The Board discussed the publication of the request for views as a separate consultation document on effective dates and transition of the forthcoming IFRSs related to the convergence efforts. The aim of this consultation is to better understand efforts involved in implementation of new IFRSs as a group. The views obtained from the consultation will be channelled into deliberations of the individual projects.

The Board in general agreed to publish this document, which was published later in the day with the comment period ending on 31 January 2011 (see our 19 October 2010 news story).

Nonetheless, in the discussion some Board members expressed some concerns over certain parts of the proposal. One Board member suggested underlining the objective to have the same transition requirements and effective dates by both IASB and FASB. He acknowledged that this could not be achieved in all cases, but he stressed that it should be the objective. The Board agreed.

The Board also agreed to clarify that the views are requested on the assumption that all the final Standards of the projects mentioned are finalised by June 30 2011.

Finally, another Board member noted that in his view the drafting reflects only the concerns expressed by preparers rather than users. He suggested including a question related to the need of continuity of accounting data for users (investors). The Board agreed.

Based on these changes the Board authorised publication of the request of views with the comment period ending on 31 January 2011.

Comment letter analysis

The Board considered the comments received on the Discussion Paper Extractive Activities published earlier this year. This was an educational session only, no decisions were made.

Most of the commentators were supportive of the Board's decision to initiate a research project on extractive activities but raised serious concerns about some of the detailed proposals. The staff will use the feedback received in further deliberations. The feedback will shape potential project agenda decision in the future.

The Board will also consider these comments on the decision on its post 2011 agenda. The post 2011 agenda will be subject of separate request for views that will be published later this year.

The two options of the scope of any potential project are either specific project on extractive activities (either comprehensive or separate for mining and for oil and gas) or a broader project that would treat extractive activities consistently with activities in other industries (e.g. research and development in high tech industries) in a form of a comprehensive intangible assets standard (either in form of new IFRS or an amendment to IAS 38). The Board members initially did show little appetite for a comprehensive intangible assets project.

The Board will also consider whether to undertake any future standard-setting activity in a single step or divide the process into stages. Several Board members argued for a separate decision on disclosures, especially the PWYP proposals (Pay What You Pay). Some Board members noted that the PWYP proposal seem to be outside of scope of financial reporting. They argued that the Board should reach decision on this issue sooner rather than later. The Board members seem to be receptive to this idea.

IFRS 1 First-time Adoption of IFRSs - Repeat application of IFRS 1

The Board discussed the recommendation of the IFRS Interpretation Committee to include in the Annual Improvements Project an issue to clarify whether an entity can apply IFRS 1 First-time Adoption of International Financial Reporting Standards more than once. (e.g. in a situation when the entity applied IFRSs as a listed company but was then de-listed from the stock exchange and was required to apply national GAAP. After certain period the local jurisdiction changes national GAAP to IFRSs.)

The Board considered the IFRS Interpretation Committee recommendation that proposed clarification that an entity is required to apply IFRS 1 each time it prepares and presents financial statements that meet definition of its first IFRS financial statements (i.e. when the entity's most recent previous financial statements do not contain an explicit and unreserved statement of compliance with IFRSs), even if the entity has applied IFRS 1 in the past.

Some Board members were uncomfortable with the proposal as they noted that aim of IFRS 1 was to provide relief to facilitate IFRS 1 adoption with a set of optional and required exemptions and therefore it should be applied only once.

Another Board member noted that the reference to statement of unreserved compliance was not helpful (e.g. in case of European carve-out, if the carve-out ended, that would require applying IFRS 1 for all companies). Nonetheless, the staff noted that this is already the requirement of IFRS 1 and the amendment only clarifies unclear requirements rather than changes practice.

Some Board members noted that they could agree with the proposal if the period between the last application of IFRS and the re-applying IFRS 1 is sufficiently long.

Finally, the Board narrowly (by 9 votes) agreed to publish this proposal in the forthcoming exposure draft.

The Board considered the proposed change against current Annual Improvements Criteria and agreed to include the proposal in the Exposure Draft Improvements to IFRSs which will be published later in the year.

IFRS 3 Business Combinations - Regrouping and consistency of contingent consideration guidance

The Board discussed the recommendation of the IFRS Interpretation Committee to include in the Annual Improvements Project an issue to amend the guidance on contingent consideration and to present it within one standard.

The Board considered the IFRS Interpretation Committee recommendation to clarify that contingent consideration that is a financial instrument in accordance with IAS 32 is not in the scope of IAS 39 or IFRS 9. The IFRS Interpretation Committee also proposed that all contingent consideration shall be measured at fair value at each reporting date, with any resulting gain or loss recognised in profit or loss.

The Board was uncomfortable with the proposal. One Board member questioned whether the proposal leads to convergence with US GAAP, given that IFRS 3 was developed together with the FASB with the aim to achieve convergence. The staff agreed to further investigate the impact of the proposal on convergence.

Several Board members were concerned with the proposal as they noted that the proposal would lead to fair valuing liabilities that are currently in scope of IAS 37. These Board members noted that this amendment raises questions about the broader issues of liability measurement and could potentially change current practice and thus it was in their view inappropriate to address this issue within Annual Improvement Project. The staff responded that the proposal only tries to address inconsistent wording within IFRS 3 rather than addressing broader issues.

Another Board member asked about the consistency of contingent consideration guidance between IFRS 3 and the proposed revenue recognition guidance. The staff will investigate the issue.

Finally, some Board members expressed concerns about the issue of own credit in contingent consideration measured at fair value. The staff noted that the own credit issue is pervasive and relates to the principle in IFRS 3 as such when fair value is applied.

The Board asked the staff to perform additional research to address the current practice, consistency with US GAAP and proposed revenue recognition guidance.

The Board also considered the proposed change against current Annual Improvements Criteria and noted that it needs to consider whether the issue is best addressed by annual improvements project or by post-implementation review of IFRS 3. The Board will revisit this issue at a later meeting.

IAS 24 Related Party Disclosures - Key management personnel

The Board discussed the recommendation of the IFRS Interpretation Committee to include in the Annual Improvements Project an issue to clarify the required disclosures in accordance with IAS 24 Related Party Disclosures in cases where reporting entity hires key management services from a separate management entity (e.g. in case of mutual funds who hire a separate management entity rather than management personnel).

The Board discussed modification of the definition of a related party to include among related parties the entity or members of its group that provides key management personnel services to the reporting entity and clarification whether the employees of the entity that provides these services, are key management personnel for the purposes of IAS 24.

Several Board members expressed concerns over these proposals as they considered potential unintended consequences on consolidation guidance. The staff noted that the fact that the management entity is identified as related party would not necessarily lead to consolidation (but rather it would depend on the agent or principal relationship and the nature of the benefits earned from the management relationship).

Other Board members questioned whether change in definition of related party fulfils the annual improvements criteria. The staff noted that the objective of the amendment is clarification of the inconsistency and change of definition is only a way how to achieve the objective.

Some Board members were also concerned by the number of related parties created by this changed definition. The staff clarified that the management entity is identified as a related party only if it provides key management services as defined by IAS 24 rather than by virtue of being a management entity.

As the Board was split on this issue, it asked the staff to bring the issue back and to provide examples that would clarify the proposals and consider potential unintended consequences.

Annual improvements - criteria

The Board considered the package of decisions (those annual improvements already agreed, i.e. IAS 1 - Clarification of borrowing costs exemption, IAS 1 - Comparative information, IAS 16 - Classification of servicing equipment, IAS 32 - Income tax consequences of distributions, IAS 34 - Segment information for total assets and IFRS 1 - Repeat application of IFRS 1) against the set of the proposed annual improvements criteria.

Without much discussion the Board agreed with the assessment against the annual improvements criteria and directed the staff to proceed to the balloting phase. The Board agreed to expose the proposal with a 90 days comment period. The staff is expecting to publish the Exposure Draft within a month.

IAS 40 - Transfers from investment property

This issue originated during the 2009 Annual Improvements process when concerns were raised about the changes in measurement bases from transferring investment property from one asset category to another. The 2009 Annual Improvements proposed:

• removing the requirement to transfer investment properties to IAS 2 at the commencement of development with a view to sale
• investment properties held for sale should be displayed as a separate category in the balance sheet
• investment properties held for sale should be subject to the same disclosures as non-financial assets held for sale in accordance with IFRS 5.

However, the comment letter analysis highlighted several issues in the interaction between IAS 40 and other IFRS.

Based on the comment letter responses, the IFRS Interpretations Committee recommended not finalising the proposals. During the May 2010 Board meeting, the Board asked the IFRS Interpretations Committee to reconsider the issue. After additional consideration the IFRS Interpretations Committee recommends that the transfers to inventories required by IAS 40 be retained and continue the present recognition and measurement of investment properties under other IFRSs, depending on the intended use and stage of development. The Board agreed with the recommendation of the IFRS Interpretations Committee.

Annual improvements - issues not to be addressed

During the September 2010 IFRS Interpretations Committee meeting, certain issues were reviewed for potential resolution through the Annual Improvements process.

The IFRS Interpretations Committee tentatively decided not to address two issues through the Annual Improvements process:

• The first issue related to IAS 1 regarding encouraged versus required disclosures which was not addressed primarily because current Board projects are proposing the inclusion of disclosure principles in IFRSs
• The second issue related to IAS 21 and repayments of investments and foreign currency translation reserves. The IFRS Interpretations Committee could not reach a consensus view on this issue.

The Board agreed with the IFRS Interpretations Committee's decision not to address these issues through the Annual Improvements process.

The staff presented the Board with a summary of the comment letters in response to Exposure Draft, Presentation of Items of Other Comprehensive Income which closed on 30 September 2010. The Board received 139 comment letters from various constituents across all geographic regions.

Respondents generally agreed with the proposal to combine the statement of profit and loss and the statement of other comprehensive income (OCI) into a single performance statement and rename the "Statement of profit or loss and other comprehensive income." However, respondents did not support the proposal to remove the option within IAS 1 to present all items of income and expense in two statements.

Even though respondents were generally supportive of the proposal, many suggested that the Board also needed to address the conceptual basis behind the use of other comprehensive income within financial reporting as well as address the issue of recycling of amounts recognised within OCI.

One Board member asked what the view of financial statement users were with respect to the exposure draft. The staff mentioned that users were generally supportive although two users did not support the proposals.

Another Board member mentioned that constituents already have concerns over the different philosophies of recycling amounts within OCI between the FASB and IASB. Additionally, the Board keeps increasing the usage of recognising items within OCI such as the credit component of financial liabilities measured at fair value. Therefore addressing these issues are an important task for the Board to undertake.

A couple of Board members mentioned their feeling that there is a lack of enthusiasm for the project with one stating she has heard the Board is "putting the carriage before the horse" by not addressing the conceptual issues around OCI before addressing the presentation issues. However, one Board member retorted that she feels that including profit and loss and OCI in a single statement is appropriate because of the lack of conceptual consideration around what constitutes recognition in OCI.

The IASB discussed three topics related to the ongoing hedge accounting project:

• Scope - own use exception
• Risk components - hedging items with a negative spread to LIBOR
• Disclosures

Scope - Own use exception

IAS 39 Financial Instruments: Recognition and Measurement currently requires that contracts to buy or sell a non-financial item that can be settled net, but are entered into for the purposes of receipt or delivery of the non-financial item as part of the entity's expected purchase, sale or usage requirements would be outside the scope of IAS 39. As a result, those contracts are not considered derivatives and would not be marked to market at each reporting period.

During outreach performed by the staff, commodity processors and servicing providers have expressed concern about the requirement within IAS 39 related to the "own use" exception. The business model for these entities includes acquiring a commodity, refining that commodity and then distributing the commodity, oftentimes into a fairly liquid market (e.g. sugar or canola oil) or are priced based on a commodity benchmark plus a processing margin. To mitigate risks in commodity price fluctuation during the refinement process (as their business model is strictly earning the margin related to the refinement process) these entities often enter into derivatives to fix their sales price of the refined product.

These entities manage their business on a fair value basis and oftentimes also on a net basis, however the inability to recognise the original acquisition contract as a derivative because of the own use exception results in an accounting mismatch. Applying fair value hedge accounting is a possible alternative, but is difficult because of the volume of contracts in place and the fact that many positions offset each other. Entities that do apply net hedging are required to frequently designate, dedesignate and redesignate the hedge relationship because of the frequent movements of the overall net position.

The Board considered three possible alternatives to address the own use exception issue:

• Retain the current "own use" exception requirement within IAS 39,
• Allow for election of the "own use" exception (approach similar to current practice under US GAAP), or
• Require entities that manage their business on a fair value basis to account for contracts that meet the "own use" exception as a derivative.

One Board member asked the staff whether under alternative three, similar to IFRS 9, an entity could have more than one business model for managing their business as the agenda paper referred to "an entire business" being managed on a fair value basis. The staff confirmed that similar to IFRS 9, entities could have more than one business model.

That Board member also asked whether the act of net settling a few contracts would prohibit those entities not managing their business on a fair value basis to continue to receive the own use exemption. The staff responded that the guidance related to the net settlement definition of a derivative was not being reconsidered as part of the hedging project and the requirements under IAS 39 would be retained within IFRS 9.

The Board tentatively agreed to retain the own use exception within IAS 39 but to require those entities who manage their business on a fair value basis to account for contracts to acquire non-financial items and permit net settlement as derivatives.

Risk components - Hedging items with a negative spread to LIBOR

IAS 39 currently requires that if a portion of the cash flows for a financial asset or liability are designated as a hedged item, the designated portion must be less than the total cash flows of the asset or liability. However, an entity may designate as a hedged item an asset or liability with an effective interest below LIBOR to be hedged for a component risk of changes in LIBOR. The difference between LIBOR and the negative LIBOR spread on the hedged item will be a source of hedge ineffectiveness, but so long as the effectiveness remains within the 80-125% effectiveness bandwidth, hedge accounting is retained. Entities may also choose a hedge relationship of other than one to one to improve the hedge effectiveness.

The staff raised the issue of whether a LIBOR-component of an interest bearing financial asset or liability exists if the effective interest rate of the instrument is lower than LIBOR and whether the LIBOR-component should be eligible for designation as a hedged item. The staff provided an analysis of an entity with a sub-LIBOR instrument who enters into a LIBOR for fixed swap. As LIBOR rates dropped below 1% a negative margin on the instrument occurs because of the floor of the fixed pay-leg.

The Board considered whether to retain the current guidance within IAS 39 described above or whether to allow for the designation of risk components on a benchmark risk basis that assumes cash flows exceeding the total actual cash flows of the hedged item. The Board tentatively agreed to retain the current guidance within IAS 39.

Disclosures

The Board continued its discussion from the September 2010 Board meeting on disclosures related to hedge accounting activities.

For the impact of hedge accounting on the balance sheet, the staff is developing a disclosure approach requiring a tabular format presentation of information by type of hedge and by risk category. For both fair value and cash flow hedges, an entity would disclose the notional amount and the carrying amounts of the hedging instrument (separating assets and liabilities). For cash flow hedges, an entity would also disclose the balance within accumulated other comprehensive income from revaluation of the hedging instrument that relates to the hedged item and the balance of any discontinued hedged items. For fair value hedges, an entity would also disclose the carrying amount of the accumulated gain or loss on the hedged item (the valuation allowance recognised on the balance sheet).

For the impact of hedge accounting on profit and loss, OCI and the cash flow hedge reserve, similar to the balance sheet disclosures above, the staff is developing a disclosure approach requiring a tabular format presentation of information by type of hedge and by risk category. For both cash flow and fair value hedges, an entity would disclose the changes in the value of the hedging instrument, the ineffectiveness recognised in profit or loss, and the line item in profit or loss in which hedge ineffectiveness is included. For cash flow hedges, an entity would also disclose the effective hedging gain or loss recognised in a separate line item in the income statement for hedges of net positions, the amount transferred out of accumulated OCI to profit or loss, the line item affected in profit or loss because of the transfer and a reconciliation of the cash flow hedge reserve.

In addition to the impacts of hedge accounting recognised in the financial statements, the staff is also developing disclosures on information not captured within the financial statements. These disclosures include information on the risk management strategy, quantitative information of risk exposures and how the risk is hedged including the monetary amount or quantity (barrels, tonnes, etc.) exposure for that risk, the amount or quantity of the risk exposure being hedged, and how hedging has changed the exposure.

The staff has favoured not requiring any specific level of aggregation for disclosure purposes rather stating that management judgement would be required in determining the appropriate level.

One Board member encouraged the staff to develop a disclosure framework that follows a logical manner rather than simply starting with the accounting information. Another Board member questioned how certain of the disclosures could be aggregated to any meaningful level given the requirement to disclose specific quantities. But the Board overall supported the direction the staff was proceeding with in developing the disclosure requirements.

The staff provided the Board with a summary of constituent outreach activities the IASB has performed since the issuance of the exposure draft.

The staff has met with over 400 preparers, accounting firms, industry groups, regulators and users in around the world through various mediums including conferences, roundtables, discussion forums, conference call and individual meetings. The staff also highlighted some of the areas frequently raised as concerns, but did not discuss the issues in detail as those issues will be brought back to the board within specific agenda papers after the comment letter process has closed.

The staff summarised, in very broad terms, the comment letters and the feedback received during the comment period and outreach activities in order to provide the Board with an overview of the main issues raised by respondents. The staff explained that overall the responses to the ED have been supportive of the overall objectives of improving transparency, comparability and understandability by eliminating the options for recognition and presentation of changes in defined benefit plan assets and liabilities as well as improving the disclosures about those plans. However, in many cases the support is based on the condition that the Board perform a comprehensive review of post-employment benefit accounting in future. Some respondents did not support the limited scope of the project and suggest that effort would be better spent on proceeding directly to a comprehensive review.

Recognition

The Board was informed that a majority of respondents agreed with the proposal to eliminate the corridor approach and to recognise all changes in the defined benefit obligation and the fair value of plan assets when they occur. Those respondents disagreeing with the proposal, stated that the recognition requirements should not be changed until the problems with the measurement of the defined benefit obligation have been resolved. Others argued that the proposal would make pensions appear riskier than other economically similar liabilities that are not measured at a current value.

The staff reminded the Board that it previously acknowledged that there are some general questions that are yet to be answered about performance reporting in the financial statement presentation (FSP) project, but that the Board has previously decided to address presentation of post-employment benefits now, rather than to risk delaying progress on immediate recognition by waiting for the FSP project to be finalised.

Some Board members question whether any new arguments were put forward not to eliminate the corridor approach. The staff responded that most concerns were around volatility in the statement of financial position and that no new information has been provided to invalidate the Board's previous discussions and decisions on the matter. The Board unanimously confirmed the decision to eliminate the corridor approach.

The Board then turned its attention to the proposals around the recognition of unvested past service cost. The staff noted that those respondents that supported the elimination of the corridor approach, also supported the proposal to recognise unvested past service cost at the time of the plan amendments. Those opposing the proposal argued that the majority of plan amendments are initiated with the intent to benefit future periods and that the proposal is therefore not consistent with the principle that employee benefit expense is recognised in the period when the employee must provide the service needed to qualify for the benefit.

Some Board members were concerned with the apparent inconsistency between IAS 19 and IFRS 2 with regards to unvested past service cost. It was pointed out that this project does not include re-examining the accounting for defined benefit plans based on a benefit formula. If the Board retains the attribution of benefits in accordance with a benefit formula, the unvested past service cost will be a liability in accordance with IAS 19. Some Board members were also concerned about the opportunities for structuring opportunities. The Board was reminded that it has previously identified this apparent inconsistency but decided to address that as part of the comprehensive project and not as part of this limited scope project. The majority of Board members voted in favour of confirming the proposals in the ED to recognise unvested past service costs when the plan amendment occurs.

By a large majority, the Board also confirmed its previous tentative decision to include in the definition of termination benefits only those benefits provided in exchange for termination of employment.

Disaggregation

The staff noted that most respondents agreed with the proposal to disaggregate defined benefit cost into a service cost, finance cost and remeasurement component. Those disagreeing with the proposal regard the determination of an appropriate disaggregation method as intrinsically linked to the accounting model and that is should be considered as part of the fundamental review of IAS 19. The staff explained that disaggregation is the step before presentation and that regardless of what the Board decides on presentation in the statement of comprehensive income, the cost should be disaggregated into separate components.

The Board unanimously confirmed the proposal that entities should disaggregate the changes in the defined benefit obligation and fair value of plan assets into the three specified components and that the service cost component should exclude gains and losses arising from changes in the estimates of assumptions used to measure the service cost.

Defining the finance cost component

The staff explained that the majority of prepares and pension funds supported the expected return approach, while the majority of actuaries, accounting professional bodies and national standard setters supported the net interest approach. Views from the accounting firms and users were mixed with no clear majority for either approach. The staff also noted that the members of the Employment Benefits Working Group were divided between the two approaches. The staff explained that the advantages and disadvantages of each approach do not clearly favour either and that the staff does not believe that the net interest approach represents a significant enough improvement to justify a change in the existing requirements of IAS 19.

Some Board members supported the staff proposal to retain the existing requirements of IAS 19 with regards to the expected return as they do not consider the existing model to be broken or the alternative to be a significant improvement. Other Board members regarded the corridor approach as an integral part of expected return. By eliminating the corridor, the expected return becomes meaningless. Another Board member noted that by recognising the expected return on risky assets in profit or loss, while the actuarial gains or losses (risk) on those assets are recognised in OCI without any recycling, is not reflecting the underlying economics of the investments.

Several other Board members were supportive of the net interest approach but were concerned about the timing of making such a significant change.

Some other Board members suggested retaining the option to recognise all changes in immediately in profit or loss. Another Board member noted that if you use expected return, there is more pressure on recycling to profit or loss. If the Board decided to retain the expected return approach, it would have to retain the option of recognise all changes immediately in profit or loss.

When put to a vote, the Board voted in favour (9 against 4) of the net interest approach as articulated in the ED. The Board will continue to deliberate the remaining issues at the next meeting.

The Board continued its discussions on the amortised cost and impairment project, specifically with regard to the recognition of subsequent changes in expected losses. At the 5 October 2010 Board meeting, the staff presented the Board with information about two possible alternatives for recognising subsequent changes in expected losses that could be operational in the context of open portfolios (the full catch up method proposed in the ED was criticised as not operational for open portfolios).

The first alternative is the time proportionate (or partial catch-up) approach which allocates a constantly updated estimate of expected losses over the total life of the portfolio with the amount recognised in the current period representing those expected losses that would have been recognised to date had they been included in the initial estimate. The second alternative is the single period allocation (or no catch-up) approach which would spread the subsequent changes in expected losses proportionately over the current and future periods.

During today's meeting, the staff provided information on what the amounts within the statement of financial position and within profit and loss represent under IAS 39, the full catch up approach in the ED, and the partial and no catch up approach alternatives. Amortised cost under the proposal in the ED represents the present value of all future expected cash flows. However, by addressing the operational limitations of the ED proposal, usage of either the partial catch up or the no catch up approach makes understanding the amount recognised in the statement of financial position more difficult (particularly for the no catch up method which also introduces a ceiling/floor concept for the loss allowance).

The Board generally struggled with the no-catch up approach primarily because of the difficulty in explaining what the amount recognised within the statement of financial position represented. The Board reaffirmed their support of the conceptual basis for amortised cost measurement in the ED but acknowledged that to address the operational issues for open portfolios, the partial catch-up approach would be the only alternative that somewhat maintained the principles within the ED.

The topic shifted to scope with one Board member expressing concern as to whether even the partial catch-up method could be applied by non-financial institutions. The staff responded that they are currently developing a model that would be operational for open portfolios (and therefore for closed portfolios as well). The Board could later consider whether the standard would impose further scope limitations to certain financial instruments (e.g., short term trade receivables) or certain types of entities (e.g., non-financial entities).

Some Board members raised the question of whether they should be considering two separate models, the partial catch-up approach for open portfolios and the full catch-up model (as proposed in the ED) for closed portfolios or individually significant items (e.g., leveraged buy-out loans). Another Board member mentioned that another alternative would be to retain the fundamental concepts contained within the ED and perhaps permit practical expedients for open portfolios by using a partial catch-up approach.

The Board made no definitive decisions, but did provide the staff with direction by eliminating the no-catch up approach from further consideration and concentrating their efforts between further development of the partial catch-up approach and reconsideration of the full catch-up approach from the exposure draft.

The IASB discussed:

• Use of credit derivatives
• Discontinuation of hedge accounting
• Rebalancing and reassessment of the hedge ratio
• Eligibility of hedged items — groups and net positions

Use of credit derivatives

Financial institutions often use credit derivatives to manage the credit risk of their lending activities (both outstanding loans and loan commitment facilities). Lending activities typically include various optionality features including prepayment options, liquidity options (undrawn facilities), and extension options. The credit derivatives used to manage credit risk are credit default swaps (CDS) (derivatives marked-to-market under IAS 39) which creates an accounting mismatch and results in financial reporting that doesn't faithfully represent the underlying economics. Loans are typically measured at amortised cost under IAS 39 (and IFRS 9) and loan commitments typically fall within the scope of IAS 37 rather than IAS 39.

Fair value hedge accounting is difficult to achieve for these relationships because of the inherent difficulty in isolating and measuring the credit risk component. Similarly, the fair value option is not a suitable alternative for a variety of reasons. For loans, the decision to purchase credit protection through CDS is typically made after origination of the loan so the decision to designate the loan as at fair value through profit and loss would have to be made prior to the decision to protect the credit exposure with credit derivatives. Also, entities often do not fully protect their credit exposure but instead leverage the CDS protection for a portion of their credit exposure. However, designating the entire loan at fair value and a CDS with a notional amount less than the loan exposure would still result in an accounting mismatch. For loan commitments, they typically fall outside the scope of IAS 39 and therefore are ineligible to designate as at fair value through profit and loss.

The staff presented three alternatives to the Board for consideration of how to permit fair value accounting for the loan or loan commitment. The first alternative was to permit fair value designation only at initial recognition, permit designation of a component of a nominal amount and permit discontinuance of fair value accounting. The second alternative is similar to alternative one except that the fair value designation could be made at any time, but if made subsequent to initial recognition, then the difference between the carrying amount and fair value at the date of designation would be recognised in profit and loss. The third alternative is similar to alternative two, except rather than recognising the difference between the carrying amount and the fair value immediately through profit and loss, it would be deferred and amortised.

The Board had significant reservations with the staff proposals. One Board member acknowledged the problem under current practice and said that the Board needed to do something to address the accounting mismatch. However, he framed the staff proposals as a new hedge accounting model. He said his preference would be to somehow allow for fair value hedge accounting under the model being developed by the Board (where the hedged item would not be remeasured but instead would have a separate valuation allowance) because when recording the loan at fair value investors lose information about the amortised cost and interest margin on the loan.

Another Board member expressed his concerns with the proposals stating the Board will get pressure to provide similar allowances for the fair value option for other instruments such as permitting designation after initial recognition and discontinuing designation. He suggested that an approach under U.S. GAAP's hedge accounting model could be a basis for a solution. ASC 815-20-25 (formerly DIG G20) addresses the assessment and measurement of the effectiveness of a purchased option used in a cash flow hedge. The Board member analogised the premium payments on a CDS to an annuity payment to acquire a purchased option.

The Board tentatively decided not to permit exceptions to the fair value designation for loans and loan commitments being managed for credit risk with credit derivatives. However, the Board did agree to further explore other potential alternatives as solutions.

Discontinuation of hedge accounting

The Board next discussed if and when a hedging relationship could or should be discontinued.

The staff proposed criteria for discontinuing a hedging relationship as follows:

• Mandatory discontinuation occurs when the hedging relationship ceases to meet the qualifying criteria for hedge accounting (entities would be able to start a new hedging relationship with the items previously included in the discontinued hedge)
• Adjustments to the hedging relationship would require discontinuation when there was a change in the risk management objective of the hedge relationship.
• Adjustments to the hedging relationship are permitted for a continuing hedge relationship when the qualifying criteria (other than risk management objective) have either failed or anticipate failing.
• Elective dedesignation would not be permitted when the qualifying criteria are still met.
• The designation documentation supporting the hedge relationship must be updated to address any changes in the hedge relationship.

The Board discussed whether hedge accounting would be elective or mandatory as that decision could be relevant to whether elective dedesignation were permitted. The staff responded that the Board had not made any decisions on whether hedge accounting would be mandatory or elective but conceded that with the model under development it would be difficult to require mandatory use of hedge accounting.

Several Board members expressed support for the criteria proposed by the staff for discontinuation. One Board member summarised it as bringing rigor, discipline and transparency to hedge accounting.

Other Board members expressed concerns with the staff proposals, particularly with respect to the criteria of not being able to dedesignate the hedge accounting relationship. One Board member mentioned that he just participated in the FASB financial instruments roundtable and their exposure draft had a similar proposal which very few supported.

There was a question on the documentation criteria as the staff has not raised the components of the hedge documentation requirements with the Board. The staff responded that it had not brought the issue to the Board yet, but the hedge documentation would likely include such items as the hedging instrument, the hedged item, the risk being hedged, whether the hedge was on a risk components basis, the period of the hedge relationship and anticipated sources of ineffectiveness in the hedge relationship.

The Board tentatively agreed with the staff proposal on the discontinuance criteria.

Rebalancing and reassessment of the hedge ratio

Under the hedge accounting model being developed by the Board, the effectiveness assessment requires entities to rebalance their hedge relationships such that they do not result in unexpected hedge ineffectiveness. To accommodate the need for entities to rebalance their hedge relationships in order to continue to meet the qualifying criteria, the Board tentatively agreed to permit voluntary rebalancing for continuation of hedging relationships which would not be dependent on the type of unexpected hedge ineffectiveness but rather that the risk management objective continues to apply.

The Board was also provided with the following examples of the application of rebalancing and its interaction with discontinuation of hedging relationships:

• Changes in the behaviour of the benchmark: increase in the premium between benchmark and hedged commodity with no change in the hedged item
• Changes in the behaviour of the benchmark: reduction in the premium between benchmark and hedged commodity with no change in the hedged item
• Changes in the quantity of the hedged item (increase) with no changes in the basis
• Changes in the quantity of the hedged item (reduction) with no changes in the basis

Based on the examples provided, the Board tentatively decided that assuming the risk management objective had not changed, then adjusting the hedge ratio would not impact the measurement of changes in the fair value of the hedged item, rebalancing may require partial discontinuation if the changes are above the expected levels of ineffectiveness, and if the quantity of highly probable forecast transactions is overestimated then partial discontinuation would be appropriate assuming there is no history of routinely overestimating such transactions.

Eligibility of hedged items — Groups and net positions

Based on requests made by the Board at the September 2010 Board meeting, the staff developed illustrative examples of net position hedges. Based on the additional information provided, the Board reconsidered the three alternatives of how to establish criteria for applying hedge accounting for net positions originally discussed during the September 2010 Board meeting.

The first alternative is to carry over from IAS 39 all of the existing restrictive criteria that apply to groups of hedged items. The second alternative is to include some of the restrictive criteria, such as that a net position cannot be an eligible hedged item in a cash flow hedge. The third alternative would not carry over any of the existing restrictive criteria from IAS 39, but rather include concepts such as demonstrating that it manages the items on a group basis for risk management purposes and identifying and designating gross amounts as part of the hedge relationship.

The Board was primarily split between Alternatives 2 and 3. However, one Board member was not comfortable with either Alternative 2 or 3 and therefore preferred Alternative 1. The Board tentatively agreed to proceed with Alternative 2 (with 8 votes) but also plans to explain Alternative 3 within the exposure draft.

The Board also discussed the topic of whether a net nil position (inbound and outbound firm commitments of the same amounts) should be eligible for hedge accounting. The staff acknowledged that this would likely be a rare scenario in practice, but did recommend permitting the hedging of a net nil position as it would be inconsistent to not allow hedge accounting because an entity manages foreign exchange risk on a net basis. The Board tentatively agreed to permit hedge accounting for a net nil position.

The Boards began their redeliberations on the pending fair value measurement standard based on feedback received to the IASB's exposure draft on measurement uncertainty and the FASB's proposed ASU, Amendments for Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.

Disclosure of highest and best use

The IASB and FASB have proposed a disclosure requirement for assets subsequently measured at fair value in the statement of financial position (for IFRSs assets under IAS 16 and IAS 40) that if the highest and best use of an asset is other than its current use, a disclosure of the reason that asset is being used in an alternative manner than its highest and best use.

An IASB Board member asked whether impaired assets would fall into this disclosure requirement. The IASB staff stated they would not apply now, but that the IASB would separately consider the disclosure requirements for IAS 36 and whether they should follow the fair value disclosure requirements.

The Boards tentatively agreed to require that for assets subsequently measured at fair value in the statement of financial position and for items disclosed at fair value but not measured at fair value in the statement of financial position to disclose the reason the asset is being used in a manner other than its highest and best use. Additionally, the Boards agreed not to limit the scope to particular types of non-financial assets so that any future decisions to require fair value measurement or disclosure would also be subject to this disclosure.

Disclosure of Level 1 and Level 2 transfers

The Boards have proposed requiring a disclosure of any transfers between Level 1 and Level 2 of the fair value hierarchy. IFRS 7 and ASC 820 already require similar disclosures for significant transfers between Level 1 and Level 2 and many respondents to the comment letter process did not support the proposal because of the potential burden of monitoring for insignificant transfers.

Several members of both Boards were concerned with the inclusion of the term significant in that it adds an additional layer of complexity to financial reporting as entities have to assess the level of significance to transfers. One IASB Board member also questioned the additional burden created be disclosing all transfers believing the information would already be available and that disclosing all could actually be less burdensome than having to monitor for significance. One FASB member mentioned that he viewed the trend analysis of this disclosure as an important source of information (to monitor items moving down the hierarchy) and that only including significant transfers could impede the quality of the information provided.

Both Boards tentatively agreed to retain the language in the proposals that all transfers between Level 1 and Level 2 be disclosed.

Disclosure of fair value hierarchy for disclosed but not recognised items

The Boards have proposed to require that items for which fair value is disclosed, but not recognised at fair value, also be categorised within the fair value hierarchy. Many comment letter respondents (typically preparers) did not see the relevance of providing the level within the fair value hierarchy as these items are not managed on a fair value basis.

However, users feel that understanding the level of subjectivity in the fair value measurement is helpful.

Both Boards tentatively agreed to retain the language in the proposals that items disclosed at fair value but not measured at fair value in the statement of financial position be categorised within the fair value hierarchy.

Unit of account guidance

Certain standards under U.S. GAAP and IFRS require fair value measurement but do not contain specific guidance on the appropriate unit of account. Based on the comment letters received on the exposure drafts, preparers are applying valuation guidance to address unit of account questions. Additionally, the proposals removed the concept of highest and best use for financial assets.

The most notable example of the lack of unit of account guidance is for investment entities where an entity owns 100% of the outstanding shares of an investee and also provides debt financing to the investee. Fair valuing the entire interest in the entity and fair valuing the equity and debt investments separately may result in different valuations.

The staffs of both the IASB and FASB acknowledged that guidance is needed in these instances, but that providing that guidance should be done within the context of those specific standards rather than the fair value measurement standard. The staff believes it can incorporate guidance through drafting within the fair value measurement standard on the value maximisation concept to provide some amount of clarity until a more permanent solution can be achieved.

The Board tentatively agreed not to address the issue of unit of account guidance within the fair value measurement standard.

The Boards continued their discussions on accounting for emissions trading schemes. During the September 2010 Board meeting the Boards tentatively agreed that both purchased and allocated allowances under emissions trading schemes should be recognised as assets. Additionally, a liability is incurred upon the allocation of an allowance.

At this meeting, the Boards discussed:

• Measurement of allowances and the associated liabilities
• Quantity of allowances expected to be returned
• Recognition and measurement of excess emissions.

Measurement of allowances and the associated liabilities

The IASB and FASB staff provided the Boards with various alternatives of measurement for the allocated allowances (both initial and subsequent) and the associated liability. Those alternatives include 1) fair value at initial and subsequent measurement, 2) initial fair value measurement, subsequent measurement not at fair value but subject to impairment, 3) initial measurement at transaction price with no remeasurement and subject to impairment, and 4) a business model approach (which would require an assessment of the intention on how an entity intends to use their purchased and allocated allowances).

Most Board members were generally supportive of the model to fair value at initial and subsequent measurement. One FASB Board member suggested an approach of fair value for initial and subsequent measurements when an entity was net long or net short with a net presentation approach (such that neutral positions would be recognised at nil).

However, a few Board members expressed support for a business model approach as it was consistent with the approach taken under the Board's respective financial instruments projects. The Board tentatively agreed to proceed in development of an approach where the allowances and associated liabilities would be measured at fair value at initial recognition and subsequently.

Quantity of allowances expected to be returned

The Board also discussed how to determine the quantity of allowance expected to be returned. The staff provided the Boards with two alternative approaches, the expected return and the derecognition approach. The expected return approach would require an entity to estimate the initial measurement of the quantity of allowances to be returned based upon expectations (and could permit a day 1 gain). The derecognition approach would require the initial measurement of the quantity of allowances to be returned as all allocated allowances with subsequent derecognition based on passing a threshold criterion. The Boards both tentatively decided (by narrow votes; IASB - 8/FASB - 3) to proceed with further development of the expected return approach.

Recognition and measurement of excess emissions

The Boards also discussed when an entity should recognise a liability for emissions that exceed the allocated amount. The Boards considered whether the additional liability would be recognised only after emissions have surpassed the allocated allowances or whether an amount should be accrued prior to exceeding the allowance amount. The FASB was unanimous in supporting an approach of recognising a liability prior to exceeding the allocated allowances amount however the IASB was split in their views. The IASB and FASB staff will further develop the two approaches including examples for additional consideration at a future meeting.

The Boards held an educational session on the feedback the FASB received from constituents regarding the proposed impairment and interest recognition guidance. The Boards also discussed the way forward in the project by examining various models that could be pursued. This was educational session only, no decisions have been made.

The FASB staff noted that the comment letters urged the Boards to work together and to develop a converged impairment model for financial assets. Constituents also strongly supported development of a single model for both loans and securities.

The outreach showed a strong support for elimination of probability threshold for recognition of impairment. Nonetheless most constituents disagreed with limiting the information considered for estimation of credit loss to current events (i.e. no forecasting of future situation) and noted that such limitation would be inconsistent with pricing of the loans. The FASB noted that it received mixed feedback on timing of recognition of credit losses — some constituents supported upfront recognition of credit losses, others supported spreading the losses over the life of the instruments.

Finally, most constituents urged the FASB to simplify the guidance for accounting for purchased assets and retained guidance on income recognition. In general, constituents urged the Board to provide practical expedients and address operational issue in its model.

The FASB noted that the feedback on its proposal received on public roundtables was consistent with the summary of comment letters.

The FASB staff provided an overview of the four significant questions that need to be addressed by the Boards and permutation of impairment models that flow from answers to these questions:

• Information considered for credit loss estimates (no forecasts, forecasts for foreseeable future, forecasts for the remaining life of the instrument)
• Time horizon for the loss estimates (expected loss over the life of the instrument, expected loss over a shorter period)
• Timing of recognition of credit losses (upfront recognition, spread recognition, distinction between the good book and bad book), and,
• Presentation of yield on the face of the performance statement.

The Boards discussed these four issues and their permutations. They noted that presentation of yield would be probably the least controversial issue and can be addressed separately. Some Board members noted that the presentation of yield would be important as decoupling could potentially lead to different objective of amortised cost measurement than effective yield.

The Boards discussed the information that should be considered for loss estimates. The Boards concluded that in practice the options of considering foreseeable future or the life of the instrument would be similar as in practice estimate of losses over the life of the instrument would be based on forecasts over foreseeable future period (as expectations over one to two years out are fairly unreliable).

The Boards then considered the timing of recognition of credit losses and acknowledged that this would be their biggest hurdle in reaching a converged standard. The preliminary views of the Boards diverged on this issue. Each Board leaned to their respective approaches in their exposure drafts with the FASB members gravitating towards upfront recognition of credit losses, whereas the IASB members preferred spreading the losses over the life of the instrument. When defining the objective of the model, the FASB focused on the principal amount not collected, whereas the IASB focussed on the present value of the future cash flows. The FASB noted that the IASB model, despite proposed practical expedients would be very difficult to apply and noted the operation difficulties in distinguishing between the good book and bad book on a portfolio level.

The Boards noted that these issues should be deliberated jointly and asked the staff of both Boards to consider the issues as well as ways forward. The Boards will discuss the way forward as well as good book — bad book distinction at the November joint meeting. The IASB Chairman noted that the Boards should try to develop a common model for the impairment model or in case of divergence in opinions present alternatives that could be submitted to constituents for comments.

The Boards considered the conditions necessary for offsetting financial assets and liabilities. The Boards discussed six potential conditions that could be considered as conditions for offsetting and their interaction. These conditions included:

1. whether the parties need to have the ability to offset or settle net
2. whether the parties need to demonstrate an intent to settle net
3. whether the amounts owed under the respective contracts ought to be settled on the same date or be settled simultaneously
4. whether the financial asset and liability ought to have the same maturity
5. whether the financial asset and liability ought to have the same underlying risk; and
6. whether offsetting should be on the basis of bilateral or multilateral netting arrangements.

After a discussion that covered the practice of netting as well as perceived purpose of the statement of financial position (shall it portray liquidity, credit risk, risks in general etc.), the Boards concluded that in most cases both net and gross figures are useful and thus both need to be disclosed (either on the face or in the notes).

Several Board members noted that the right of offset must be substantive and this assessment might be complicated by enforcement of offsetting in different jurisdictions.

The Boards agreed that when the parties have the substantive unconditional right (ability) of offset and they have the intent to net settle offsetting should be required. In this case no other conditions would be required.

The Boards also discussed situations when parties have the unconditional right (ability) of offset and enter into transaction simultaneously. The Boards discussed what does simultaneously mean (at the same moment vs. the same date). The Boards considered the exposure to counterparty, credit and liquidity risk in this situation but did not reach any conclusion. The Boards asked the staff to further analyse the issue and will revisit the issue at their November meeting.

The Boards continued their discussion with the netting when parties have the conditional right (ability) of offset (conditional on bankruptcy). Several Board members noted that other conditions would need to be fulfilled in this situation (i.e. the same day, the same maturity and the same underlying risk). Other Board members disagreed. They noted that offset is applicable only on bankruptcy and considering this conditionality is inconsistent with the principle of going concern. In addition, they noted that the counterparties would exchange gross cash flows payments in the meantime.

The Boards asked the staff to further analyse the issue and will revisit the issue at their November meeting.

The Boards asked the staff to prepare three options for the November meeting covering netting in the three situations covered. Some Board members expressed their concerns that the emerging consensus seems to be to allow netting in fewer situations than is the current practice under both IFRSs and US GAAP and limit it virtually to payment netting. The Boards will discuss these issues at their November joint meeting.

The staff presented an analysis of comment letters from the recent ED Conceptual Framework for Financial Reporting: The Reporting Entity. The feedback from the exposure draft was generally positive, nonetheless, constituents raised several significant issues that need to be re-deliberated. No formal decisions were made at this meeting.

The Board spent a considerable amount of time discussing whether to include in re-deliberations issues related to the nature of guidance on control in the Reporting Entity Chapter or in the Consolidation guidance on the standard level. The Boards also noted that several other issues need to be included in the re-deliberation process — the combined financial statements, providing separate financial statements as well as perspective of financial reporting (entity perspective vs. proprietary perspective). The Boards did not discuss the issues in detail as they will be subject of separate papers at a later stage. Some Board members expressed their concerns that the Board will re-discuss issues that were already discussed as part of the discussion paper stage or in the remits of the first chapter of the conceptual framework that was finalised earlier this year.

The Boards also discussed the timing of the project and asked the staff to analyse the nature of the issues that need to be re-deliberated. The staff will provide this analysis in November. In general, the Boards noted that given the priorities of the Boards to finish the MoU projects by June 2011, finalising of this project seems to be less urgent. The Boards will decide in November whether given the nature of the issues on the project the Boards could finalise the guidance speedily. Nonetheless, most of the Board members seem to be unconvinced that the Boards will be able to finalise the project in that timeline and in light of the priorities suggested deferring re-deliberations beyond June 2011. The IASB Chairman suggested waiting for the staff analysis in November before making final decision on timing of the project. At that point the Boards will also consider an updated project plan and plan for outreach activities.

The Boards considered the ways forwards in the FICE project and initial suggestions of some Board members to perform a targeted improvements approach in the areas of fixed-for-fixed guidance, convertible debt and redeemable and puttable instruments.

Most Board members expressed their concerns over timing of the project, given the convergence priorities (mainly to finish the four big projects — Revenue, Leases, Financial Instruments and Insurance Contracts) by June 2011. They noted that given these priorities the FICE project should be deferred. Another Board member noted that the Boards should first agree on classification and measurement of basic financial liabilities before proceeding to hybrid instruments. Additionally, several Board members questioned the usefulness of the targeted improvements approach — they noted that convergence within these issues would require significant time and would not lead to full convergence in debt and equity classification, due to divergent nature of the other guidance in this area. Some Board members question the usefulness of the project before the Boards address the issue what is equity on a conceptual level.

Given all these concerns the Boards decided to remove the FICE projects from its active agenda for the time being.

The Boards considered the summary of comment letters from the ED Presentation of Items of Other Comprehensive Income. The Boards noted that constituents supported all aspects of the proposal apart from the most significant one — presentation of one continuous statement of profit or loss and other comprehensive income with two sections (i.e. support was limited to change of name, separate presentation of recycled and non-recycled items as well as presentation of income taxes). Nonetheless, constituents in general questioned the merits of the proposals before the Boards first addressed conceptual issue what is performance or the principle when items of OCI should be recycled and when not.

Almost all the discussion focussed on the requirement to present a single performance statement with two sections. The Boards remained split on whether to mandate single performance statement (supported by a slight majority of the IASB members), to mandate two separate performance statements (idea suggested by some FASB members) or to maintain status quo for the IASB. The FASB seem to see some attraction in the current IASB guidance on an option between a single statement or two statements that follow each other (what would be a change from current requirements in US GAAP that allows presenting items of OCI within the Statement of changes in equity). Given these diverse opinions the Boards asked the staff to provide an additional analysis of this issue (as other issues were relatively uncontroversial) and suggest some middle ground that would emphasise the importance of information in other comprehensive income but without de-emphasising the importance of net income. The Boards will continue discussion about this issue at the December joint meeting.

The staff provided the Board with a summary of constituent outreach activities the IASB and FASB has performed since the publication of the staff draft. The staff noted that the outreach is still taking place, in cooperation with preparer group (re-casting the financial statements), users and user groups as well as the EFRAG. The staff also highlighted some of the areas frequently raised as concerns, or areas that need more clarification or are subject of misunderstanding among constituents but did not discuss the issues in detail as the outreach is still taking place.

Some Board members expressed serious concerns about the project — its timing (both in terms of Board time and implementation time), perceived complexity and costs to implement as well as application for financial institutions.

Some Board members questioned if all the proposals in the staff draft need to be implemented as a single package and asked the staff to ask for feedback during the outreach relating to prioritisation of some of the proposals that might be easier to implement.

Other Board members expressed their general concerns over the project — they would prefer first to address the conceptual issues what is performance, what is the principle around recycling before mandating the major change of financial statements. These Board members also noted that any proposal of change in financial statements should be finalised only after major changes related to financial instruments, leasing and revenue are finalised as they might change financial statements. Some Board members also noted that finalisation of this project is less urgent than finalisation of other convergence priorities before June 2011.

In general, the Boards seemed to prefer a pause in the project that would allow performing and finalising additional outreach and addressing concerns of constituents as well as development in other projects. The Boards noted that after the required changes caused by convergence priorities, it would be difficult to impose another significant change on constituents that was not perceived to provide major benefits so soon after implementation of major changes related to other priority projects.

Finally, the Boards asked the staff to continue in performing outreach activities and directed it to prepare a project plan that would allow for discussion of the proposal after June 2011.