Non-controlling Interests and Goodwill: Follow-up

Basis for a measurement exception

At the December 2006 meeting the Board members voted 9 to 5 in favour of the principle of full goodwill. However, the Board decided by majority of 9 votes to allow an exception to the principle.

It appeared that the majority of those Board members who favour an exception that it should be on the basis of practical difficulties (availability of data) and/or cost-benefit considerations. One Board member noted that the full goodwill principle might result in non-relevant information. For example, in case of various layers of NCI the Board member observed that the block premiums might lead to the situation that the total of fair value of the controlling interest and fair value of NCI exceeds the fair value of the acquired entity.

The Board could not agree on the rationale for an exception. The Board members in favour of exceptions were asked to discuss the various possibilities with the staff in small group sessions.

Control Model

Under the control model no additional goodwill is recognised after the acquisition date (i.e. once control is obtained) even if additional non-controlling ownership interests are acquired. It is also not derecognised if some ownership interests are sold but control is not lost. Consequently, any changes in the ownership interests after the acquisition that do not cause the acquirer to lose control would be accounted for as transactions between owners (i.e. transactions within equity). The Board decided by a majority of 10 votes that this model should be applied irrespective of how NCI and goodwill are measured.

In this context the Board discussed whether measuring NCI at a basis other than fair value is a 'measurement issue' or a 'recognition issue'. Some Board members are of the opinion that the exception would result in a 'recognition issue' since a part of the goodwill would not be recognised. No decisions were made in this respect.

Applying the measurement exception

The following alternatives were discussed:

• Principle of full goodwill as the required principle with an exception under certain circumstances (that would still have to be agreed by the Board)
• Accounting policy choice, that is, the acquirer should be permitted to assess whether to measure NCI at fair value or not

No decisions were made. However, it appeared from the discussion that the alternative treatment (the exception) would be to value NCI as a proportion of the acquiree's identifiable net assets.

The Board decided first to agree on the rationale for an exception as this might influence the decision on this issue.

Income Taxes

The Board unanimously affirmed the following decisions:

• Exception to the fair value management principle for assets and liabilities for income taxes Income taxes should be accounted for in accordance with the guidance in IAS 12 Income Taxes, as amended by the amendment to IFRS 3.
• Require that the acquirer recognises separately from the business combination accounting any changes in its deferred tax assets because of the business combination. Such changes should be recognised in post-combination profit and loss or equity.
• Recognition of changes to the acquired deferred tax benefits subsequent to the acquisition The Board decided to modify slightly the amendments to paragraph 68 of IAS 12 to:

  a. Include a rebuttable presumption Require that qualifying measurement period adjustments (both increases and decreases) in the acquired deferred tax benefits recognised within one year from the acquisition date the measurement period be recognised as an adjustments to goodwill (until increases in the acquired deferred tax benefits recognised would be limited to reducing goodwill is reduced to zero). b. Require that other changes in the acquired deferred tax benefits one year from the acquisition date be recognised in income, rather than as an adjustment to goodwill.

• Recognition of changes to tax uncertainties subsequent to the acquisition

The Board decided to account for these changes in the same way as for changes to the acquired deferred tax benefits subsequent to the acquisition (see above). It was decided not to address tax uncertainties in paragraph 68 of IAS 12.

• Recognition of deferred tax assets and liabilities for indefinite lived intangible assets The Board affirmed the requirements of IAS 12, that is, decided not to provide an exception to comprehensive recognition of deferred tax assets and liabilities related to indefinite lived intangible assets.

Contingencies

The Board agreed to the overall approach that the amendments to IFRS 3, including guidance for accounting for contingencies acquired/ assumed in a business combination, should be finalised before the IAS 37 project. The results of the IAS 37 project might then lead to subsequent amendments to the (amended) IFRS 3.

The staff recommended that the Board retain the IFRS 3 guidance for the accounting for contingencies acquired/assumed in a business combination with the following improvements:

• Eliminate the term contingent liability from the business combinations standard. This would clarify that only those items that meet the definition of a liability should be recognised (i.e. 'possible obligations' should not be recognised).
• Remove the probability recognition criterion from the business combinations standard.
• Clarify that 'possible assets' should not be recognised even if the realisation of income is virtually certain.

The proposal would result in:

• contingencies acquired/assumed in a business combination being measured at fair value;
• a contingency acquired/assumed in a business combination being recognised only when it satisfies the definition of an asset or liability and its fair value can be measured reliably; and
• Subsequent to initial recognition, contingencies being measured at the higher of (a) the amount that would be recognised in accordance with IAS 37 or (b) the amount initially recognised less any amortisation recognised under IAS 18.

The Board unanimously agreed to the staff proposal.

Employee Benefit Plans

Paragraph 48 of the current version of the BC ED exempts post-employment benefits, under IAS 19 Employee Benefits from fair value measurement. The Board decided to extend this exemption to all employee benefits that are within the scope of IAS 19.

Valuation Allowances

Paragraph 34 of the BC ED states:

The acquirer shall not recognise a separate valuation allowance as of the acquisition date for assets required to be recognised at fair value in accordance with this [draft] IFRS. For example, an acquirer would recognise receivables (including loans) acquired in a business combination at fair value as of the acquisition date and would not recognise a separate valuation allowance for uncollectible receivables at that date. Uncertainty about collections and future cash flows is included in the fair value measure.

Respondents from the financial services industry raised the following concerns:

• The measurement of receivables acquired in a business combination at fair value would bear high compliance costs and the proposal would not be cost-beneficial
• For practical purposes, the fair value of receivables acquired in a business combination should be measured on a portfolio basis
• An acquirer should be allowed to present a valuation allowance for assets acquired in a business combination

The Board affirmed that receivables should be measured at fair value as of the acquisition date and that only the net amount should be presented on the face of the balance sheet.

The Board acknowledged that the historical performance of receivables is of relevance for users and that the presentation of gross amounts and allowances in the notes would be useful. Some Board members pointed out that separate disclosure of the fair value adjustments as of the acquisition date might also be of relevance. The FASB staff mentioned that the FASB is going to discuss a similar issue in its February meeting. The Board decided to discuss disclosure requirements at a future meeting and to take the outcome of the FASB meeting into account.

The Board noted that guidance on the unit of measurement would not be necessary since the unit of measurement should have no effect on the fair value as of the acquisition date.

Discussion of timetable for developing an Agenda Proposal

AASB staff participated in London and by video link from Melbourne.

The Board discussed the timetable for developing an Agenda Proposal for a joint IASB/FASB project to develop a new or revised accounting standard on intangible assets. The project is a Memorandum of Understanding item.

The Board agreed the proposed timetable, which envisages a Discussion Paper being issued in the third quarter 2009. However, many Board members expressed concern about the degree of detail in the papers submitted (and available on the IASB's Website), thinking it too much at this stage.

Concerns were expressed about the interaction of the intangibles project and other matters on the IASB's agenda, some of which should be regarded as precedential because they will equip the Board with the tools necessary to address the issues in the intangibles project. A Board member noted that one of the most important tools would be an agreed definition of an asset, as neither academics nor users nor standard-setters had yet agreed on a definition. Another would be to identify the appropriate measurement attribute. In addition, the project plan had to be realistic and identify who was going to undertake it and by when.

Board members noted that it in a recent meeting with users, some analysts had expressed concern about the recognition of internally-generated intangible assets. Those users were sceptical about the reliability of measurement of such items and suggested that disclosure of expenditure and the nature of the item might be a more useful substitute and enable analysts to value the asset.

Scope

The Board reconfirmed the scope of the project as examining the acquisition of intangible assets other than through a business combination (the latter are the subject of the revisions to IFRS 3 Business Combinations). 'Acquisition' included acquiring an intangible in an exchange transaction and through internal generation.

Another tension would be the dividing line between an intangible asset and a financial instrument, something that the IFRIC has had to address twice, in IFRIC 3 (since withdrawn) and IFRIC 12.

Assessment against IASB Agenda Criteria

The Board noted that the project met all the criteria for a Board Project. In pursuing the project, it would be important to involve the FASB staff at an early stage. The AASB staff expressed a desire to continue their involvement, although the lead staff would be IASB and FASB, as this was a MoU project.

The Board agreed that a Working Group would be useful. In addition, Board members suggested that staff meet with representatives of business sectors such as pharmaceuticals, telecommunications, film, computer software, etc, as these were sectors in which intangible assets arise most frequently.

The AASB staff will refine the Project Proposal with a view to reviewing it with the Trustees and SAC in the third and final quarters of 2007 such that the IASB can take a formal Agenda Decision in December 2007.

Round-table discussions: summary report

The IASB staff presented a 'Summary of Outcomes' of the roundtable discussions held in the US, UK and Australia during November and December 2006. It is intended that a revised version of the agenda paper would be posted to the IASB Website as a permanent record of these meetings.

Board members thought that the summary was both comprehensive and balanced. However, a disclaimer should be included to the effect that the summary reflected participants' views and assertions and that the roundtable meeting format was not intended to and did not allow Board members to challenge participants' views. As such, Board members and participants might not have a common understanding of what was said.

Next steps

Main issues: measurement

In light of the concerns expressed by roundtable participants with respect to measurement in IAS 37, the staff asked the Board to confirm the scope of the current project: that an objective of the proposed revisions to IAS 37 was to clarify the measurement guidance in IAS 37 rather than to introduce new a new measurement objective.

Board members expressed differing views. Some accepted that the project had not set out to fix measurement, but rather clarify the existing guidance and limit alternatives. To address measurement now might pre-empt the conceptual framework project's measurement debate. Other Board members wanted to address measurement; to amend IAS 37 and leave measurement alternatives in it would not be acceptable to them.

All Board members seemed to accept that there was a need to fix the notion that, just because a liability had a range of possible outcomes, the correct measurement of that liability in the financial statements was zero.

The staff noted that IAS 37 lacks a measurement objective. However, it might be possible to identify the inputs to measuring a liability which had a high degree of uncertainty by identifying the inputs necessary to measure that liability and build on guidance already in IFRS to eliminate the inconsistencies that exist currently. The Board explored this idea, with some Board members expressing a desire to see symmetry between the components of the measurement of 'uncertain assets' (that is, measuring the recoverable amount of an asset under IAS 36) and 'uncertain liabilities' in IAS 37.

Board members noted that IAS 36 paragraph 30 requires the following components as part of the assessment of the impairment calculation. Board members also noted that these components are expressed in terms of the value in use calculation and that, consequently, they might no map easily on to the measurement of a liability. However, what was important was the nature of the components, which were current estimates of:

• future cash flows
• possible variations in the amount or timing of those future cash flows
• the time value of money, represented by a current market risk-free interest rate
• a risk margin specific to the item being assessed; and
• other factors that market participants would reflect in the pricing the future cash flows.

The Board accepted that, with any adaptation that might be necessary to render them suitable for liabilities, these were the appropriate components for the measurement of an uncertain item.

The Board also suggested that the staff develop the measurement model for legal/ contractual liabilities first, and then examine what needs to be done differently for non-contractual liabilities. Although some Board members did not accept that all contractual liabilities had a settlement notion (in that some contractual liabilities involve an unknown counterparty), the staff was asked to proceed on this basis.

Interaction with other IASB projects

The Board noted that some of the issues addressed in the IAS 37 project touched on issues in the conceptual framework and IAS 18 projects. With respect to the conceptual framework project, the Board did not think there were any serious cross-cutting issues that should delay progress on this project. Any peripheral issues that developed could be addressed later. More immediate was the dividing line between revenue and liabilities. The IFRIC, in particular, was often faced with issues related to multiple element transactions and the identification of incidental liabilities. Board members thought that the building block approach to be adopted would help resolve many of these issues.

Project timetable

The Board reviewed and accepted the project timetable (available in the Observer note 4B), which would result in a revised standard being issued in the fourth quarter 2008.

The IFRIC Co-ordinator reported the results of the January 2007 IFRIC meeting. You can find Deloitte's report on that meeting Here.

Key Management Personnel

The Board considered the following Illustrative Example:

A person, X, holds a 100 per cent investment in Entity A and is a member of the key management personnel of Entity C. Entity B holds a 100 per cent investment in Entity C.

In Entity C's financial statements, Entity A is a related party of Entity C because X controls Entity A and is a member of the key management personnel of Entity C.

Entity A is also a related party of Entity C if X is a member of the key management personnel of Entity B.

Further, Entity A is a related party of Entity C if X holds only joint control, significant influence or significant voting power over Entity A.

Under the current version of IAS 24, in Entity A's separate financial statements, Entity C is not a related party of Entity A. The Board agreed that IAS 24 should be amended such that, in Entity A's separate financial statements, Entity C should be included as a related party.

Disclosure

The Board agreed that a new sub-paragraph 17A(b) should be reworded to state something along the lines of: A reporting entity is exempt from the disclosure requirements of paragraph 17 in relation to an entity that: (a) is a related party only because the reporting entity is controlled or significantly influenced by a state and the other entity is controlled or significantly influenced by that state; and (b) there are no indicators that the reporting entity influenced or was influenced by the entity.

Definition of a related party transaction

The Board agreed that transactions or commitments, which have a future settlement date, should be included in the definition of a related party transaction and that an example should be added to IAS 24 paragraph 20 to clarify this.

Comment period

The Board agreed that the comment period should be 90 days rather than 120 days. This was in response to strong representations from jurisdictions most affected by the proposed amendment. Those jurisdictions wanted the amendment to be in place in time for 2007 financial year ends. In addition, the Board noted that every effort should be made to accommodate this request, even at the expense of obligations under the Memorandum of Understanding with respect to Discussion Papers (Standards-level documents have priority).

Deferred taxes on initial recognition of goodwill

Paragraph 15 of IAS 12 Income Taxes establishes a general principle that a deferred tax liability should be recognised for all taxable temporary differences. However, subparagraph (a) of that paragraph provides a special exception from that general principle for the initial recognition of goodwill. As a result of that exception, a deferred tax liability is not recognised.

Based on a tentative Board decision in September 2006, the pre-ballot draft of an Exposure Draft of an IFRS for SMEs that was sent to the Board in December 2006 proposed the same general principle as in paragraph 15 of IAS 12 but without the subparagraph (a) special exception.

In their comments on that pre-ballot draft, a number of Board members noted that the issue of whether, and in what amount, deferred tax should be recognised on initial recognition of goodwill is under study in the IASB's current convergence project on accounting for income taxes and also in the current business combinations phase two project. They suggested that it is premature to reach a decision on the issue for SMEs alone.

Consequently, in early January, when staff sent a Ballot Draft of the Exposure Draft to the Board, staff asked Board Members whether they wished to reconsider the matter. A majority of the Board asked that the issue be discussed at the January 2007 Board meeting.

On the basis of that discussion, the Board decided to propose in the SME Exposure Draft the same special exception as is in IAS 12.15(a). That is, an entity shall not recognise a deferred tax liability for taxable temporary differences associated with the initial recognition of goodwill.

The Board also decided to require disclosure of the aggregate amount of temporary differences associated with the initial recognition of goodwill for which deferred tax liabilities have not been recognised.

Extension of the comment deadline on the Discussion Paper

The staff reported that several constituents had asked the Board to extend the deadline for comments on the Board's Discussion Paper Fair Value Measurements. The constituents highlighted that the comment period coincided with the financial reporting season for those with calendar year ends and asked for more time so that an important and complex document could receive the attention it deserved.

The Board agreed unanimously to extend the deadline for comments to Friday 4 May 2007.

Guarantees liabilities

Contractual guarantees

The Board discussed whether a third-party contractual guarantee affects the fair value to the debtor of the liability related to the contractual guarantee. The Board concluded that such a contractual guarantee does not affect the fair value unless payment of the guarantee by the guarantor to the creditor results in the release of the debtor from its obligation.

In addition, the Board agreed that if payment of the guarantee by the guarantor to the creditor results in the release of the debtor from its obligation, the debtor should recognize an asset as well as measuring the fair value of the liability based on the combined probability of cash flows from the debtor and cash flows from the guarantor.

Statutory guarantees (such as deposit insurance)

The Board agreed that statutory deposit insurance and similar non-contractual guarantees do affect the debtor's obligation and should be included in the valuation of the liabilities with statutory and similar non-contractual guarantees by the debtor. (Some Board members, while agreeing with this conclusion, disagreed with the staff's rationale. The rationale, some of which is included in Observer Note 7, will be revised.)

The forthcoming Discussion Paper would reflect these views.

Hedge accounting

The staff noted that the Due Process Document (DPD) treats hedge accounting as a departure from normal recognition, measurement and presentation principles. The staff then presented a number of situations and asked the Board which, if any, of the situations justified a departure from the general principles. The staff noted that hedges of the foreign currency exposure of a net investment in a foreign operation were not addressed in the Due Process Document.

The Board then discussed each of the following issues:

• Exposures to changes in the fair value of a recognized item in the scope of the DPD
• Exposures to changes in the expected future cash flows of a recognized item in the scope of the DPD
• Exposures to changes in the expected cash flows of a forecast transaction to buy or sell an item that, when recognized, would be within the scope of the DPD.

The Board agreed that the Due Process Document should express a Preliminary View that there is no justification for an exception to normal accounting principles for these items. Board members noted that information about risk exposures required by IFRS 7 should address many of these items.

Exposures to changes in the fair value of assets or liabilities (including firm commitments) outside the scope of the DPD

The Board was sympathetic to permitting a 'fair value option' for exposures to changes in fair value outside the scope of the due process documents, for example, commodities traded other than for normal purchase and sale. Such an approach would permit both the hedged item (the purchase commitment) and the hedging instrument (presumably a derivative) to be marked to market through profit and loss. Designation would be required. Board members stated that components (that is, specific risks) of hedged items (for example, inflation risk) could not be hedged. A hedge need not be for the entire period of the commitment, nor for the entire quantity of the purchase commitment. Any gains and losses on such hedges would be recognised in profit and loss.

Some Board members were cautious, noting that they did not want to create additional accounting mismatches. Others were worried about the possibilities for obfuscation presented by permitting hedge accounting. These Board members were worried that there would be no disclosure of non-financial items exposed to economic risk (because they were not hedged). Again, it was noted that IFRS 7 should address much of these concerns.

It was also noted that the Due Process Document should acknowledge, although not necessarily resolve, the challenges posed by firm commitments denominated in a foreign currency. Although such transactions were outside the scope of the document, the Board noted that they were inextricably linked to the issues addressed in it.

Exposures to changes in the expected cash flows of a forecast transaction to buy or sell an item that, when recognized, will be outside the scope of the DPD

The Board expressed a preference that the Due Process Document should state a Preliminary View that there should be no exception to normal accounting principles for such items, provided that the document discussed the related presentation and disclosure issues. Some Board members suggested that, if the item eventually recognised was a fixed asset (for instance, an aircraft or a ship), the exposure to changes in cash flows should be presented as a Financing cash flow; if related to inventory, it would be an Operating cash flow.

Project proposal

The Board discussed the latest project plan for the Liabilities and Equity project and its interaction with other projects, in particular the steps contemplated with respect to issuing the forthcoming FASB Preliminary Views document as an IASB Discussion Paper.

The staff noted that it intended to discuss with the IASB three models for distinguishing liabilities and equity in the FASB Preliminary Views document as well as a model being developed under the auspices of the European Financial Reporting Advisory Group. Other sessions would allow for a discussion of the FASB's Preliminary Views and associated Invitation to Comment.

Board members asked whether the EFRAG model was a new approach or a variant of one of the FASB models. It was suggested that it was a variant of the 'ownership/settlement' model. Board members suggested that it would be highly beneficial to the IASB, FASB and the EFRAG working group if the EFRAG model was discussed before the FASB finalised their Preliminary Views document. The Board asked the staff to suggest that the item be added to the April IASB/FASB joint meeting agenda, provided that the EFRAG working group had completed their work.

Interaction with the conceptual framework project

The Board also noted that there was a potential overlap between the Liabilities and Equity project and the definitions part of the conceptual framework project. Board members noted that the Boards' current efforts in the conceptual framework project had been focussed on the definition of an asset; it was almost assumed that the Liabilities and Equity project would address the conceptual issues. It was noted that the staff summary (Observer Note 12B) was a very good summary of why the Liabilities and Equity project was the appropriate context in which to consider the conceptual issues involved.

Overview of IAS 32

The Board discussed a memorandum prepared by the staff that summarised and illustrated the difficulties in applying the current distinction between liabilities and equity in IAS 32 Financial Instruments: Presentation. The paper addressed issues such as the tension between legal form and economic substance, the overlapping nature of many hybrid instruments and the challenge faced by the IASB in developing further guidance, given the diversity of opinion about what constitutes 'equity'.

The Board commended the staff's work, but asked that before issuing the summary in final form, the staff should include arguments refuting commonly-presented 'problems' (such as 'economic compulsion'). In addition, the Board suggested other issues for inclusion and discussion.

The Board discussed the accounting for investment allowances in the context of a specific tax regime's requirements. A national standard-setter and securities regulator had approached the IFRIC staff for guidance on how to apply IAS 12 to a tax allowance in their jurisdiction. The allowance is given as an incentive to entities to encourage investment/ expenditure on qualifying projects and activities. Under the tax rules, an entity would be able to claim 60 per cent of qualifying expenditures as an additional deduction under certain conditions. If the asset acquired as a result was disposed of within two years of the date of its acquisition, the allowance would be refundable. (Further details are available in Observer Note 6, available on the IASB Website.)

The Board debated whether the tax allowance would be reflected in the asset's tax basis and concluded that, at initial recognition, it should not. The entity would have to reflect the possible obligation to return the additional deduction until such time as the deduction was non-refundable. Although the accounting effect looked like a basis adjustment, it was not. One Board member noted that the solution to the problem was to fix the definition of tax basis such that everything else that does not create a temporary difference should be reflected in the current period.

The Board agreed that a sub-group of Board members and staff should consider this point, in conjunction with the FASB staff, and report to the Board within a reasonably short time period.

Definition of Discontinued Operations

The Board was asked which of the following criteria should be included in the definition of Discontinued Operations:

• Separate major line of business
• Operating Segment
• Continuing involvement
• Capital appreciation

The Board discussion concentrated on the first two criteria. At the beginning of the discussion it appeared that a majority of Board members supported a level 'one level below Operating Segments'. Those in favour of this noted that an Operating Segment criterion would exclude significant business line within a segment from being presented as Discontinued Operations.

The FASB staff in formed the Board that the FASB had agreed on the Operating Segment criterion. The FASB considered it to be sufficient to only show and restate Operating Segments since disclosures for all other components are to be provided in the notes.

One Board member pointed out that because of the restatement issue there should be no GAAP difference.

Finally Board members voted 8 to 6 in favour of the Operating Segments criterion. No final decision was made on the scope of disclosures for the other components classified as held for sale.

It appeared from the discussion that the last two criteria should not be considered. However, no vote was taken on this.

FASB staff informed the Board that the FASB intends to revise FAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The Board acknowledged that it might be necessary to launch a similar project for IFRS 5. However, it was decided to await the outcome of the FASB project first.

Disaggregation on the Statement of Comprehensive Income

The staff presented the following alternatives:

Alternative A: Pure Management Approach

Under Alternative A, an entity would be required to present the following:

• Information based on the primary activities (functions) in which the entity engages
• For each of those functions, information about the significant related costs (by their nature) that would provide information useful in predicting future cash flows.

The standard would include examples of functional activities and related costs that an entity might present separately. Those examples would include:

a. Functional activities:

• 1. Sales of product
• 2. Sales of services
• 3. Cost of product sales
• 4. Cost of services sales
• 5. Marketing
• 6. General and administrative
• 7. Research and development

• 1. Salaries and wages
• 2. Pension and other benefits
• 3. Materials
• 4. Depreciation
• 5. Amortization
• 6. Rent
• 7. Energy
• 8. Lease
• 9. Maintenance
• 10. Technology
• 11. Royalty fees
• 12. Licensing fees.

Alternative B: Modified Management Approach

Alternative B would be the same as Alternative A except that the first seven costs listed in Alternative A under related costs by their nature would be required to be presented separately unless the cost is deemed to be insignificant. As with Alternative A, an entity also would be required to break out any other cost that is important in understanding its operating results that may not be or relate to a functional line item because it does not relate to what the entity does on a regular basis (not a primary activity). Examples would be a gain or loss on the disposal of an asset or impairment of goodwill.

Alternative C: Permit Nature Only (as exception to Modified Management Approach)

Alternative C would add an exception to Alternative B that would permit an entity to present information only based on the nature of expenses (materials, labour, depreciation, and so forth) if classifying costs (expenses) into functional activities provides information that is not relevant.

No formal decision was made. The majority of Board members supported Alternative A for disaggregation by function and were in favour of having Alternative C in certain situations (e.g. holding companies).

Hybrid Entity considerations

Some Board members noted that issues associated with applying the working format to the financial statements of hybrid entities are of high importance. Hybrid entities were considered to be the 'rule rather than the exception' (e.g. manufacturers providing significant finance services).

The Board decided to further explore this issue prior to the issuance of the initial discussion document and asked the staff to prepare a paper for discussion at the March meeting.

Statement of changes in equity and other equity-related issues

The Board discussed the following five issues.

1. Whether the statement of comprehensive income should be expanded to include all changes in net assets including investments by and distributions to owners

The Board decided not to expand the statement of comprehensive income to become a statement of changes in net assets. The statement of changes in equity should be viewed together with the statement of comprehensive income, thereby making the set of financial statements cohesive and complete.

2. What format the statement of changes in equity should take

The staff provided a schedule including details of the change in the beginning and ending balance of each of the following components of equity:

• Common Stock
• Warrants
• Retained Earnings
• Accumulated OCI

The Board agreed to the format but pointed out that within the caption Common Stock an entity should be allowed to show the par value and the additional paid-in capital separately.

3. Whether the working format should be modified such that the equity category would be presented as a separate section distinct from the financing section

The Board agreed to have a separate equity section.

An illustrative example is provided on page 11 of Agenda Paper 13D of the Observer notes available from the IASB website.

4. Whether the Board should be pursuing another statement that would provide information about how capital is allocated

The Board decided not to have this additional statement on grounds that the information can be extracted from the existing statements.

5. Whether Board members are interested in pursuing a schedule that would present equity items (and possibly financing liabilities) at fair value

The Board decided not to have this additional statement as outlined in the Observer Notes.

In this connection the Board discussed and approved a suggestion submitted by one Board member dealing with the presentation of equity components at fair value. However, no details were made available to observers.

The Board discussed two sweep issues arising from the Exposure Draft.

Accounting treatment for the liability component

The staff proposed to include in IFRS 2 a new paragraph 28(ba) to clarify the accounting treatment for the liability component and provided the following revised wording:

however, if the grant arrangement included a liability component, the entity shall remeasure the fair value of the liability at the date of cancellation or settlement. and Any payment made to settle the liability component shall be accounted for as an extinguishment reduction in of the liability.

Definition of vesting conditions

Two issues were discussed in respect of this.

Firstly, one Board member noted that the proposed definition is potentially confusing. The main reason for this is considered to be that the term 'service' could mean the quantity (service condition) and/or quality of services (performance condition) as well as the state of being in employment (in service) and that in paragraph 21 of IFRS 2 the term is used in all three different senses without ambiguity.

Accordingly the staff proposed the following amendment of the definition in Appendix A of IFRS 2 and the following additional paragraph BC 171A of the Basis of Conclusion:

Definition of vesting conditions

The conditions that determine whether the entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity under a share-based payment arrangement. Therefore, service conditions include service conditions, which require the other party to complete a specified period of service, are vesting conditions. All other vesting conditions are performance conditions which require specified performance targets to be met (such as a specified increase in the entity's profit over a specified period of time). Performance conditions may be market conditions or other conditions.

Paragraph BC 171A

The term services refers to the quantity (service condition) or quality (performance condition) of the service received by the entity.

In principle the Board agreed to the revised definition but noted that the wording needs to be changed. Proposals for re-wording will be given to the staff offline.

Secondly, one constituent noted that further clarification is needed in respect of the treatment of conditions that are not dependent on service, for instance, when the employee receives the share on a successful initial public offering, even if the employee leaves service before the IPO occurs. The Board decided to explain in the Implementation Guidance to IFRS 2 when such a condition is a vesting condition and when it is not.

Analysis of Comment Letters on the Discussion Paper

The staff summarised the comments received. For a comprehensive comment letter analysis please refer to the Observer notes available from the IASB website.

In general a majority of the respondents agreed to the proposals in the Discussion Paper. However, with regard to the question whether entities should be required to include Management Commentary (MC) in their financial reports to assert compliance with IFRSs 61% of the respondents addressing this issue thought that MC should not be mandatory. Some respondents raised the concern that MC lacks the same degree of objectivity as financial statement information. Others noted that important consequences for the audit will arise since the audit of MC poses significant challenges compared to an audit of financial statements.

With regard to the audit implications one Board member pointed out that in Germany MC is part of the audit and that it has been proofed to be auditable.

Other issues like objectivity, essential contents and the form of guidance were briefly discussed but no majority views became apparent.

By a majority of 12 votes the Board decided to go forward with this project and directed the staff to prepare an Agenda Proposal.

Policyholder participation rights

The staff presented a working draft of chapter 6 'Policyholder Participation' of the Discussion Paper.

The discussion focused on the question to what extent an insurer should classify the participating component of a participating contract as liability. The Board noted that the 'unitary view', which requires classifying the whole contract as a liability, is not an appropriate solution.

In previous meetings the Board had tentatively decided that an insurer should recognise a liability relating to expected dividends for participating policyholders if the insurer has an enforceable obligation. Economic compulsion was not considered to be sufficient to create an enforceable obligation. After a thorough discussion the Board came to the conclusion that a liability should be recognised when the insurer has a constructive obligation.

The staff was directed to further investigate this issue and to take into account the definition of a constructive obligation under both IFRSs and US GAAP.

Universal life contracts - discount rate(s)

The Board agreed that in measuring a universal life contract, each cash flow scenario should include interest credited at the rate that the insurer estimates will apply in the scenario, rather than the absolute minimum that can be contractually required.

Analysis of Comment Letters on the Exposure Draft

The staff presented an analysis of comment letters received on the Exposure Draft of Proposed Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements (ED).

The Board discussed certain aspects of the comments received but no decisions with regard to amendments of the ED were made.

Project Plan

The Board discussed whether to proceed with this project or to await the outcome of the long-term project on Liability and Equity.

About half of the respondents had suggested widening the scope of the project in order to classify as equity additional instruments such as:

• Financial instruments puttable at no more that its fair value (for example, financial instruments puttable at book value and co-operative capital)
• Minority interests puttable at fair value
• Financial instruments puttable at fair value that are not in the most subordinated class but are subordinated to creditors, or financial instruments puttable at fair value that are in the most subordinated class but there exists another class of shares in the most subordinated class without the right to put
• Warrants (and other derivatives) to be settled by the issue of financial instruments puttable at fair value
• Financial instruments puttable at fair value with the right to mandatory dividend distribution or partnership remuneration.

The Board members pointed out that the scope of the project is the most critical issue and agreed to keep the scope narrow since otherwise this project could prejudice the outcome of the Liability and Equity project. The Board acknowledged that, accordingly, the project could only resolve the problems in some jurisdictions.

The Board decided to go forward with this project and directed the staff to prepare a paper on the scope issue for discussion at a future meeting.