The Board will meet on 5 June 2009 beginning at 1300 London time for a short session.

In December 2008, the IASB asked Wayne Upton to prepare a discussion paper on the single issue of credit risk and how it is reflected in the measure of a financial asset or financial liability. Mr Upton presented his paper to the meeting and asked Board members to consider whether any substantive changes should be made to it before it is published. The current text was released as the Observer Paper and is available Here on the IASB Website.

Mr Upton explained that the discussion paper was not intended to be a complete history of the topic, but rather a discussion of the three principal arguments for and against including own credit risk in the measure of a liability. He suggested to the Board that the discussion paper not include any preliminary views, although he acknowledged that the IASB is on record as stating that credit standing is a component of fair value.

Mr Upton also noted that the Board had asked for the discussion paper to be prepared in order to isolate the issue of own credit risk and credit standing and allow constituents to focus on that issue alone when responding to the IASB, rather than have it as one of a number of issues in an invitation to comment; one that might not be as high a priority as another issue in the same document.

Board members generally agreed with the approach and in particular that it should not contain any preliminary views. Board members had specific suggestions for modifications and improvements, which Mr Upton asked for some leeway to incorporate, noting his desire to have a short, easily digested document.

The Board did ask that worked examples illustrating the financial statement effects of the various approaches discussed. Board members noted that how the effects of changes in credit standing were presented in the financial statement were critical to the topic.

In addition, Board members noted that the discussion paper should be candid about what would happen if credit standing was excluded from measurement: there were significant implications for derivatives and cash flow hedges in particular. The Board agreed to issue the discussion paper on a 'negative clearance' basis. No comment period was recommended. The discussion paper is likely to be published in June or July 2009.

The Board considere comments received relating to the remaining proposals in the September 2008 Exposure Draft Additional Exemptions for First-time Adopters (Proposed Amendments to IFRS 1)

Operations subject to rate regulation

The Board discussed and agreed:

• To extend the scope of the exposure draft proposals to include qualifying items classified as an intangible asset;
• To amend the definition of operations subject to rate regulation included in the proposals to reflect the current thinking of the Board's potential project on rate-regulated activities on which entities should be within the scope of an eventual standard on this topic;
• To remove the requirement for an entity to demonstrate the impracticability of both retrospective restatement and fair value as deemed cost before being permitted to use the proposed exemption;
• To add a sentence to paragraph D23 to clarify that an entity uses the proposed exemption or the borrowing costs exemption, not both.

In addition, the Board agreed not finalise these actions pending deliberations on its potential separate project on rate-regulated activities (this is so that the IFRS 1 exemptions can be aligned with the product, if any, of the Board's activities on rate-regulated activities).

Leases

The Board agreed to extend the exposure draft proposals to allow no reassessment of the determination of whether an arrangement contains a lease when previous GAAP the same as IFRIC 4 was applied prospectively rather than retrospectively. At the same time, the Board agreed to clarify that the determination applies on an arrangement-by-arrangement basis.

The Board agreed to amend paragraph D9 to explain that a determination of whether an arrangement contains a lease under previous GAAP should have been in accordance with requirements that would give the same result as would be achieved in accordance with IAS 17.

Assessments under previous GAAP before the date of transition to IFRS

The Board agreed that no additional changes to the exposure draft regarding assessments under previous GAAP before the date of transition to IFRSs were necessary.

The staff introduced the first paper to be discussed. The objective of the paper was to decide how options to renew contracts should be accounted for. The staff noted that they thought there were essentially three ways to account for such options:

• (a) ignore the option
• (b) account for the option as a separate performance obligation (method 1)
• (c) look through the option by including within the contract boundaries those optional goods and services the customer is likely to receive (method 2)

The Board was first asked if they agreed with the staff recommendation not to ignore the renewal and cancellation options in the proposed revenue recognition model. The Board agreed.

The Board then had a general discussion around types of options and the difficulty in distinguishing some options from marketing. For example, what happens if an option is one that everyone can get even if they don't buy anything? The staff thought this would have a selling price of nil. It was noted that it was important to distinguish genuine options from selling devices.

The staff noted that they thought the two approaches (method 1 and 2) would give similar financial statements, but they wouldn't say that they are conceptually the same.

The staff then introduced the two approaches. The staff recommended the use of the second method. The Board then discussed the two approaches. One Board member thought that both approaches would be equally as difficult as one another. Another Board member thought that the two models would provide different answers.

Another Board member said that the difference would be that the binomial method used in method 1 would include the time value of money and the second method would not. The Board member thought that the staff were underestimating the degree of difficulty. The value also depends on other factors such as surplus capacity, alternative products etc. This makes this type of valuation more difficult than valuing an employee stock option.

One Board member was not sure why they were worrying about options that were written that were profitable? They were not onerous. The staff responded by saying that onerous contracts are unexpected, whereas the performance obligation relating to the revenue recognition was expected.

The Board did not reach any consensus as to their preferred method. The staff were asked to reconsider their analysis. The (acting) chair noted that some Board member seemed to prefer the components/performance obligation approach (method 1), but there were mixed views.

The Board were then asked by the staff if they supported an approach that requires renewal options to be accounted for as performance obligations if the standalone selling price of that option can be determined without undue cost? The majority of Board members agreed.

As the Board members were running out of time for the session, they then moved directly to Question 5 of the staff paper which asked the Board members if they thought options should be accounted for options for additional goods and services by looking through then, regardless of whether the optional goods and services are the same as the non-optional goods and services. The Board agreed.

The Board then very briefly discussed the second agenda paper regarding collectability. The Board will continue the discussion later in the meeting.

High-level discussion of comments received on ED 10

The staff noted that 148 comment letters had been received in response to ED 10, and that there was a significant level of support for the concept of consolidation based on control. However, there was also a significant level of disagreement about how the IASB had articulated the control concept.

A Board member noted that many of the comment letters he had read demonstrated that constituents were schizophrenic about whether control meant that an entity was in control of another now and whether that control could be perpetuated. He thought that the ED had been as clear as possible on that issue, but it was obvious that constituents did not believe the Board mean what it said. Other Board members echoed these comments.

The main item of discussion in this part of the debate was the concern expressed by several constituents that the Board should coordinate its work on consolidation and derecognition so that the two standards are consistent. Board members were sympathetic to this idea, but noted that it was possible that something might be removed from the balance sheet under the proposed derecognition standard only to be consolidated.

Project plan

The Board discussed how best to proceed with the project. The staff presented three alternatives to completing the project: (i) proceed as planned and issue a final IFRS by the end of 2009 if possible; (ii) align the publication date of the consolidation IFRS with that for derecognition; and (iii) split the consolidation project in two and issue a standard enhancing disclosures as soon as possible and then work on the control model, publishing that portion by 2011.

Board members discussed the alternatives, but ultimately concluded that now was not the time to make such decisions. The Board directed the staff to continue work on the project as it is. Any decision to split the project would be taken in September or October, that is, after the initial analysis of comments on the derecognition project was available to the Board.

Amortised cost - an expected cash flow approach

The staff introduced the session with a brief overview of the key features of an expected cash flow approach to recognising impairment for assets measured at amortised cost. In particular they reminded Board members that this approach would remove the requirement to identify a trigger event before recognising credit losses.

Board members discussed the worked examples provided by the staff in their agenda paper. Initial discussions concentrated on Example 3 which illustrates a scenario where the amortised cost is calculated to be higher than original cost. Some Board members were uncomfortable with this if the objective of the expected loss model is to measure impairment, as a carrying value exceeding cost would seem counter-intuitive (ie indicating negative impairment). Other Board members were happy with the example as they believed it was a consequence of effective interest rate methodology and simply represented the present value of future interest and principal cash flows.

Discussion moved on to how the expected cash flows used to calculate the effective interest rate would be defined. Board members requested clarification on whether the expected cash flows would be the entity's own expectation of cash flows or the entity's estimate of a market participant's expectation of cash flows. Board members also requested further clarity on which risks should be included in the expected cash flow and which risks should be included in the effective interest rate.

One Board member questioned whether the expected loss model actually reduced complexity and the burden on preparers because of the need to reassess expected cash flows on a continuous basis even where there have been no impairment triggers. Other Board members felt that the removal of impairment triggers in the current incurred loss model would reduce complexity overall.

The staff informed the Board that they are in the early stages of exploring with some banks the systems impact of an expected loss approach.

Board members requested the staff to give more detail on how collective and individual impairment would work under an expected cash flow approach. The staff informed the Board that the interaction between individual and collective impairment would be another topic covered in their discussion with banks to gain an understanding of the practical impacts.

Some Board members expressed concern that an expected loss model may obscure the reporting of credit losses as in cases where expected losses are correctly estimated at inception, no bad debts would subsequently be recorded.

Amortised cost - objective of an impairment test and implications for financial assets

The staff presented their paper setting out the differing complexities for measuring impairment of financial assets versus non-financial assets.

It was explained that the general approach for measuring impairment for non-financial assets is based on current values due to the nature of such instruments. However, for financial assets, alternatives are available as cash flows associated with such instruments are contractual.

The Board expressed an understanding of the different characteristics of financial and non-financial assets and the consequential different impairment approaches available.

Comparison between impairment approaches

With the objective of aiding Board members decide between the three different impairment approaches (incurred loss approach, expected cash flow approach and fair value based approach) the staff presented their paper comparing each approach.

One Board member requested that the cost to stakeholders of each model not only be shown as a cost of implementation but instead be split between cost of implementation and on-going cost. It was agreed that this would allow a better comparison to the existing model which has no incremental implementation cost.

Board members enquired whether the costs of implementation of the expected loss model would be significant for banks given their existing internal systems used to produce Basel 2 data and fair value calculations. The staff explained that this was being explored in discussions with banks over the next month.

Fair value impairment method

The staff summarised from their paper the key points to consider in relation to a fair value based impairment model. They then put forward to the Board a version of such a model, not recommended by the staff but for discussion purposes only. Under this version an impairment is recognised if the fair value of the instrument is below its amortised cost. As long as fair value is below amortised cost the financial asset is measured at fair value. Once fair value is equal to or above amortised cost the asset is once again measured at amortised cost.

One Board member raised the point that such an approach would require the simultaneous tacking of amortised cost and fair value. The staff highlighted that this was currently required for certain impaired debt instruments classified as available for sale.

Project timetable

The staff noted that the forthcoming exposure draft was unlikely to be completed until July 2009 (this was contrary to the optimistic assessment in the Board paper).

Disclosures — defined benefit plans

During a long and frustrating debate, the board decided:

• not to provide additional guidance on materiality (contrary to the staff recommendation);
• to replace the disclosure objectives in IAS 19 with objectives similar to those in IFRS 7 Financial Instruments: Disclosures and IFRS 4 Insurance Contracts;
• to require disclosure of information about how the defined benefit plan is managed;
• to use a principle-based approach for the disclosures on the entity's actuarial assumptions based on similar requirements in IFRS 4.

This topic was especially contentious, with Board members split on the usefulness of disclosure of items such as mortality assumptions. A Board member noted that the real issue was how to disaggregate information in a meaningful way: for example, it would be more useful to know how relevant to the workforce in question was the mortality table being used. The staff cautioned that if the Board wanted detail in one area of the actuarial assumptions, it might as well require the whole lot.

In the end, the Board agreed with the staff's proposed approach, with some modifications in how it was expressed.

• additional disclosures on the risks arising from defined benefit plans including:
  • qualitative disclosures, including risk management policies and investment strategies
  • sensitivity analysis
  • expected maturity analysis for the defined benefit obligation
  • comparison of actual versus estimated contribution.

During the discussion, several Board members objected to how the risks had been defined, in particular 'funding risk', which was essentially the same as 'liquidity risk'. The Board requested the staff not to invent new and potentially confusing labels, but rather to explain what the disclosure was intended to achieve.

Disclosure-Multi-employer plans

With little debate, the Board agreed to propose the following additional disclosures for multi-employer plans:

• (a) A description of the nature of the multi-employer plan including but not limited to:
  • (i) A description of the regulatory framework in which the plan operates.
  • (ii) A description of the funding arrangements in place including the method used to determine the participant's rate of contributions and any minimum funding requirements.
  • (iii) The extent to which the entity can be liable to the plan for other participants in the event of their insolvency.
• (b) its best estimate of the contributions it expects to pay to the plan during the next annual period. Such information may be disaggregated into (1) contributions required by funding arrangements or regulation, (2) discretionary contributions and (3) noncash contributions.
• (c) details of any agreed deficit/surplus allocation on wind-up, or the amount that is required to be paid on withdrawal.
• (d) the total and employer's proportion of the number of active members, retired members, and former members entitled to benefits.

Curtailments and settlements

The Board agreed that

• (a) the existing requirements on curtailments and settlements are removed
• (b) curtailments are included in negative past service costs, and disclosure is required of the effect of plan amendments with a narrative description of the amendments; and
• (c) a definition of 'non-routine settlements' based on the IFRIC May 2008 Update wording is added to the definitions in IAS 19 and separate disclosure of such 'non-routine settlements' is required.

Agenda paper 20C, containing staff recommendations for transitional provisions, was not discussed.

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

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

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

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

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

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

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

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

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

The Board considered two questions:

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

The staff outlined three alternatives to address those questions:

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

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

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

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

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

The treatment of pre-existing contingent consideration of the acquiree

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The staff introduced the paper by noting that the FASB staff is undertaking initial work on lessor accounting issues during the comment period of the Leases discussion paper. At this meeting the Board will be asked to consider analysis of rights and obligation in a simple lease contract.

The first question the staff asked the Board was whether the Board agreed that the lessor has an asset for its right to receive rental payments from the lessee. The Board unanimously agreed.

The Board then considered what is the credit? That is, does the lessor derecognise all or a portion of the leased item or does the lessor have a liability for the obligation to allow the lessee to use the leased item?

• View A: The lessor is viewed as having transferred a portion of the leased term to the lessee.
• View B: The lease contract is viewed as creating a new right, leaving the lessor's rights relating to the leased item unchanged. The leased item is treated as the lessor's economic resource and continues to recognise the leased item.

Some Board members expressed support for view A, although the majority of Board members supported view B. There was disagreement amongst Board members as to which of the views is consistent with the framework. Those who supported View B expressed a number of concerns with View A, including the fact that they were concerned that following the approach in View A would give a day 1 profit. Those in support of View A were concerned that View B would result in entities (for example, banks) having assets on their balance sheet for which all the risks and rewards had passed on to someone else. Concerns were also expressed that View B was 'grossing up' the balance sheet and would potentially impact on ratios. It was noted, however, that this may be overcome by presenting the gross amounts on a linked (net) basis.

The (acting) Chair said he would like more time to reflect on the issues and requested the staff to consider the issues raised by the Board members, although it was noted that a significant majority of the Board members favoured View B.

Joint Control instead of Shared decision-making

The staff introduced the session by noting that the definitions in ED 9 were criticised by a significant majority of respondents for not placing enough emphasis on 'joint control'. Respondents observed that the term had disappeared from the definition of 'joint arrangement' and that 'joint control' was no longer related to the other types of arrangement (ie 'joint assets' and 'joint operations'). In addition, there was concern about how 'shared decision-making' was intended to operate and about the fact that both terms 'shared decisions' and 'joint control' as defined in ED 9 did not include the term 'strategic' in their definitions.

The staff admitted that they were split; some preferring to retain this distinction because control of an entity is different from control of an asset.

However, some staff are of the view that it is confusing to introduce two terms (ie 'shared decisions' and 'joint control') with similar meaning (ie, requirement of unanimous consent for strategic decisions) depending on whether the arrangement is a 'joint operation/asset' or a 'joint venture'. They also think that there are strategic operating and financing decisions related to arrangements that are joint assets or operations such as approving the budget, designing employment contracts, approving external borrowing, etc. These staff members are also of the view that 'joint control' is a term that expresses the IASB's intention better than 'shared decision-making': that the 'control' over the activities that are the subject of the arrangement is shared among the parties of the arrangement. The matters that give the parties 'control' over the activities of the arrangement need to be determined based on the requirements of IAS 27.

The Board was firmly of the view that shared decision-making was the key determinant of joint operating arrangements. Joint operating arrangements could include 'joint operations' or 'joint ventures' or both (see below).

A Board member was very concerned that two key factors in IAS 31 should be retained in the IFRS: that a characteristic of all joint arrangements was the presence of a contractual agreement over shared decision-making; and that unanimous consent over strategic financial and operating decisions. The IFRS should not change these words unnecessarily.

After further discussion, the Board agreed that it should modify the definition of 'joint arrangement' to:

• Agreements that establish the terms by which two or more parties agree to undertake and jointly control an activity.

The Board also agreed that the definition of joint control should not change unnecessarily from that in IAS 31.

Two types of joint arrangement instead of three

The Board agreed that the IFRS should describe two types of joint arrangement (that is, 'joint operations' and 'joint ventures') instead of three, as stated in ED 9 (that is, 'joint operations', 'joint assets', 'joint ventures'), noting that:

• in many instances, joint arrangements have elements of both types of arrangements (ie, joint assets that are jointly operated by the parties of the joint arrangement). The classification of this type of arrangements between 'joint operations' or 'joint assets' is difficult since elements from both types of arrangement are present;
• 'Joint operations' and 'joint assets' are types of joint arrangement that share common features: the parties to both types of arrangements have interests in assets, liabilities, revenues and expenses. Therefore, from an accounting point of view, both arrangements result in the same accounting outcome.

The Board agreed that this will allow aligning the number of different types of joint arrangement (ie, 'joint operation' and 'joint venture') with the two possible accounting requirements (ie, recognition of assets, liabilities, revenues and expenses; or recognition of an investment in the joint arrangement).

Hybrids (that is, two different types of joint arrangements within the same joint operating agreement)

The Board agreed that two types of joint arrangement (i.e., joint operations and joint ventures) can be the subject of a single joint operating agreement.

Determining the type of joint arrangement: 'rebuttable presumption' or 'open assessment'?

The Board debated whether it was possible to define a rebuttable presumption that would trigger a consistent and appropriate classification of whether a joint arrangement was a joint operation or a joint venture (or whether it had elements of both). Board members were concerned that they would not be able to develop an operational distinction.

A Board member noted that the contractual agreement establishing the joint arrangement would define the rights and obligations of the parties (that is why it was vital to have the 'contractually agreed sharing...' in the definition of joint control). A careful reading of the agreement should lead to the correct classification of the activities. This would pre-suppose an 'open assessment' approach. While not disagreeing with this view, another Board member noted that such an approach might be at odds with recent developments in US GAAP.

The Board agreed that joint arrangements that are not established through a separate entity would be 'joint operations'.

They also agreed that the IFRS should adopt an indicator approach (open assessment) to assessing the classification of joint arrangements that are established in entities separate from the parties to the joint arrangement. ('Entities' in this context is to be understood in a manner consistent with the definition of a 'reporting entity' in the IASB's current Conceptual Framework project.)

'Investors' in joint arrangements

The Board had an initial discussion of whether and how to address the issue of 'investors' in a joint venture - that is, those participants in a joint arrangement that do not have joint control over the activities that are the subject of the joint arrangement.

The Board did not agree with the staff recommendation, in particular their suggestion that 'Investors in a joint venture shall account its investment in accordance with IAS 39 or, if they have significant influence in the joint venture, in accordance with IAS 28', which they thought was unhelpful.

Board members noted that investors should be recording their 'beneficial interest' in the joint arrangement: something not addressed in IAS 39 or IAS 28. In addition, the Board needed to think more about what the beneficial interest represented: was it an interest in the assets and liabilities of the joint arrangement or in the net income of that joint arrangement? The accounting would be quite different.

The staff closed the discussion, saying that it would reconsider its recommendations in light of the Board's advice and would return to the Board at a later date.

A final topic, "clarification of the accounting requirements for 'joint operations/assets'", was deferred.

Classification

The Board discussed circumstances in which financial instruments could be measured on a basis other than fair value.

The staff presented their paper to begin the discussion about possible classification criteria for financial instruments which would subsequently drive their measurement basis.

The three possible criteria put forward were:

1. the characteristics of the instrument
2. the business model of the entity; and
3. the intent and or ability to trade the instrument.

Board members debated each criterion. Some Board members objected to a criterion based on management intent in part due to the potential for this intent to change over time based on market conditions. However, some Board members felt that management intent was relevant to predict the cash flows that would be realised from any financial instrument. These Board members also suggested that changes in intent could be highlighted to users through appropriate disclosure.

Board members considered the notion of distinguishing between instruments based on the predictability of their cash flows. This would distinguish between instruments with predictable cash flows and instruments with volatile cash flows. Some Board members questioned whether such criteria could apply to derivatives. One Board member highlighted that the cash flows on forward foreign currency contracts have a high degree of predictability and question whether this could result in it being grouped with vanilla instruments with predictable cash flows (such as loans) and potentially measured on a basis other than fair value. Other Board members suggested a distinction would need to be drawn between leveraged and unleveraged instruments which would result in derivatives being categorised differently. Some Board members stated that they did not believe the measurement basis for derivatives was up for debate and would remain at fair value.

Board members questioned whether the criteria for characterising instruments would be done only at inception or on a continuous basis.

One Board member felt strongly that instruments should not be characterised solely on the predictability of its cash flows. He believed a distinction should be drawn based on whether the instrument could be traded. Some board members felt that most instruments could be traded which would result in no clear distinction. Other Board members noted that the ability to trade an instrument will not necessarily mean that an entity would realise the cash flows of that instrument by selling it but instead could realise the cash flows by holding the instrument to maturity. In such a case characterising the instrument as traded would conflict with management intent.

Some felt there was congruence in practice between the characteristics of an instrument and the way in which the cash flows of that instrument was realised. The implication was that plain vanilla instruments tended to be realised through their contractual cash flows whilst more complex instruments tended to be realised by sale. As a consequence the focus on management intent was overdone.

One Board member suggested that an amortised cost measurement basis should be used for instruments with predictable contractual cash flows. Another Board member objected to this on the basis that it would introduce measurement complexities for instruments that met this criterion but were traded in an active market from which a single measure of fair value could easily be obtained, for example an investment in a government bond.

A number of Board members indicated their preference for fair value measurement for equity instruments. This was the case even where equities were held for strategic purposes on a long term basis. Questions were raised as to whether this would be fair value via profit or loss or fair value via other comprehensive income.

Starting point for a classification approach

The discussion moved on to considering a possible starting point to determine a classification approach between fair value and amortised cost. Three approaches were put forward.

• Approach one – based on current IAS 39 amortised cost categories, that is, whether the instrument has fixed and determinable payments
• Approach two – based on an approach used in the forthcoming IFRS for Small and Medium-sized Entities, that is, a distinction between basic and non-basic financial instruments
• Approach three – based on whether the asset was originated by the entity.

On a straw poll a majority of Board members broadly supported approach two, however, some Board members felt that additional modifications would be needed to this approach, for example in relation to excluding actively traded instruments from amortised cost measurement. In the absence of modifications those board members would support approach three. Therefore, a majority of Board members would allow certain highly liquid instruments that were deemed basic to be accounted for at amortised cost.

Board members were asked whether they would support the removal of tainting rules for assets classified as amortised cost based on an entity's intention to hold the instrument to maturity, in support for additional disclosures if the asset was subsequently sold. Board members were generally in favour of this.

One Board member put forward the idea that a distinction could be drawn between basic instruments under approach two based on whether their fair values could be determined on a level one, two or three basis and allowing at least level 3 instruments not to be fair valued. Some board members felt that level two instruments should also be excluded from fair value measurement if they were considered basic under approach two.

When asked, no board members objected to the notion of a fair value option for instruments that were traded. Therefore, the key consideration for the Board was over whether fair value should be mandatory for certain instruments, and if so, which instruments.

The Chairman moved discussion on to the recognition of gains and losses for instruments measured at fair value. Board members were asked whether they would consider an approach where fair value gains and losses would either be (1) recognised in profit or loss or (2) recognised in other comprehensive income and never recycled to profit or loss. A majority of the Board agreed they would consider such a treatment.

The Chairman summarised the debate as follows:

• There was support for simplifying the categorisation of financial instruments into two buckets: fair value and amortised cost. The majority supported an approach that builds on the approach used in the forthcoming IFRS for Small and Medium-sized Entities.
• There was support for a fair value option to permit fair value for an asset that would meet otherwise meet the requirements of amortised cost.
• Within the fair value category, changes in the value of some instruments could be recognised in other comprehensive income.
• No reclassifications between categories would be permitted.

Dividing the Financial Instrument project into parts

The Chairman then suggested that, given that it was possible that the Board had a workable model for the classification of financial instruments, many impairment issues existing in IAS 39 would be removed. It was suggested that, if the staff concentrated on developing this classification model, it would be possible to issue an exposure draft by July 2009 with a 2 to 2.5 month comment period. The expectation would be an IFRS would be issued by the end of 2009.

In addition, the Board would issue a Request for Views on the impairment issues remaining given the classification model in the exposure draft. The expectation is to issue this concurrently with the classification ED. The Board would use that input to develop an exposure draft that would be issued in the final quarter 2009. Also, proposals on hedge accounting would also be issued in the final quarter 2009.

Board members expressed concerns about transition and implementation issues. The Chairman stated that these would be addressed at their special meeting on 5th June.

The Board will meet on 1 June 2009 beginning at 1700 London time for a short session.

An amendment to IAS 34 Interim Financial Reporting as part of the annual improvements project.

The staff introduced the paper by noting that at its May 2009 meeting, the IFRIC concluded that IAS 34 provides guidance sufficient to enable entities to decide whether updates to fair value disclosures are required in interim financial reports and decided not to add the issue to its agenda as it did not expect diversity in practice. The IFRIC's decision does not specifically address other IFRS 7 disclosures such as reclassifications. However, we think that, by analogy, IAS 34 provides a clear principle for determining which explanatory notes are required in interim reports-disclosures that explain events and transactions that are significant to an understanding of changes in financial position and performances of the entity since the end of the last annual reporting period. (IAS 34.15)

The staff believed that amending IAS 34 could be addressed through the annual improvements process. The staff proposed amendments to IAS 34 that add guidance to emphasise the existing disclosure principle that when providing explanatory notes at an interim date, an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity and the financial statement effects of such events and transactions since the end of the last annual reporting period are more useful. The additional examples proposed by the staff discuss disclosures relating to fair value measurements and reclassification.

One Board member queried whether the changes relating to fair value which would require disclosure (if material) of significant changes in the business or economic circumstances that affect the fair value of financial assets and liabilities related to only those assets which are measured at fair value, or if it also relates to those assets measured at say amortised cost for which disclosure of fair values is made. The Board member thought it was both. The staff agreed it was meant to be both. The Board member suggested that the wording be clarified.

The Board discussed concerns that the proposals relating to fair value measurement (for which an ED is yet to be published) include a proposal to include fair value disclosures in interim financial statements. Some Board members wondered whether disclosure is already required by IAS 34 or not. Concerns were also raised as to the amount of work would be required for entities to comply with these requirements. The staff noted that as this is an Exposure Draft the Board could reconsider the proposals depending on the responses received.

The Board agreed with including the proposed draft amendment to IAS 34 (subject to editorial changes) in the forthcoming annual improvements ED.

The staff outlined the proposed project timetable for the Board. The publication of the exposure draft is currently scheduled to occur in late July 2009. The Board agreed with the project timetable.

The staff the introduced the first issue for discussion which is the measurement and expected cash flows for rate-regulated activities.

The staff detailed the cause and effect relationship between the entity's costs and its rate based revenue stream. The staff noted that the cause and effect relationship between an entity's costs and its rate based revenue stream provides evidence of the existence of an asset in accordance with the definition of an asset as set out in paragraph 49(a) of the Framework. A regulatory asset is a right to recover previously incurred costs through rates over future periods as a result of action by a regulator. Thus, the asset is the right to identifiable cash flows to be received from the customer base. The staff believes that this cause and effect relationship is important to the conclusion that a recognisable asset exists.

The staff then went on to outline issues relating to a discount rate being applied to the cash flows. The staff noted that at the Board meeting in April 2009 the Board agreed with the staff's recommendation that the risk of disallowance of incurred costs should be captured by the probability-weighted average of all possible outcomes. Consequently, this risk would not be one that is considered as part of the risk specific to the asset for which the future cash flow estimates have not been adjusted.

One Board member noted that he had heard scepticism from others as to how these items are assets and liabilities in keeping with the Framework. There needs to be discussion of this in the exposure draft. In particular, concerns had been noted as to what the resource was. Is it a promise by the regulator or the customer? The staff responded by saying that they though the resource was a promise from the regulator to include costs in future rates. So the resource is a right - more specifically, the believed that the resource is the expected future cash flows arising from that right.

Another Board member stated that this was similar to buying an intangible right such as a phone license where the right is to charge customers.

The Board then moved on to discuss what it was they were actually capitalising. One Board member summed up the rather confused discussion by saying that his understanding was that if something is already permitted to be capitalised under other IFRSs then they don't need to identify this separately as a rate-regulated asset. Rate-regulated assets are only relevant for amounts that are not otherwise capitalised. The staff agreed. This was further reiterated by another Board member who noted that they were only dealing with costs that are incurred that would otherwise be charged as an expense. The staff noted that this affects the timing of when these amounts are recognised through income, and amounts are expensed in a different period than would otherwise be the case.

Another board member then asked the staff if regulatory approval is generally performed on each individual item (or cost) or as a package. The staff responded by saying that practically this was normally dome as a package. The staff also noted that companies affected by this type of regulation keep very detailed records as the regulators can request look at individual items.

The same Board member also asked if the rate-regulation was referring to actual or estimated expenses. The staff responded by saying that the only way that these companies can come up with a rate for 2009 in December 2008 is to make estimates of costs. There will always be estimates in the rates, although these estimates will be trued up to actual in subsequent periods.

Another Board member asked if the company needed to wait until approval before an asset could be recognised? The staff responded by saying that this was not the case - it may be that a past track record of approvals would be sufficient. This is why the model they have developed is a probability weighted model.

A further Board member said that a lot of judgement is involved to determine if something is probable in some jurisdictions. The Board then returned to the recommendation of the staff that the discount rate be determined on the same basis as in IAS 36 and IAS 37. The Board agreed.

The Board then moved on to discuss the effect of including amounts permitted by regulation in the cost of self-constructed assets. Allowable costs are usually defined as the actual or estimated costs for which revenue is intended to provide recovery. The staff presented two alternatives to the Board:

• Alternative 1: The new standard permits an entity to recognise assets in accordance with other IFRSs and for specific costs incurred that meet the standard's criteria to be recognised.
• Alternative 2: The new standard permits an entity to recognise assets in accordance with other IFRSs and for identifiable amounts the regulator specifically permits to be included in the determination of rates.

The majority of the Board agreed with Alternative 2. it was noted that this view is also consistent with the existing US GAAP guidance.

The Board then discussed illustrative examples on presentation and disclosure. The staff included recommendations for minimum disclosure in the financial statements, including a recommendation that such information should be presented in a tabular format. The Board agreed with the staff recommendations; however, the staff noted that they would be removing a recommendation to disclose costs being amortised in accordance with the actions of a regulator, but which are not being allowed to earn a return during the recover period as well as the remaining amounts being amortised and the remaining recovery period. The Board agreed that the tabular format should be required unless an alternative presentation method is more appropriate.

The staff will proceed with drafting the exposure draft. In response to a question from the staff, one Board member indicated they were considering dissenting.

The staff recommended that the length of the comment period for the Exposure Draft on the Reporting Entity Chapter of the Conceptual Framework be 120 days. The Board agreed.

In April 2009, the IASB had a preliminary discussion on future insurance contract premium receipts (that is, policyholder behaviour and the related issue of contract boundaries). This session discussed a staff analysis and their recommendations on this topic.

Accounting for future premiums that depend on options

The staff noted that in many long-term insurance arrangements, the insured has the right to continuing cover provided it continues to pay the contact premium. The insurer has effectively written an option for the policyholder. The option compels the insurer to accept the policyholder's premiums (as determined by the insurance contract) and continue the insurance coverage. The insurer has a premium for the current year and a series of written options into the future years. The staff had identified three approaches to accounting for renewal options, which they thought were consistent with the approaches the Revenue Recognition team explored in its paper on Contract Boundaries:

1. Ignore the option.
2. Measure the option.
3. Look through the option (ie treating cash flow subject to renewal and cancellation options as part of the existing contract).

The Board debated a staff recommendation that the measurement of an insurance contract should include the expected (that is, probability-weighted) cash flows (future premiums and other cash flows resulting from those premiums, for example, benefits and claims) resulting from that contract, including those cash flows whose amount or timing depends on whether policyholders exercise options (such as renewal and cancellation options) in existing contracts. Put otherwise, the measurement of an insurance contract should look through renewal and cancellation options.

Some Board members were unhappy about how the staff had analysed the issue. Some thought that the 'option' that the insured had to renew the insurance contract was the same as an option as understood in the Revenue Recognition Discussion Paper-others thought that it was. Some Board members would prefer measuring the renewal option at initial recognition, rather than looking through, as the staff proposed.

Another Board member rephrased what he thought the staff was trying to express: that the initial recognition of an insurance contract needed to identify what the Insurer was receiving and for what it had been received. He suggested that on initial recognition, the insurer had received the premium for (i) the first years' cover; and (ii) the right to renew at the same premium next year. This Board member did not want to establish a general principle of always looking through renewal options and asked the staff to be cautious about how it expressed the principle.

Another Board member thought that looking through the option would allow you to get to an expected value measure: it includes some time value, but whether it was the 'right one' was debatable. This Board member was not opposed to looking through the option, but again was concerned about how the principle was expressed. In particular, in his view, the future premiums were not contractual, since the insured has no obligation to pay the premium in the future. Thus, the cash flows are not contractual.

Ultimately, the Board accepted the staff recommendation, but with significant concerns about how it was expressed and articulated. The staff will return with more refined proposals at a subsequent meeting.

The Board discussed how collectibility of the customer consideration amount affects the carrying amount of an entity's net contract position and, hence, its effect on revenue recognition. Specifically, the Board considered the effects of the customer's credit risk.

The Board debated whether the measurement of an entity's net contract position should reflect the customer's credit risk. Hence, uncertainty of collectibility because of the customer's credit risk would affect the amount of revenue recognised when a performance obligation is satisfied. In addition, after a performance obligation is satisfied, whether any change to the amount allocated to that performance obligation relating to customer credit risk should be recognised as income or expense rather than revenue. Finally, once the entity has an unconditional right to cash, that right should be accounted for in accordance with existing receivables standards.

In doing so, the Board discussed how revenue should be recognised and whether it should be 'gross' or 'net' - that is, whether the seller's assessment of financing and default should be separated from the consideration itself.

Board members noted that any time that the seller did not receive the consideration on the date of sale, the seller was financing that sale. This would help to derive the true selling price. The longer the time between sale and collection, the larger the financing and credit risk elements.

Some Board members were caught up in separating revenue from bad debt expense and financing. Others did not support this view; rather, they saw gross presentation as an invitation to inflate revenue artificially. Still others saw it as a presentation matter. Many points of view around these positions were aired during the debate.

A majority (8 members) favoured a 'gross presentation' of revenue. However, whether this presentation should be required on the face of the statement of comprehensive income was not resolved and the staff will return at a subsequent meeting to discuss this with the Board.

Uncertain consideration

This topic was a joint FASB-IASB meeting.

The session was chaired by FASB Chairman Robert H Herz.

The staff introduced the topic by noting that at previous board meetings, the boards considered how an entity should measure its net contract position and recognise revenue when a customer promises an uncertain amount of consideration. The boards agreed that:

• At contract inception, the transaction price (i.e. the measure of rights and performance obligations) is the probability-weighted estimate of consideration to be received.
• After contract inception, an entity should update the measurement of rights to reflect changes in the transaction price and allocate those changes to the performance obligations. The effects of those changes on satisfied performance obligations would be recognized as revenue in the period of change.

Although the boards agreed with that expected consideration approach for measuring performance obligations, they disagreed on whether to constrain the amount of revenue recognized (and measurement of rights) in some instances.

• The IASB decided tentatively that the approach should not be constrained. Rather, an entity should disclose information about estimates and uncertainty.
• The FASB decided tentatively that the cumulative revenue recognised should be limited to an amount that is certain or noncontingent. That constraint results in a 3-step process whereby an entity 1) measures performance obligations based on an expected consideration amount, 2) determines how much revenue to recognise based on satisfied performance obligations, and 3) adjusts the measurement of rights (and revenue) so that the increase in the net contract position is limited to the amount of consideration that is certain.

The staff thinks that the boards' differing conclusions create a fundamental issue that must be resolved before the development of an exposure draft. Therefore, the objective of the discussion is to get a consistent view from the boards on whether to constrain the expected consideration approach when the customer promises an uncertain amount of consideration. The staff recommendation was to constrain the expected consideration approach only if it is impracticable for an entity to reliably estimate a consideration amount.

The staff highlighted that as part of their outreach activities they had received feedback from preparers, auditors and users. Preparers and auditors were generally supportive of the staff recommendation. Users, however, had differing views. Some had a low tolerance for estimates of revenue, and preferred an approach that constrains revenue. Others thought that estimates were okay and depicted the economic of the transaction.

The Boards were asked if they agreed with the staff recommendation.

A number of Board members expressed support for the staff view; however, they would also like to see some disclosure made around the estimates.

Much of the discussion by the Boards focussed on Example 4 in the staff paper. This example considered a scenario where revenue for fund management services was based on an increase in the funds value relative to an observable index determined at the end of a period (6 months).

One Board member said that they struggled to get to this being reliable. An index is outside the control of the entity. Only the entity's own performance is within their control. Other Board members had difficult in understanding the numbers produced for the constrained revenue approach.

Following discussion, one Board member suggested it is helpful to consider in these types of scenarios how the counterparty would recognise the liability. Another Board member suggested that what the entity really had was a call option on money if they outperformed the index. Some Board members then expressed concerns as to the interaction between IAS 39 and the revenue project, given that any receivable is likely to be a financial asset.

The Chair summed up the discussion by noting that there was a high level of support for the staff recommendation plus some disclosure. There are also issues to consider related to the interaction of revenue recognition and financial instruments. The staff will consider the issues raised in further developing the model.

The staff presented their papers which set out the general principles and decision rules for distinguishing between equity instruments and financial liabilities. The staff began discussions by focusing on one of the general principles, namely:

"An instrument shall be separated into a liability and equity components if the instrument has two separate or alternative outcomes, one of which would require equity classification if it were the only outcome and one of which would require liability classification if it were the only outcome."

Staff explained that as a consequence of this principle an equity instrument puttable at the option of the holder to the issuer would be bifurcated into an equity component and a liability component as the two outcomes were:

1. equity (no exercise of put option) or
2. liability (exercise of put option or the put option itself).

The staff then explained that under the proposed general principles that a convertible bond would not contain an equity component because both outcomes were liabilities (that is (1) if the conversion option was not exercised the outcome would be liability and (2) the conversion option is by default a liability under the principle. It was explained that the second outcome results in liability by virtue of the option meeting the definition of a derivative and the Board's previous decision (reflected in the decision rules) to treat all derivatives as liability instruments regardless of whether equity is delivered under them.

Board members began to question whether their previous decision to treat all derivatives as liabilities was appropriate. One Board member made the point that under this rule, forward contracts over equity would be treated as liabilities as would warrants. Some Board members felt that instruments that reduced leverage, such as equity forwards, should not be classified as liabilities. One Board member commented that treating derivatives as liabilities would at least result in the same accounting for both cash share appreciation rights and equity share appreciation rights. However, the Staff had earlier commented that the scope of the proposals had yet to be determined.

One Board member recommended that the Staff avoid a form-based model as this would be open to structuring opportunities. At least two Board members felt that the following decision rule included in the Staff paper would be open to structuring opportunities:

"An issuer would classify the following other instruments as equity: Instruments that the holder is required to own in order to do business with or otherwise actively engage in activities of the issuer and that are redeemable only if the holder dies, retires, resigns, or otherwise ceases to actively engage in the activities of the issuer. (This would include holdings the amount of which vary based on volume of business transacted by the holder)"

The Board went on to discuss some of the other outcomes of applying the proposed principles which were set out in the staff paper. Following this the Chairman asked the Board whether they agreed with the general principles and decision rules described in the Staff paper. A majority agreed for the staff to proceed to build on the current platform but felt that additional changes were needed to deal with undesirable outcomes of applying the proposed principles.