face of the financial statements; it will not address recognition or measurement guidance that is provided in other Statements/Standards.
• b. This project will address the necessity for totals and subtotals within the financial statements including the subtotal of net income/profit or loss. This project will assess whether to make changes to the mechanism of recycling as it is used today.
• c. This project will not include a comprehensive review of the notes to the financial statements. However, this project may result in amendments to existing disclosure requirements due to changes made to the face of the financial statements. In addition, this project may result in new disclosure requirements in areas where the project objective cannot be achieved on the face of the financial statements.
• d. This project will address all the financial statements that constitute a complete set of financial statements, not just the income statement/statement of recognised income and expense (statement of earnings and comprehensive income).
• e. This project will focus on a complete set of financial statements (most commonly annual financial statements); it will not address condensed financial information (most commonly interim financial information or reports). Reporting requirements for condensed financial information may be addressed, but that decision will be left open for now.
• f. The resulting standard will apply to all business entities (both public and non-public). However, the Boards will consider whether there should be different presentation provisions for financial institutions.
• g. The resulting standard will not apply to non-business entities such as not-for-profit organisations or defined benefit plans (therefore, it will not amend or replace FASB Statements 35 Accounting and Reporting by Defined Benefit Plans and 117 Financial Statements of Not-for-Profit Organizations).
• h. This project will not address:
  • i. Management discussion and analysis or management commentary
  • ii. Pro-forma measures (while pro-forma reporting, which is not part of IFRS/ GAAP, may diminish as the result of this project, reduction or elimination of pro-forma reporting is not an objective of this project)
  • iii. A comprehensive review of segment reporting requirements (FASB Statement No 131 Disclosures about Segments of an Enterprise and Related Information and IAS 14 Segment Reporting). However, this project may result in amendments to the segment reporting requirements due to changes made to the financial statements. (The IASB has issued ED 8 proposing amendments to IAS 14 as a separate short-term convergence project.)
  • iv. Financial ratios (except EPS and other per-share amounts)
  • v. Forecasts of information
  • vi. Non-financial ratios or other non-financial information
  • vii. Financial statements for specific industries (except for, as noted in (f) above, how the implications of decisions in this project may affect the financial statements of financial institutions).

Project objective

The Board agreed that the project's objective should be described as follows:

In this project, the Boards will address how the presentation of information in the individual financial statements (and in the financial statements as a whole) can be improved to help investors, creditors, and others fully understand an entity's financial position and changes in that position and use that information to assess the amounts, timing, and uncertainty of an entity's future cash flows.

In doing so, the Boards will address the classification and display of line items in the financial statements, including their aggregation into subtotals and totals. In addition, the Boards will address how to best present information in the financial statements so that those statements are complementary.

Project name

The Board agreed to change the working title of the project to 'Financial Statement Presentation for Business Entities'.

Working principles

The Board approved a set of 'Working Principles' designed to aid both it and the FASB in making specific decisions regarding how information should be displayed and presented in the financial statements. The following working principles are in no particular order (that is, they do not represent a hierarchy) and all have equal priority.

Principle 1

Financial statements should present information in a manner that portrays a cohesive financial picture of an entity and is comparative and consistent from one period to another.

Board members criticised the use of 'cohesive', which is not a word seen in IFRS materials. In addition, Board members expressed concern about how the staff was using 'comparable.' It was determined that, for the purposes of this project, comparable was with respect to the same entity through time; some Board members said that comparability among entities was also desirable.

Principle 2

Financial statements should present information in a manner that helps a user assess the liquidity of an entity's assets and liabilities (nearness to cash or time to maturity).

Principle 3

Financial statements should present information in a manner that separates an entity's value-creating activities from its capital activities.

This principle is likely to be redrafted to emphasise that the separation should be between transactions with owners in their capacity as owners; financing transactions not with owners; and other activities. Board members found the term 'value-creating activities' unhelpful.

Principle 4

Financial statements should present information in a manner that helps a user understand:

• a. The different methods used to measure assets and liabilities
• b. The relative precision of those measurements
• c. What caused a change in reported amounts of individual assets or liabilities (such as a transaction or a change in value or measurement method). [This was clarified as being the cost/amortised cost vs remeasurement issue.]

Principle 5

Information in the financial statements should be disaggregated and categorized into groups that respond similarly to changes in the same economic condition.

In deciding how to apply this Principle, the Boards will consider differentiation in display and presentation by nature or function; gross or net; continuing or discontinued operations; before or after income taxes; expected or known volatility; and the risks associated with the final settlement of the asset or liability.

Financial Statements

The Board agreed that the starting point for what constitutes 'a complete set of financial statements' should be as proposed in the March 2006 Exposure Draft of proposed amendments to IAS 1.

Purpose of each financial statement

The Board agreed not to define the purpose of individual financial statements.

Earnings per share

The Board agreed to defer consideration of per share amounts until after the initial document had been through the public comment process.

Conflicts with the IASB's March 2006 ED of proposed amendments to IAS 1

The Board agreed that decisions in this project should not be constrained by the amendments to IAS 1 proposed in the IASB's March 2006 ED. However, the Board agreed that it would have to be sensitive in this project to the progress of the IASB's work on the March 2006 ED, and the suggestions raised by constituents.

Discussion document

The Board agreed that the first product of the project should be a Discussion/Preliminary Views Document. The current plan is to issue the discussion paper some time in first quarter 2007. The staff acknowledged that this timetable was ambitious, but achievable.

The Board discussed how best to involve the Joint International Group in the run-up to issuing the discussion document. An open meeting in September was suggested. The staff will investigate this further.

The IFRIC staff reviewed the decision summary from the March 2006 IFRIC meeting (see also the IAS Plus Notes from this Meeting. They noted in particular that the IFRIC was likely to conclude on the dividing line between the financial asset and intangible asset models in the service concession project 'soon'.

Other projects before IFRIC illustrated stress points in current IFRS, for example IAS 18 (loyalty programmes) and IAS 39 (derecognition issues). Board members made comments on proposed Agenda Decisions, which will be considered by the IFRIC staff and the IFRIC at a future meeting.

The Board held a preliminary discussion of a potential joint IASB/FASB project on leasing transactions. The IASB and FASB are currently developing a project proposal that would then be subjected to each Board's agenda review process (in the IASB's case this would include a discussion at a future meeting of the SAC).

The staff asked the Board for its preliminary views on the potential agenda proposal, including the assessment of the agenda criteria, the proposal for a working group and the outline project timetable; for any further points that should be made to the SAC in its consideration of the agenda proposal; for its views on the form a joint project with FASB could take; whether and when consultation through an advisory working group or focus groups would be appropriate, and the form such consultation could take.

The Board continued its discussion of a draft ED of proposed amendments to IAS 32 Financial Instruments: Presentation.

Sweep issues arising from the pre-ballot draft

A formula to determine fair value of financial instruments puttable at fair value by an entity that is not publicly accountable

The Board had previously allowed use of a formula to estimate fair value of financial instruments puttable at fair value upon issuance, redemption or repurchase of the instruments, provided that the formula is intended to approximate fair value. A national standard-setter had requested clarification about whether an instrument's pro rata share of the entity at book value qualifies as a formula.

The Board agreed that an amendment setting out that using the pro rata share of net assets of the entity at book value is not considered to be a formula that approximates fair value, except in rare cases when there is no material difference.

Appropriate guidance for determining fair value

A national standard-setter had requested that the exception in subparagraph 46(c) of IAS 39 be included in reference to guidance on determining fair value in the proposed amendments to IAS 32. This would imply that non-public entities would be allowed to redeem or repurchase puttable instruments at the instrument's cost and to classify these as equity.

The Board agreed that such a reference as the sub paragraph is only relevant for the measurement of the equity instruments of other entities, and not for when an entity measures its own equity instruments.

The issue price of an ordinary share puttable at fair value issued upon conversion of a convertible bond

The staff had been asked to consider whether the price of an ordinary share puttable at fair value issued upon conversion of a convertible debt instrument is considered to be at fair value. If not, the shares will not qualify for equity classification.

The staff identified two issues. The first issue was that this scenario would create an option embedded in the convertible bond that would have to be separated and accounted for as a derivative that meets the definition of a financial liability. The second issue the staff identified was that financial instruments puttable at fair value would only be considered issued at fair value if the fair value of the consideration received equals the fair value of the instruments issued (and thereby be qualified for equity classification).

The Board decided that the staff should draft application guidance for this issue.

Analysis of benefits and costs

The Board decided that they would consider this analysis at a later meeting.

Transition and effective date

The Board decided: on three staff proposals:

• The ED should not specify a proposed effective date. This issue will be left open for the moment.
• Early adoption will be permitted.
• The amendments will be applied retrospectively for both first time adopters as well as current users of IFRS.
• The Board agreed to provide an exemption from applying the requirement of IAS 32 retrospectively for compound financial instruments. Because the proposal was to apply the amendments retrospectively, a compound instrument with an obligation for a pro rata share of net assets arising on liquidation would have to be separated into a liability and an equity component from the instrument's inception (ref to point c) under sweep issues). At the date of application it could be that the liability component (the derivative) no longer is outstanding, that is, separation would have no benefit. This is the exact same reason there already is an exemption for applying the requirements in IAS 32 retrospectively for compound financial instruments under IFRS 1.

The Board has decided to issue an exposure draft with an amendment to IAS 23 to remove the option to expense borrowing costs when they are incurred.

The Board agreed that this amendment should not be applied to borrowing costs directly attributable to the acquisition, construction or production of qualifying assets measured at fair value (such as biological assets). If this exception were not made, entities would be forced to capitalise interest costs on this assets, only to then write them back off again when remeasuring the assets to fair value.

The Board continued its deliberations on business combinations. FASB staff participated in this session. Staff presented the following five papers:

• Business combination principles
• Accounting for partial and step acquisitions, changes in controlling ownership interests, and loss of control with a retained ownership interest
• Accounting for bargain purchases and overpayments
• The nature and classification of noncontrolling interests in the consolidated balance sheet*
• Presentation and disclosure of information about changes in controlling ownership interests*

Discussion of the fourth and fifth of these papers on continued on Thursday 30 March.

Business combination principles

The purpose of this paper was to outline to the Board the basic presumptions, assertions and principles that form the foundations of the BC ED proposals. The paper also summarised the scope of the project and the main implications of the presumptions, assertions and principles. This was in response to concerns expressed by some respondents that the project had gone beyond its original scope and resulted in proposals that are fundamentally different from current practice.

The Board affirmed and endorsed the following definitions, assertions, presumptions and principles as an appropriate basis for the standard (vote 11/3):

Basic assertions and definitions

• A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.
• An acquirer can be identified in every business combination.
• The business combination acquisition date is the date the acquirer obtains control of the acquiree.
• A business combination is accounted for by applying the acquisition method.
• By obtaining control of an acquiree, an acquirer becomes responsible and accountable for all of the acquiree's assets, liabilities and activities, regardless of the percentage of its ownership in the acquiree.

Principles and presumptions for applying the acquisition method

• Recognition In a business combination, the acquirer recognises all of the assets acquired and all of the liabilities assumed.
• Measurement In a business combination, the acquirer measures each recognised asset acquired and each liability assumed at its acquisition-date fair value. The acquisition-date fair value of the consideration transferred by the acquirer is presumed to be the best evidence of the fair value of the interest acquired.

Disclosure

• Users of the acquirer's financial statements should be able to evaluate the nature and financial effect of business combinations recognised by the acquirer.

Board members generally agreed to the principles proposed by the staff.

The issue that raised most discussion was the principles and presumption in relation to recognition of goodwill. The proposal would result in the acquirer recognising all of the goodwill at the acquisition date, including goodwill related to the non-controlling interests (the 'full-goodwill method'), which will be a change from the requirements in the existing IFRS 3. Some Board members indicated that they would prefer the current approach where the acquirer recognises the full fair value of all assets and liabilities except from goodwill, and only its own purchased share of the acquiree's goodwill.

Accounting for partial and step acquisitions, changes in controlling ownership interests, and loss of control with a retained ownership interest

1. Partial and step acquisitions

The following issues were discussed and decided on:

• Measurement of the identifiable net assets in a partial or step acquisition; The Board affirmed the proposal in the BC ED that in a partial or step acquisition the acquirer would measure the acquiree's identifiable assets and liabilities at 100 percent of their fair values on the acquisition date (vote 13/1).
• Measurement of goodwill in a partial or step acquisition; The Board voted 8/6 that the full goodwill method be applied(recognising goodwill for both the purchaser and the non controlling interests share). They believed that the only compelling argument in support of the purchased goodwill method is reliability of measurement. However, they did not believe that the concerns expressed about reliability of measurement outweigh the benefits of improved relevance and transparency of financial statements and reduced complexity. The full goodwill method would also be consistent with the principle that the acquirer should recognise all assets and liabilities in a business combination. Again some Board members raised remarks that they had concern about this, as they had a preference for applying the purchase method for goodwill.
• Accounting for the acquirer's previously held equity interests in the acquiree in a step acquisition; The Board voted 7/5 (2 abstained) in favour to proceed on the basis that obtaining control or losing control of an entity is a remeasurement event. Remeasurement adjustments would therefore be recognised in net income/profit or loss. In addition to the reasons cited above, the staff preferred not to recognise such remeasurement adjustments in other comprehensive income/directly in equity because those adjustments would be 'trapped' indefinitely until the acquirer sells the business or even permanently if the acquirer never sells the business. The staff also proposed that the acquirer disclose the amount of any gain or loss recognised and the line item in the income statement in which that gain or loss is presented. The staff believed that disclosure will mitigate the concerns expressed by respondents. All Board members agreed that this would be a remeasurement event, but Board members seemed to be somewhat split between recognising this in profit and loss or in other comprehensive income.

2. The accounting for loss of control of subsidiaries

The staff proposed the following alternative for measuring and recognising any retained noncontrolling equity investment on the date control is lost: Any retained noncontrolling equity investment should be remeasured to fair value on the date control is lost, and the remeasurement gain or loss should be recognised in net income/profit or loss.

The Board agreed with the staff's proposal.

Accounting for bargain purchases and overpayments

Bargain purchases

The staff recommended that the Board:

• Affirm that bargain purchases can occur and that an economic gain is inherent in a bargain purchase transaction. Therefore, conceptually, the acquirer should recognise a gain on the acquisition date.
• Affirm the proposed accounting for bargain purchases in the Business Combinations II exposure draft.
• Acknowledge that the accounting for a bargain purchase is an exception to the principle that the acquirer should recognise all of the assets acquired and all of the liabilities assumed since any positive goodwill would be reduced to zero before recognising a gain. (Goodwill is already an exception to the fair value measurement principle.)
• Acknowledge that the accounting for a bargain purchase is consistent with the overpayment decision in that it is based on the notion that measuring the consideration paid by the acquirer on the acquisition date is generally more reliable than measuring the fair value of the interest acquired using other valuation techniques.

The Board agreed with the proposal by the staff as a working decision, but indicated that the issue had to be brought back at a later meeting for more extensive discussion.

Overpayments

The staff recommended the following accounting:

• Affirm the proposed accounting for overpayments in the Business Combinations II exposure draft.
• Acknowledge that the accounting for overpayments is an exception to the principle that the acquirer should recognize all of the assets acquired and all of the liabilities assumed since any the overpayment, which is not an asset, would be subsumed in goodwill. (Goodwill is already an exception to the fair value measurement principle).
• Acknowledge that the accounting for overpayments is consistent with the bargain purchase decision in that it is based on the presumption that measurement of the consideration paid by the acquirer on the acquisition date is more reliable than measuring the fair value of the interest acquired using other valuation techniques.

The Board agreed with the staff proposal

Disclosure

The Board agreed with the staff's proposed disclosure requirements.

Note: Discussion of this topic continued on Thursday 30 March 2006.

The Board discussed the quarterly technical plan. Visitors to IAS Plus should note that the following EDs are expected in the second quarter of 2006:

The staff made a presentation on the objectives of this project and the project plan.

The objective of this session was to provide the Board with an update on the work of the definition stage of the project; discuss some questions brought forward by the staff; and decide on the direction of future work on the project in light of the IASB's decisions in relation to the short-term convergence project.

At the December 2005 meeting, the Board had asked the staff to explore whether substantive guidance could be developed to distinguish jointly controlled assets or operations and jointly controlled entities. At this stage of the project, the staff had addressed classification of joint arrangements for accounting purposes by proposing to divide arrangements into:

• non-integrated resource arrangements in which the participants continue to hold direct rights in assets contributed and assume direct responsibilities for obligations arising from the joint economic activity. In this case, each participant primarily pursues its own economic activity within the arrangement to achieve its own specific objectives
• integrated resource arrangements, where rights in assets and responsibilities for liabilities reside with the joint arrangement itself, which utilises them to achieve its own separate objectives. The arrangement is a separate entity carrying on an economic activity of its own. It has a separate decision making identity.

Classification as integrated/non-integrated arrangement would be based on an analysis of the specific features in the arrangement as described in the bullets above. Furthermore the staff introduced some indicators that should give additional guidance on whether a joint arrangement exists.

The Board had a lengthy discussion, which did not take a clear path. It was rather obvious that the Board had no consensus on how they wanted to pursue the definition issue. However, Board members expressed their concern about the proposed model, and how it defined whether a joint venture could exist or not, and it was clear that the Board did not agree with the starting point of the staff, that existence of a joint venture should be defined by whether the arrangement is set out in a separate entity or not (this is in accordance with statements the Board have made at previous meetings). Rather the Board seemed to think that a joint venture would be defined based on the nature of the contractual arrangement.

Board members discussed the various scenarios set out in the staff paper and indicated that it was difficult to articulate what are the key differences between an undivided interest and a joint venture.

The Board also discussed the approach to joint control. Board members expressed that the first question that needed to be asked, before defining whether a joint venture exists, is whether the arrangement is jointly controlled. If the arrangement is not jointly controlled by the parties involved, no special accounting rules should apply. It was expressed that this concept had to be explored further and integrated in the decision process for whether you define the arrangement as a joint venture or not.

The Board also reiterated the fact that the project should not be over-complicated as the primary objective in the short-term convergence project was to get rid of proportionate consolidation as an accounting option in IAS 31.

It was decided that the staff should go back and redraft their papers based on the discussion the Board had during this session and bring them back at a later meeting.

The Board continued the review it began in January of a preliminary draft of an Exposure Draft (ED) of an IFRS for Small and Medium-sized Entities (SMEs). In reviewing the draft ED, Board members considered the recommendations made by its SME Working Group, which reviewed the draft at its 30-31 January 2006 meeting.

The Board made the following tentative decisions:

Accounting policy options for SMEs

The Board was informed of constituents' wishes for a stand-alone standard without accounting alternatives. The staff informed the Board that to date their recommendations for the SME standard had been based on an assessment of what is viewed as the simpler alternative where such alternatives exist in the main IFRS. The Board reaffirmed its previous decision that all accounting policy options included in IFRSs should also be available to SMEs in the IFRS for SMEs and that a question should be added to the exposure draft to allow constituents to comment on this issue after reviewing the Board's proposals.

Construction contracts

Use the percentage of completion method, provided that the stage of completion, future costs, and collectibility can be estimated reliably. Include the standards on construction contracts in the section on revenue.

Government grants

An SME would use the principle for recognising grants in IAS 41 Agriculture as the basic principle for recognising all grants. However, an SME wishing to use one of the alternatives in IAS 20 Accounting for Government Grants and Disclosure of Government Assistance would be permitted to do so by cross-reference to IAS 20. Under the IAS 41 approach:

• (a) an unconditional grant would be recognised in income when the grant is receivable
• (b) a conditional grant would be recognised in income when the conditions are met;
• (c) grants would be measured at the fair value of the asset received; and
• (d) grants received before the income recognition criteria are satisfied would be recognised as deferred income (a liability).

Borrowing costs

Only the expense model will be included in the IFRS for SMEs. However, an SME could choose to use the capitalisation model by applying IAS 23 Borrowing Costs. The ED will note that the IASB has agreed to issue an exposure draft of an IFRS proposing to prohibit the expense model and invite comments on whether that is appropriate for SMEs as well.

Share-based payment

The IFRS for SMEs will address cash-settled options and will refer back to IFRS 2 Share-based Payment with respect to equity-settled share-based payments. The IFRS for SMEs will note that IFRS 2 permits the use of the intrinsic value method if fair value cannot be reliably measured.

Impairment of non-financial assets

This section will cover all non-financial assets in one place. The principle would be that non-financial assets other than inventories should not be measured at more than fair value less cost to sell. Inventory should not be measured at more than net realisable value.

Employee benefits

This section will include standards for:

• (a) short term benefits;
• (b) the following kinds of retirement plans: multi-employer plans, state plans, insured plans, and defined contribution plans. However, defined benefit retirement plans will be addressed by cross-reference to IAS 19;
• (c) other long term benefits (including deferred compensation and long-service payments) and termination benefits (measurement at discounted present value, actuarial valuation not required, need not use the projected unit credit method).

Income taxes

Deferred tax assets and liabilities will be recognised for all temporary differences between the carrying amounts and the tax bases of assets and liabilities (the various exceptions and special rules in IAS 12 Income Taxes would be eliminated). Staff indicated that it will consider whether to make a special recommendation to the Board regarding deferred tax assets arising from operating loss carryforwards.

Interim financial reporting

Instead of having a separate section on interim reporting, the IFRS for SMEs will cross-refer to IAS 34 Interim Financial Reporting for guidance. However, the IFRS for SMEs will expressly permit an entity that is not subject to a periodic interim reporting requirements to present, as comparative information, a statement of income and retained earnings (or separate income and equity statements) and a cash flow statement of the immediately preceding year when the year-to-date comparative statements otherwise required by IAS 34 have not been prepared previously.

Classification of instruments as debt or equity

The exposure draft will acknowledge that the IASB and FASB are working jointly on standards for classifying puttable shares and similar instruments as debt or equity and will indicate that the final IFRS for SMEs would reflect the decision(s) in that project.

Note: This is a continuation of the discussion on Wednesday 29 March 2006.

The nature and classification of non-controlling interests in the consolidated balance sheet

Staff noted that respondents did not raise any compelling arguments to classify non-controlling interests in subsidiaries as something other than equity. The Board reaffirmed its previous decision that non-controlling interests in subsidiaries are equity and should be presented in the consolidated balance sheet within equity, separately from the parent shareholders' equity.

Presentation and disclosure of information about changes in controlling ownership interests

The staff informed the Board that most respondents disagreed with the proposals in the NCI exposure draft. Many respondents disagreed that changes in controlling ownership interests should be accounted for as equity transactions. That is because they believe that parent entity shareholders view purchases and sales of non-controlling interests as transactions with third parties that produce significant economic effects that should be recognised in net income/profit or loss. To address respondents' concerns that the proposals in the NCI exposure draft do not adequately address the information needs of parent entity shareholders, the staff proposed the following presentation/disclosure formats for changes in controlling ownership interests:

• Alternative A - Presentation only in the consolidated statement of changes in equity, if presented, otherwise separate note disclosure
• Alternative B - In addition to presentation in the statement of changes in equity, disclosure of a supplementary schedule in the notes to the consolidated financial statements
• Alternative C - Introduce a new statement to the set of consolidated financial statements or disclose at the bottom of the consolidated income statement.

The Board agreed that additional disclosure should be provided and asked the staff to consider other more complex instruments such as puts on minority interests to ensure the proposals capture such instruments adequately.

Reporting entity

The staff proposed that an entity for financial reporting purposes should not be limited to legal entities. The staff proposed that an entity be defined as follows (amended for Board comments at the meeting):

An entity is an economic unit that has the capacity to engage in transactions with other entities.

The exact wording will be refined as necessary during the course of the project. However, what these words are intended to convey is that an entity for financial reporting purposes:

• (a) Is broader than legal entities, hence the use of the word economic;
• (b) Has a cohesive or unified organisational structure, such that it has observable boundaries and therefore can be distinguished from other parties that have an interest in it, such as investors and creditors.

The Board agreed with the staff proposals as well as the fact that what constitutes an entity for financial reporting purposes includes; a natural person, sole proprietorship and a branch or segment of a legal entity. However, a mere collection of assets and liabilities would not constitute an entity. In this regard, the staff were asked to consider more closely, the definition in IFRS 3 of a business.

Parent-only entity

Sometimes a parent entity might prepare parent-only (separate) financial statements, in addition to (or instead of) consolidated financial statements. The Board agreed that the parent should be considered an entity according to the proposed definition. However there was some discussion about whether parent-only financial statements faithfully present decision-useful information as they do not display the actual underlying assets and liabilities of subsidiaries that are effectively under the parent's control (instead, only the investment in subsidiaries is displayed, at cost or in accordance with IAS 39). The consequence of this view is that parent-only financial statements would not be viewed as general purpose financial statements as they are 'incomplete'.

Other Board members pointed out that the parent-only financial statements contain information that is useful to shareholders, for example the dividend flows that are paid out of the parent entity alone (not necessarily the group).

Policyholder participation rights

Some insurance contracts give the policyholder both guaranteed benefits (these are benefits to which a particular policyholder has an unconditional right that is not subject to the discretion of the insurer, for instance, a death benefit) and a right to participate in favourable contract performance, but the insurer has constrained discretion over the amount and/or timing of distributions to policyholders. Similar policyholder participation rights are also found in some investment contracts (financial instruments) sold by insurers. The Board discussed whether an insurer should classify policyholder participation rights:

• (a) entirely as a liability, or
• (b) entirely or in part as an equity component of a compound contract that also contains a liability component. The liability component is the obligation to provide guaranteed benefits.

To aid the discussion, the Board considered various examples. In some scenarios the Board indicated its leaning but in other scenarios the staff were asked to explore, in more detail, how the contracts work in practice.

Separate from the individual examples discussed, the Board was asked to consider available accounting models and indicate its preference. The options discussed were:

• (a) policyholder participation rights do not create an obligation until a particular policyholder has an unconditional right to a distribution arising from that right.
• (b) if the policyholder participation right does not create an obligation, that suggests that a participating policyholder is buying a compound instrument with two components: a liability (the stand-ready obligation to pay the guaranteed benefits) and an equity component (the participation right).

The Board suggested a third alternative which received majority support. Under that model, there would be no split accounting, as this was viewed as onerous and conceptually flawed because it is questionable whether simply because the liability definition has not been met, the default classification is equity - the Framework states that if the liability definition is not met, recognise income. Under this alternative, when dividends are declared, the participation therein would be expensed in the income statement. The Board did not favour an allocation of net income between shareholders and participating policyholders (similar to the allocation required by equity holders of the parent and minority interests required for consolidated financial statements).

Investment contracts

For policyholder participation rights in investment contracts, the Board agreed with the staff recommendation to account for them in the same way as for participation rights in insurance contracts.

[The following portion of the discussion was held on Friday 31 March 2006]

Estimating cash flows

The Board discussed an 'early version' of material that could be included in the forthcoming Discussion Paper. [This session was very difficult to follow.] There was a long debate around the following principle and its application. The Board tentatively agreed that:

In estimating the current [entry/exit] value of insurance liabilities, an insurer should develop estimates of cash flows that:

• (a) are explicit;
• (b) incorporate, in an unbiased way, all available information about the amount, timing and uncertainty of all cash flows arising from the liabilities;
• (c) are as consistent as possible with observable market prices; and
• (d) correspond to conditions at the end of the reporting period.

Risk margins

The Board agreed that:

• the objective of a risk margin is not to provide a shock absorber for the unexpected, nor is it to enhance the insurer's solvency. Instead, the objective is to convey decision-useful information to users about the uncertainty associated with future cash flows. A risk margin will satisfy that objective best if it is consistent with an unbiased estimate of the compensation that market participants would demand for bearing the risk in question; and
• the Board should not prescribe specific techniques for developing risk margins. Instead, the Board should explain in the Discussion Paper (and ultimately in an IFRS) the attributes of techniques that will enable risk margins to convey useful information to users about the uncertainty associated with risk margins.

Embedded derivatives

The Board discussed the treatment of embedded derivatives (including embedded options and guarantees) included in a host insurance contract that is measured at current entry value. This was a preliminary discussion and the Board was not asked for a view.

Discount rates

The Board agreed that the objective of the discount rate is to adjust estimated future cash flows for the time value of money. The discount rate should be consistent with observable market prices for cash flows whose characteristics match those of the insurance liability in terms of timing, currency and liquidity. The observed discount rate should be adjusted to exclude any factors that influence the observed rate but are not relevant to the liability (for example, risks that are not present in the liability but are present in the instrument used as a benchmark). The Board agreed that, at this stage, it would not provide further guidance on how to achieve that objective.

Recognition and derecognition

The Board agreed that the conclusions in IFRS 4 Insurance Contracts with respect to the derecognition of an insurance liability are still valid.

Project plan

The Board received the latest project plan for the project. The current expected publication date for the Discussion Paper is December 2006.

The Board discussed two alternative basis of revenue recognition; extinguishment-based method (EBM) and performance-based method (PBM) in the context of various examples prepared by the staff. Concern was raised about how the EBM model could be applied - in particular, how legal extinguishment could be assessed in all cases. The Board agreed to pursue a hybrid model that encompasses both the EBM and PBM models.

The Board also discussed the notion of customer 'utility' and appeared to agree that this term is unclear. The Staff were asked to articulate this notion on the basis of whether a customer is better off after the entity's performance (or part performance) compared to the situation prior to that performance.

with respect to determining cost of subsidiaries in separate financial statements of a parent

The IASB considered a proposal to prepare an amendment to IFRS 1 First-time Adoption of IFRSs to address problems in the separate financial statements of the parent.

• Initial cost. In some cases it is difficult to determine the initial cost of an investment in a subsidiary in the separate financial statements of a parent, in accordance with IAS 27 when an entity adopts IFRS for the first time. This difficulty has been highlighted by the use of merger relief accounting in the United Kingdom and other countries. Under merger relief accounting, any shares provided as consideration for the purchase of an investment in a subsidiary are recorded (for the purposes of cost) at their nominal value. This nominal value is not cost in accordance with IAS 27, which requires that the cost be stated initially at the amount of consideration paid.
• Post acquisition dividends. IAS 27 requires that the initial cost is adjusted for any dividends paid out of pre-acquisition reserves, and impairments. When the cost of investment is restated under IAS 27, on transition to IFRS, the pre-acquisition retained earnings would also need to be restated accordingly in order to determine which distributions are a recovery of the initial investment. This would require a reconstruction of pre-acquisition reserves under IFRS. Constituents argue that the related compliance burden has led to many entities choosing to prepare the separate financial statements of parent entities in local GAAP rather than in accordance with IFRS.

These issues had been raised to the IFRIC. The IFRIC referred them to the IASB on the grounds that this is not a matter of interpretation, the standards are clear and do not provide any basis for granting the relief sought.

The staff stated that preparing the amendment would not consume excessive resources. The Board concurred and agreed to add this project to its agenda. It was noted that, although an amendment to IFRS 1, the amendment would not affect the stable platform (because it applied only to separate financial statements) and would help IFRSs gain wider acceptance.

The Board continued its redeliberations of proposed amendments to IAS 37.

Scope

The Board agreed that:

• (a) IAS 37 applies to all liabilities not within the scope of another Standard.
• (b) The wording in paragraph 7 of the ED be improved specifically to clarify that items presented as credits on the balance sheet that arise from the operation of IAS 18 Revenue are outside the scope of IAS 37.
• Board members noted that the dividing line between 'deferred revenue' and other non-financial liabilities was not well defined in IFRS, but is important because of the fundamentally different accounting that results from following IAS 37 as opposed to IAS 18. The staff acknowledged this tension and promised to revisit it.
• (c) The Basis for Conclusions should be expanded to explain the analysis undertaken that leads the Board to believe that the requirements of IAS 37 are appropriate for all liabilities.
• (d) The term 'provision' should not be a defined term in IAS 37 [the Board wants to avoid using it altogether].
• (e) The term 'liability' should be used to describe liabilities within the scope of IAS 37 [that is, the ED term 'non-financial liability' will not be carried forward to the final standard].
• (f) The scope section include positive examples of liabilities within the scope of the Standard.

Possible additional topics

The Board considered whether five topics raised by constituents during the comment letter process should be added to the project. The Board decided not to add the following items:

• Recognition and measurement guidance in IAS 38 Intangible Assets
• Onerous contracts There was a brief discussion on this topic. It was noted that there is often difficult to distinguish an out-of-the-money forward from an onerous contract. They distinguishing feature was whether the forward would settle in cash. If it would settle in cash, it would be within the scope of IAS 39; if not cash settled, it would be an onerous contract within the scope of IAS 37.
• Application guidance for specific staff benefit plans
• Measurement guidance for non-financial liabilities

However, the Board agreed to provide measurement guidance on reimbursement rights in the final standard.

The Board discussed the general approach the staff is intending to take on this project and, in particular, how it intends to monitor and interact with the concurrent project to revisit the IASB's Framework.

Timing and interaction with the Framework project

The Board agreed that the Framework was the appropriate location of the general concepts (e.g., that financial statements should present the financial position, etc, of the parent and all entity that it controls) and that the standards on consolidation should house the detail of how that concept is made operational. The Board agreed that it would be ideal if the application dates for the proposed replacement for IFRS 3 and the amendments to IAS 27 under the current phase of the Business Combinations project were aligned with the proposed replacement of IAS 27 under the consolidations project.

The Board also agreed that the consolidation project should not delay the completion of the project to replace IFRS 3, which is currently scheduled for completion in 2Q 2007. The staff currently intends to proceed directly to an exposure draft, on the basis that the overall approach to consolidation will not change (it will still be control), rather the Board will be providing greater specificity around how the control model is applied. While giving their tentative approval to this approach, Board members warned the staff that constituents might not see the proposals in the same manner.

Special purpose entities

The Board was notified that Ed Trott, an FASB member, will present an educational session on the development and problems of FIN 46(R) during the April Board meeting. Several Board members noted that the session should help to convince the Board that the FASB model is not an optimal answer.