The staff presented an analysis of comment letters received on the exposure draft Severe Hyperinflation (amendment to IFRS 1 First-time adoption of International Financial Reporting) published in September 2010.

The Board has received 28 comments letters, all supporting the proposed amendment, however respondents raised concerns on the following matters:

• Scope of the amendment
• Comparative information
• Other comments.

Scope of amendment

Some respondents asked the Board to clarify if the amendment would apply to any entity whose functional currency had been subject to severe hyperinflation in the past, whether or not this entity prepared financial statements under IFRS at the time. Some Board members were confused by the question, especially since IFRS 1 allows an entity to use fair value as the deemed cost on initial adoption. The staff explained that the fair value as deemed cost exemption only applies to tangible fixed assets but is not available to other assets such as intangible assets. After a short deliberation, the Board agreed that the amendment should be made available to all entities whose functional currency has been subject to severe hyperinflation in the past and that is should be made clear that it not only applies to entities that are resuming IFRS accounting.

Respondents also asked the Board to clarify to which assets and liabilities the proposed amendments could be applied to. Some respondents identified the risk that an entity could unnecessarily apply the exemption to assets and liabilities that were acquired after the functional currency normalisation date. In addition, the respondents asked whether the exemption may be applied to assets and liabilities on an 'item by item' basis.

Some Board members were supportive of allowing the exemption to be applied on an 'item-by-item' basis as this would be consistent with the application of the other exemptions in IFRS 1. However, some other Board members could not envisage why it would be possible to apply to requirements of IFRS 1 to some assets but not for others. The staff explained that once an entity has suffered severe hyperinflation, there would be not real alternative than to apply the exemption. The Board deliberated the matter and considered a situation where a group with a functional currency that is suffering from severe hyperinflation has a subsidiary that doesn't suffer from severe hyperinflation. The Board did not consider it appropriate for the subsidiary to be fair valued through the exemption. The Board agreed that the exemption should apply to all the assets and liabilities in a group that with a functional currency that suffered from severe hyperinflation at the transition date. The Board asked the staff to redraft the amendment how they see fit and return it for consideration at a later date.

Comparative information

The Board considered whether it would be appropriate for an entity to have a short comparative period when the functional currency normalisation date falls within the comparative period. Although some Board members were uncomfortable with situations where the comparative period would only be a month or two, it was acknowledged that the situation is not unique to normalisation of severe hyperinflation, but equally applies to newly incorporated entities. The Board unanimously agreed to allow a comparative period that is shorter than 12 months.

Other comments

The Board considered other comments received from respondents and agreed that no further changes need to be made to include a description of severe hyperinflation or to exempt an entity from the reconciliation to previous GAAP as required by IFRS 1.24.

The Board approved an effective date of reporting periods beginning on or after 1 July 2011 with early adoption permitted.

The staff would circulate a marked-up ballot to the Board during the course of the meeting.

The staff presented the Board with an analysis of the responses received on the Exposure Draft Defined Benefit Plans.

Past service costs, curtailments and settlements

The staff explained that the majority of respondents to the ED supported the proposal to present gains and losses arising from curtailments in profit or loss and gains and losses arising from routine settlements in other comprehensive income. Respondents also supported the disclosure of the details of any plan amendments, curtailments and non-routine settlements. However, the majority of respondents did not support the presentation of non-routine settlements in other comprehensive income.

Curtailments

Curtailments were defined in the ED (without substantial change from current IAS 19 requirements) as:

1. a significant reduction in the number of employees covered by a plan; or
2. an amendment to the terms of a defined benefit plan so that a significant element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.

Part (b) of the proposed curtailments definition is the same as the definition of past service cost except it applies to plan amendments that change benefits for future service.

The distinction between past service cost and curtailments is necessary in current IAS 19 because curtailments are recognised immediately, but past service cost is recognised over the vesting period. Because the Board has tentatively decided to require immediate recognition of unvested past service costs the distinction between past service cost and curtailments is no longer necessary. Therefore, past service cost will include amounts attributed to past service resulting from plan amendments to both past and future service and would be recognised immediately.

The Board considered the following approaches to part (a) of the definition of curtailments (the significant reduction in the number of employees covered by a plan):

1. retain it as currently defined in IAS 19, or
2. remove it from the definition of curtailments (which will result in the removal of the definition of curtailments in its entirety).

Without much deliberation, the Board tentatively agreed not to eliminate part (a) of the definition. The Board was of the opinion that if the criteria is eliminated, there will be no guidance to differentiate between the closure of a plan to all employees (which is closer to a plan amendment) and increase in turnover (which is closer to an actuarial gain or loss).

Settlements

The staff reminded the Board that settlement gains or losses arise when an entity settles its employee benefit obligation with its employees, or a third party, for an amount that differs from the IAS 19 measurement. This gain or loss might reflect various amounts, such as a profit margin, an amendment to the benefits or differences between actuarial assumptions used by the entity and the counterparty in the settlement transaction. Respondents were of the opinion that there was an overlap between the definitions of settlements and past service costs and curtailments.

The Board acknowledged that it is not clear whether there is an overlap in the definitions (because the definitions are not defined exclusive of one another) or whether it is just difficult to distinguish the effect of a curtailment from the effect of a settlement when they occur together. However, it would be necessary for entities to be able to distinguish the gain or loss on settlement from any past service cost or gain or loss on curtailment if they are required to include amounts relating to each in different components of defined benefit cost.

The staff informed the Board that the perceived overlap could be eliminated by either requiring any past service cost or curtailment to be determined before a related settlement, or by amending the definition of a settlement to exclude past service cost and curtailments, with both approaches achieving a similar outcome.

The Board unanimously agreed to amend the definition of a settlement to exclude past service cost and curtailments, while at the same time amend the definition of non-routine settlements to exclude benefits envisaged in the terms of the plan (routine settlements).

Presentation

The Board then turned its attention to the question of in which component of defined benefit cost past service cost and the gain or loss on curtailment and settlement should be included, and considered the following three alternatives:

• Alternative A: confirm the proposals that past service cost and a gain or loss on curtailment should be included in the service cost component and a gain or loss on settlement should be included in the remeasurement component
• Alternative B: retain the requirements in IAS 19 that past service cost and any gain or loss on curtailment or non-routine settlement should be included in the service cost component and any gain or loss on routine settlement to be included in remeasurements
• Alternative C: requiring the effect of settlements, curtailment and plan amendments to be presented in the remeasurements component.

The Board was supportive of alternative B and agreed to retain the requirements in IAS 19.

Disclosure

Most respondents to the ED agreed with the disclosure of any past service cost, curtailment and non-routine settlement, however some were concerned that the proposed disclosure requirements would be excessive and should be required only if material or significant to the financial statements. The Board unanimously confirmed the disclosure requirement proposed in the ED but agreed to not require distinguishing between these items if they occur together and are presented in the same component.

Multi-employer plans

The staff informed the Board that the comments received on the ED were similar to the comments received by the FASB on its exposure draft to expand disclosures about an entity's participation in a multi-employer plan. In general respondents were concerned about the following three proposed requirements:

• the quantification of a withdrawal liability as it is typically determined using assumptions different to the IAS 19 measurement and different plans specify different allocation methods using different assumptions
• the disclosure of expected contributions for the next five years
• the requirement to disclose the entity's proportion of the total number of members of the plan.

The Board confirmed its intention to retain the requirement in IAS 19 that an entity account for its share of a defined benefit multi-employer plan in the same way as for any other defined benefit plan unless sufficient information is not available, in which case an entity accounts for the plan as if it were a defined contribution plan. The Board also agreed to amend IAS 19 to reflect that the ability to account for multi-employer plans as defined benefit plans is less common than currently implied by the words 'in some cases'.

Withdrawal liability

The Board confirmed its intention to require either quantitative or qualitative information about an entity's obligation if it decides to withdraw from a plan. Such disclosure was intended to provide users with information about the effect on the cash flows of an entity in the event of a withdrawal or wind-up of the plan. The Board acknowledged that withdrawal from a plan is not always an option and that if it was a requirement for all entities, it would be an onerous requirement. The Board therefore agreed to limit the required disclosure to qualitative information and to specify that any withdrawal liability should be recognised and measured in accordance with IAS 37.

Future contributions

The Board acknowledged that disclosing the contributions for the next five years would require an entity to forecast future levels of employee service and therefore the amount would be difficult to determine and the disclosure would also result in the disclosure of forward looking information. The Board therefore agreed to reduce the period for the disclosure of future contributions to 1 year.

Proportion of members

The Board confirmed its intention that the disclosure should focus on the objective of providing information about the effect of any surplus or deficit on the amount, timing and uncertainty of an entity's future cash flows. If an entity does not account for its participation in a multi-employer plan as a defined benefit plan, providing users with information about the entity's relative level of participation in a plan would help meet this objective. The Board confirmed the requirements proposed in the ED and agreed that the requirement on an entity's level of participation in a plan can be met either by disclosing its proportion of total members or total contributions.

Tax and administration costs

The staff reminded the Board that the ED proposed to remove the options in IAS 19 for entities to include plan administration costs either as a reduction in the return on plan assets or in the actuarial assumptions used to measure the defined benefit obligation.

With regards to taxes, the ED proposed to amend IAS 19 to clarify that the estimate of the defined benefit obligation includes the present value of taxes payable by the plan if they relate to service before the reporting date or are imposed on benefits resulting from that service, and if this is the case, those taxes should not be included as a reduction in the return on plan assets.

The staff informed the Board that there was significantly more support for the proposals regarding plan taxes than there was for the proposals regarding administration costs. Those respondents opposing the proposals for administration costs noted the interaction between these proposals and the amendments regarding the determination of finance costs. Because the ED proposed that the finance cost should be determined based on the net defined benefit asset or liability multiplied by the discount rate used to measure the defined benefit obligation, respondents noted that including any taxes and administration costs in the return on plan assets will result in those costs being presented as part of the remeasurements component.

The Board considered the following three approaches with regards to administration costs:

• Approach A: confirming the proposals in the ED
• Approach B: retaining the existing requirements of IAS 19
• Approach C: requiring administration costs to be expensed when incurred.

The Board noted that for approach A guidance would have to be provided to address the practical difficulties noted by respondents such as splitting the costs between managing assets and administering the plan and splitting the costs of administering the plan between costs that relate to current and past service and cost related to future service.

However, the Board also noted that deducting administration costs from the return on plan assets (approach B) will result in these costs being presented in the remeasurements component. .

Several Board members considered approach B the worse possible outcome and one that would lead the Board onto a slippery slope.

With regards to approach C, most Board members were supportive of the approach and felt that it would address some of the practical concerns raised by respondents as costs will not need to be split between current and past service and future service. However, this approach would represent a change to the fundamental measurement objective of IAS 19, that the defined benefit obligation should be determined based on the ultimate cost of the benefits and may require re-exposure.

The Board was in general supportive of alternative A, but acknowledged the practical difficulties of splitting the costs. One Board member noted that the Board seems to be discussing measurement issues and that the scope of the project specifically excludes measurement. The Board member suggested that the Board delay any decisions on the matter until the comprehensive review of IAS 19.

After deliberating the advantages and disadvantages of each approach, the Board agreed to consult the Employee Benefits Working Group on the impact of adopting approach C as a practical expedient, as its first choice.

As a fall-back position, the Board agreed to modify approach B to specifically exclude administration costs from the remeasurement component. This would leave entities with the existing IAS 19 requirements of either recognising administration costs as part of the service cost component or as part of the defined benefit obligation.

With regards to plan taxes, the Board agreed to confirm the proposals in the ED. Only one Board member did not vote in favour of this decision.

Mortality assumptions

The exposure draft proposed to state explicitly that the mortality assumptions used to determine the defined benefit obligation are current estimates of the expected mortality rates of plan members, both during and after employment. Although respondents were overall supportive of the proposals, some were concerned about why the Board was using 'current estimate' since such language is not used anywhere else in IAS 19 and found references to 'current' and 'expected' confusing and suggested the deletion of 'current'. Without any deliberation, the Board confirmed the proposals in the ED.

Incorporating IFRIC 14

The ED proposed to incorporate into IAS 19, without substantive change, the requirements of IFRIC 14, as amended in November 2009 and to define 'minimum funding requirement' 'any enforceable requirement to fund a long-term defined benefit plan'. Respondents suggested that a fundamental review of IFRIC 14 precede the incorporation into IAS 19, indicating that there is diversity in current application of IFRIC 14 and any slight change to the words used in IFRIC 14 could be interpreted as a change in requirements. Without much deliberation, the Board agreed to withdraw the proposal to incorporate IFRIC 14.

Identification of back-end loaded plans

The Board considered responses to the proposal to consider expected future salary increases in determining whether a benefit formula allocates a materially higher level of benefit in later years. Although most respondents were supportive of the proposals, some disagreed on the basis that service in neither previous nor subsequent period changes the benefit increment earned in a specific year. They were also of the opinion that the fact that the entity compensates later periods of service at higher levels is an intrinsic part of the plans and there is no reason for smoothing cost over all periods of service - they are not intended to compensate for overall services on a straight-line basis.

One Board member questioned why the Board proposed such an amendment as this is again touching on measurement, which has been specifically excluded from the scope of the current project. Another Board member supported this view and added that the proposed amendment would have a knock-on effect on defined benefit plans. When put to a vote, only 4 Board members voted in favour of confirming the proposals in the ED. As a result, the Board agreed to withdraw the proposals.

Interim reporting

The Board considered the issues that respondents raised in relation to the remeasurement of net defined benefit liability (defined benefit obligation less plan assets) for interim reporting purpose. These issues included questions around how often the defined benefit liability should be remeasured, whether the assumptions should be updated at the interim reporting date or fixed at the beginning of the year and whether the base used to calculate net interest should be remeasured at each interim reporting date or averaged over the interim period.

Apart from clarifying the wording of IAS 19 to make clear that reporting date does not refer to interim reporting dates and to further clarify the requirements for interim reporting and the updating of assumptions, the Board agreed that no further amendments to IAS 19 are needed in this regard.

State plan and group plan disclosures

The ED proposed updating, without further reconsideration, the disclosure requirements for entities that participate in state plans or group plans to maintain consistency with the disclosures for multi-employer plans and defined benefit plans. Many respondents were supportive of the proposals, however some disagreed on the basis that for group plans the information is already provided in the parent's financial statements and for state plans, the information may not be available. Some other respondents also asked the Board to clarify whether the disclosures are required for defined contribution state plans as well.

Without much deliberation, the Board confirmed the proposal in the ED to make the disclosures:

• for defined benefit state plans consistent with the disclosures for multi-employer plans if the information is available
• for group plans consistent with the disclosures for defined benefit plans

For group plans the information can be included by cross-reference to disclosures in the parent entity financial statements provided that they:

• separately identify and disclose the information required for the group plan, and
• are available to users of the financial statements on the same terms as the financial statements and at the same time

Disclosure requirements for modifications to fair value

The IASB and FASB staffs have received questions on whether the proposed disclosure requirements would also apply to those fair value measurements when fair value is adjusted as part of the measurement attribute (e.g., fair value less cost to sell). This issue would be most relevant to IFRS 5 and IAS 41 and ASC Topic 360 Property, Plant and Equipment under US GAAP.

The Boards had not specifically addressed this issue during their initial deliberations. Both the IASB and FASB tentatively agreed to provide explicit guidance in the final standard that fair value measurement disclosures are required even in instances when fair value is modified.

Fair value measurement of a liability issued with an inseparable third-party guarantee

US GAAP's ASC Topic 820 Fair Value Measurements and Disclosures specifically addresses how to determine an issuer's unit of account for a liability issued with an inseparable third-party guarantee (originally issued as EITF Issue No. 08-5 Issuer's Accounting for Financial Liabilities Measured at Fair Value with a Third-Party Credit Enhancement). However, existing IFRS does not have explicit guidance on this issue. Paragraph BC 92 of IAS 39 simply provides that "the [IASB] also noted that the fair value of liabilities secured by valuable collateral, guaranteed by third parties or ranking ahead of virtually all other liabilities is generally unaffected by changes in the entity's creditworthiness."

Measurement of the liability

Under the guidance within ASC Topic 820, no separate asset would be recognised by the issuer for the packaging of the guarantee as part of the issued debt instrument. Instead, the amount initially recognised upon the issuance of the debt would be the net cash received (amount recognised for the debt issuance less the guarantee premium paid). If the liability were subsequently measured at fair value (i.e., the fair value option has been elected), the issuer would consider their own credit risk rather than the credit risk of the guarantor as part of the measurement of the liability at fair value.

Due to the lack of specific guidance within IAS 39 on this topic, the accounting may differ depending on whether the fair value of the liability is determined based on the packaged debt instrument including the guarantee, or whether the liability is measured separately from the attached guarantee. The IASB's exposure draft Fair Value Measurement proposed guidance that would require the fair value of a liability to be adjusted from the observable price of the liability when held as an asset by another party for features present in the asset but not in the liability, such as a third-party credit enhancement being packaged along with the liability.

In order to ensure the fair value guidance is applied consistently under IFRS and US GAAP, the staffs of the IASB and FASB have suggested moving the guidance outside the scope of the fair value measurement standard and instead address the unit of account issue within the guidance on measurement of financial instruments. The staffs have also recommended that the fair value measurement standard include guidance as mentioned above in the IASB exposure draft that the unit of account when fair valuing a liability might differ from the unit of account for the corresponding asset and therefore would not include the effect of third-party credit enhancement.

The Boards focused their discussion on whether the accounting under IFRS would result in a different answer than that under US GAAP and how the IASB plans to address the lack of specific guidance. The IASB discussed whether clarification would require a separate exposure draft on financial instruments, whether guidance could be included through the annual improvements process or whether the guidance could be included through consequential amendments to other standards as part of the issuance of the fair value measurement standard. The staff mentioned that the guidance was included in the exposure draft and therefore would not necessarily require a re-exposure.

The IASB and FASB both tentatively agreed with the staff recommendation to provide guidance within the fair value measurement standard that the unit of accounts for the liability and associated asset may differ. The FASB agreed to relocate the unit of account guidance within Topic 820 to ASC Topic 825 Financial Instruments. The IASB agreed to provide unit of account guidance within IAS 39 and IFRS 9 as part of the consequential amendments from the issuance of the fair value measurement standard.

Scope of the guidance

The guidance within Topic 820 related to third-party credit enhancements excludes when the credit enhancement is provided by 1) a government entity, 2) a parent to a subsidiary (or vice versa), or 3) entities under common control.

The IASB and FASB tentatively agreed that the guidance that the unit of account may not be the same for corresponding assets and liabilities and therefore not including the effect of third-party credit enhancement would only apply to guarantees purchased by the issuer and does not apply to liabilities guaranteed by entities within a consolidated group.

Disclosure of the guarantee

US GAAP already requires disclosure of the existence of a third-party credit enhancement on its issued liability. The IASB tentatively agreed to require similar disclosures.

Initial comment letter analysis

The staff provided the Board with a preliminary analysis of 986 respondents' comment letters as well as feedback received from outreach activities conducted on the Exposure Draft Revenue Recognition.

The staff explained that most respondents were supportive of the core principles and acknowledged the progress made by the IASB and FASB since the discussion paper. However, respondents identified the followings for further clarification of the operation of those principles:

• concept of control and indicators of control to the service contracts and continuous transfer of work-in-progress
• the principle of distinct goods or service for identifying separate performance obligations.

Further, many respondents were concerned that the proposals as written could be difficult to apply consistently across a wide range of industries and may produce accounting outcomes that do not faithfully portray the economic substance of the entity's contracts with customers.

Because of those concerns, many respondents are concerned that applying the proposed requirements would impose costs on prepares in excess of the benefits of having a single revenue recognition model applying equally to all contracts with customers.

The two main issues identified for re-deliberation based on the comment received were:

• separating/segmenting a contract
• the application of the control approach.

Other issues also identified for re-deliberation include:

• transaction price and variable consideration
• credit risk
• time value of money
• onerous contracts
• transaction costs
• disclosure
• application guidance
• transition.

The Boards considered a preliminary timeline to re-deliberate the above issues and agreed to focus on the two main issues at the January meeting, with the other issues to be considered at future meetings.

Multilateral netting arrangements

The IASB and FASB have previously agreed to the criteria that require offsetting within the financial statements (unconditional right of offset and intention to either settle the asset and liability net or settle simultaneously). However, the Boards had not yet addressed whether that requirement would apply only to bilateral arrangements (between two counterparties) or also apply to multilateral arrangements (between multiple counterparties). IAS 32 currently permits multilateral arrangements to achieve offsetting while US GAAP limits offsetting to only bilateral arrangements.

An IASB member requested clarification that under a multilateral arrangement, the same criteria would apply (unconditional right of offset and intention to either settle the asset and liability net or settle them simultaneously) and the staff confirmed that would be the case.

A FASB member asked how the multilateral arrangement would apply to an example of an insurance arrangement as he felt those arrangements should be presented on a gross basis, but the staff clarified that insurance contracts would not be financial instruments and therefore outside the scope of the offsetting proposals.

Several of the staff examples of multilateral arrangements involved transactions within a group structure such that the netting would be relevant in the separate financial statements. The acting Chair of the FASB mentioned that she would prefer to limit offsetting to bilateral arrangements and deal with related party issues separately rather than expanding the offsetting provisions to multilateral arrangements. However, the IASB staff noted that multilateral arrangements often happen outside the group context, in particular for structured transactions which involve multiple counterparties and have terms established that require settlement directly between counterparties.

Both the IASB and FASB agreed to require offsetting for both bilateral and multilateral arrangements when the criteria are met.

Disclosure requirements

During the early part of the offsetting of financial instruments project, the staff had provided the Boards with disclosures from several banks on the information provided around offsetting.

In considering the scope of the disclosure requirements related to offsetting, the staff recommended a disclosure objective "to provide users of financial statements with information that enables them to evaluate the extent of credit risk associated with an entity's financial instruments, how the entity manages those risks and the specific strategies employed in managing those risks." The staff's proposed disclosures include specific requirements and tabular formats for 1) non-derivative financial assets, 2) derivative assets, 3) derivative liabilities, and 4) credit derivatives and similar instruments, and qualitative information on an entity's strategy for managing credit risks.

Several IASB and FASB members expressed concern with the staff proposals feeling they overreached the intended scope of the offsetting project. The disclosure proposals do not solely address offsetting arrangements but instead address credit risk more broadly. They felt that the consideration of these disclosures should be performed as a comprehensive review of IFRS 7 or the various disclosure requirements within US GAAP rather than as part of the offsetting project simply because it is currently open on the Boards' agenda.

A FASB member mentioned that the examples provided by the staff were all for banks but that the new offsetting model, particularly for US companies, would also have significant implications for utilities and manufacturers with commodity exposures (e.g., food processors) who have significant derivative portfolios and therefore that must be kept in consideration.

The FASB staff clarified they did not necessarily share the same view of the IASB staff on this issue and felt the disclosures should be limited to providing information on the gross balance when amounts are offset in the balance sheet and providing information about conditional arrangements (e.g., master netting agreements) when offsetting is not recognised.

The "user" representative IASB and FASB members had mixed views on the staff proposals. Some felt that the proposals were duplicative and beyond what was needed while others felt the information was necessary and not including it would not be addressing user needs. They also felt that non-financial institutions would have sufficient information to provide the proposed disclosures.

There was discussion about which of the tables should be required as part of the scope of the offsetting project (non-derivative financial assets, derivative assets, derivative liabilities, and credit derivatives and similar instruments). A FASB member mentioned that such an approach was not appropriate as there was certain information within each table that is needed to provide appropriate information on offsetting arrangements. Instead, he recommended that the Boards focus on how to aggregate the information into a single table to provide information on both the gross and net positions. The Boards requested the staff to work under this approach and try to bring back new disclosure proposals later during the week.

Transition requirements

The IASB and FASB tentatively agreed to require retrospective transition where all comparative periods would be presented to reflect the revised netting requirements.

Comment period

Because of the need to finalise the offsetting standard before 30 June 2011, the staff recommended a 90 day comment period on the forthcoming exposure draft. The staff mentioned they are targeting an issuance date of 28 January 2011 for release of the exposure draft.

One FASB Board member expressed significant concern with the 90 day comment period proposal for US constituents as he felt it essentially only provided a 30 day comment period (the month of March) as it would be squeezed between annual reporting due in late February and first quarter close in April for SEC registrants. Given the significant change the proposals would be for US companies, he felt the 90 day comment period was insufficient.

However, both Boards agreed to proceed with a 90 day comment period in order to maintain the 30 June 2011 timeline.

Feedback received through FASB roundtables

The IASB staff provided the IASB with a summary of the feedback received from participants during the FASB's two public roundtables held on 22 November 2010. The FASB roundtables consisted of a morning session for non-financial institutions and an afternoon session for financial institutions (primarily asset managers) with participants including preparers, auditors and analysts.

The analysts were generally supportive of a model that requires more consolidation, however stated they were ultimately more interested in increased disclosure that supplement consolidation decisions.

Roundtable participants expressed concern on the IASB's proposals regarding the "ability" approach to control. In particular, they had concerns when an investor held less than 50% of the voting rights of an investee with no other contractual rights evidencing control but could be considered to have control based on the inactivity of other shareholders. Other concerns over the control principle included the requirement for investors to reconsider control based on factors outside of the investor's control. However, some participants felt that the issues under de facto control were likely less relevant in the US capital markets than in other jurisdictions around the world.

Another area where roundtable participants expressed concern was on potential voting rights (i.e., unexercised options or convertible instruments). Participants were particularly concerned that changes in valuations of such instruments (i.e., moving from in- or out- of the money) could impact consolidation conclusions from period to period.

Roundtable participants generally supported the principal/agent guidance but requested additional guidance and illustrative examples to help ensure consistent application. Areas within the principal/agent relationship guidance that most needed additional clarity were 1) how to assess decision-making ability when law or regulation imposes restrictions or when no ongoing decisions are required, 2) how liquidation rights should be assessed, and 3) how removal rights exercisable by a board of directors should be evaluated.

The IASB agreed to retain their existing proposals on the ability approach to control and potential voting rights. However, they did agree to incorporate clarifying language in the final standard to attempt to address some of the concerns expressed. On the topic of ability to control, the basis for conclusion of the final standard will mention that 1) a local jurisdiction's regulatory and security laws will influence the rights of shareholders and 2) an investor considers all available evidence, but does not have to search endlessly for evidence of control; in the absence of evidence of control, then control is not presumed as the default position. On the topic of potential voting rights, the standard will clarify that changes in market conditions, the economics of the entity or other entity specific conditions driven by market conditions would not typically change the consolidation conclusion and that the purpose and design of both the entity and the investor's involvement should be considered when assessing control.

The IASB also agreed to include application examples on the principal/agent guidance based on examples included in previous board meetings which should help to address the concern on assessing decision-making ability under regulatory or legal restrictions. The IASB also plans to clarify that consideration of the purpose and design of an entity would include any rights given to an entity's board of directors by its investors and that liquidation rights would be considered in a similar manner to removal rights.

One IASB member asked the FASB what their intentions were with regard to the consolidation project. The FASB staff confirmed their intention to issue an exposure draft during early 2011 after the final IASB standard is issued. The FASB will be discussing consolidation during a meeting in January to conclude on the proposals in the exposure draft, but the preliminary intention of the FASB staff is to recommend a single consolidation model based on current control (50% + 1 vote) and including principal/agent guidance. The current control model would be inconsistent with the IASB's ability approach to control; however the principal/agent guidance would be largely similar.

An IASB member questioned why the FASB staff planned to recommend a control model inconsistent with that of the model in the forthcoming IASB standard as he interpreted that roundtable participants generally supported the ability approach to control. The FASB staff clarified that roundtable participants had both theoretical and operational concerns over the ability approach to control.

Another IASB member questioned whether preparers would reach different consolidation conclusions for special purpose entities (e.g., securitisation trusts) when applying the IASB standard and the proposals the FASB staff anticipated recommendations. The FASB staff mentioned that assuming they reach the same place on the principal/agent guidance and depending on how related parties factor into the analysis, they would likely reach similar conclusions.

Effective date for IFRSs on consolidation, joint arrangements and disclosure of involvement with other entities

The IASB staff recommended that the effective dates for IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Involvement with Other Entities and IAS 28 Investments in Associates be 1 January 2013 with retrospective application. The staff also proposed allowing early application as this permits first time adopters of IFRS to implement the consolidation standard only once rather than transitioning to IFRS and then immediately implementing new standards only one or two years after initial transition. However, if early application was selected for any of the standards then all four standards would need to be applied early.

One IASB member asked if it were possible to defer the decision on the effective date of the proposals until the comments on the request for views on effective dates have been considered. The IASB Chairman mentioned that they should at least put in a date of "not before 1 January 2013" as issuing the standards without an effective date may raise questions on whether application could be required during 2012.

Two IASB members expressed concern over the recommendation for early application because of the resulting lack of comparability. One of those Board members also expressed concern that the requirement do adopt all four standards at the same time may result in entities not providing enhanced disclosures in accordance with IFRS 12 early because of not wanting to early adopt the changes in accounting for the other three standards.

The IASB tentatively agreed to an effective date of no earlier than 1 January 2013, subject to reconsideration based on feedback from the effective date request for views. The Board also plans to permit early application for those first time adopters of IFRS but would reconsider the early application and transition provisions at a future meeting.

The IASB staff introduced the session by reminding the Boards of the extensive outreach activities that have been undertaken during the exposure draft comment period. Those activities have included webcasts, conference appearances, meetings with industry groups in many countries and regions, ratings agencies, regulators and supervisors, analysts and others. These activities together with a preliminary reading of comment letters received on the IASB Exposure Draft and the parallel FASB Discussion Paper have enabled the staff to identify the critical issues that need to be given priority as the Boards commence redeliberations in January 2011.

The staff introduced a proposed project timetable that would permit the IASB to ballot an IFRS in June 2011.

IASB staff presented a paper that reminded the Boards why the IASB (and subsequently the FASB) had undertaken this project. The overriding reasons were that the current accounting and financial reporting requirements are opaque and impair comparability. There was no substantive discussion of this paper.

IASB staff also presented a refresher on the proposed measurement model. It was noted that IFRS 4 (uniquely in IFRSs) permits different accounting policies within an organisation, such that an insurer with operations in four jurisdictions might consolidate information based on four different sets of accounting requirements. Generalised comparisons between insurance accounting in a number of jurisdictions could be made, but detailed comparisons were extremely difficult. The impetus for change has come from the industry as well as users, who wanted a unified model, not only for external financial reporting but for operational reasons as well. Again, there was no substantive discussion of this paper.

Issues identified in the outreach activities

Need for an IFRS

The IASB staff confirmed that, outside the United States, there was a high degree of support for an IFRS on insurance contracts.

However, the outreach activities also highlighted a concern that to address thoroughly all issues raised during the exposure period in the five-to-six month period proposed by the IASB was potentially overly ambitious.

Principal areas of concern and/or controversy

As a result of the outreach and preliminary review of comment letters received so far, the staff has identified five critical topic areas:

• Volatility in profit or loss
• Unbundling insurance contract components
• Residual vs. composite margin
• Presentation (especially with respect to profit and loss/ other comprehensive income items)
• Short-duration contracts

There was a general discussion of these areas, which the staff tried hard to keep out of technical re-deliberation. Board members declared various degrees of sympathy or lack of sympathy with some of the issues identified, giving the staff and their fellow Board members an idea of interesting debates to come.

For example, some Board members were not disposed to using an IFRS to avoid volatility in profit or loss. These Board members wanted to portray economic reality and the economic mismatches that exist as a result of insurance activities. Others observed that some of the measurement guidance proposed (and the resulting effects in profit and loss) fitted well with developed markets such as those in North America, Europe and Japan, but were decades ahead of insurance markets in some other IFRS jurisdictions (e.g., parts of Asia).

It was noted that in several key areas, such as the discount rate and presentation issues and the cross-cutting issues with financial instruments and revenue projects, there was no consensus among either the major audit networks or large industry players.

Another critical decision would be the extent to which the IASB's decisions in IFRS 9 guided their decisions for insurance. The mood of the meeting was that it would be necessary to be consistent between the two.

Boundary issues between what are insurance contracts and derivatives, and between financial guarantee contracts will need careful consideration.

With respect to risk adjustment, the comments fell largely into two groups: those with an interest in having an accounting treatment as close to the Solvency II regulatory requirements, and others.

On unbundling, views in the comments letters examined so far and other outreach have been mixed. The ED sought to clarify the principle outlined in the IASB's Discussion Paper, but it was clear from the feedback that this attempt had not succeeded. There were questions about whether one could use unbundling the effects of the measurement rules. On the other hand, some wanted unbundling so that they could measure some components at fair value and others at amortised cost.

Education session

The IASB and FASB held an educational session for the IASB staff to present the proposals in ED 2010/13 Hedge Accounting to the FASB.

FASB questions on the hedge accounting proposals were primarily clarifying in nature, focusing on such topics as:

• basis adjustments related to time value of options
• recognition of hedge ineffectiveness when the hedge relationship is rebalanced
• the "other than accidental" offsetting requirements in the effectiveness criteria
• presentation of the hedged item risk adjustment
• application of hedge accounting to groups of items
• application of the disclosure proposals.

The FASB then asked the dissenting IASB member for a summary of his concerns with the proposals. The IASB member gave a brief overview of his concerns primarily focusing on potential abuses including the ability of entities to circumvent the requirements within IFRS 9 and also the ability to "park" amounts within other comprehensive income through designating a hedge relationship. He also cited that the hedge accounting model within IAS 39 has been flipped so that derivatives are now eligible hedged items and cash instruments are no eligible hedging instruments.

The acting Chair of the FASB mentioned what she viewed as a contradiction the IASB's proposals on hedge accounting and the decisions made on the joint offsetting project. In her view, the hedge accounting proposals permit an exception to adjust the recognition of items in profit or loss to more accurately reflect an entity's risk management activities. However, in the offsetting project, an entity is not permitted a similar exception to adjust the balance sheet presentation to reflect their management of credit risk (i.e., through the use of a master netting agreement for derivative settlement in bankruptcy).

Results of outreach on model choices from IASB and FASB

The IASB opened the discussion with the results from their outreach to the Basel committee and a number of international banks regarding the "4'" model previously discussed at the 8 December 2010 meeting. Specifically, the IASB staff asked (1) whether the model was "operational", (2) should the expected loss estimate for a specified time period be a bright line 12 months or an amount based on expected losses for the foreseeable future, but no less than 12 months, and (3) is the proposed good book/bad book split operational.

The informal feedback received by the IASB indicated:

1. Both committees supported the 4' model and believed it to be operational.
2. The Basel committee's preference was for the foreseeable future option because they believe it would provide a more adequate allowance.
   The strong preference of the international banks was that the bright line 12 month approach as they believe using a foreseeable future approach adds a level of unnecessary complexity. Further, the interpretation of foreseeable future could be different across companies causing a lack of comparability across disclosures.
3. Both committees indicated that the good and bad book split appears operational. However, the Basel committee's preference is that the bad book is not limited to only past-due and non-performing loans. Further, a suggestion was made to use the term "problem" loans so that banks with less sophisticated systems will still be able to apply the guidance.
   The international banks indicated (1) that the line between the good and bad book should be based on the quality of the asset, not the method of calculation (e.g., portfolio vs individual) (2) the split should be grounded in the preparer's risk management practices, and in order to avoid potential unintended consequences, consideration should be given to introducing a backstop measure – possibly based upon Basel or regulatory definitions and (3) flexibility should be maintained in terms of "collectible/uncollectible" definitions as these terms are open to interpretation and disclosure should be used to develop market convergence.

The discussion then turned to the results of the FASB outreach on similar queries to US banks. The FASB's response indicated:

1. The 4' model resulted in a number of conceptual issues. The "2" model previously discussed in the 8 December 2010 meeting should be considered as a viable alternative to the 4' model.
2. There was a mixed response to the bright line of twelve months versus foreseeable future; however the responses leaned towards foreseeable future. A comment from one bank was that a bright line was preferred, but for a longer timeline than 12 months.
3. The good and bad book split was operational and was similar to that guidance already included in US GAAP.

The IASB and FASB members then discussed these results and were concerned that there were conflicting views as to not only the choice of the timeframe for the expected loss period but also for the preference of one model over the other. The discussion then went back and forth between all members on each of the responses described above. The Board held the following two votes in order to move the process forward:

1. How many board members from each board prefer to amend the 4' model to indicate that the time period for estimated losses should be for the reasonably foreseeable future, but at least 12 months?
   • IASB – 10 members voted in favour
   • FASB – 5 members voted in favour
   This represents a majority in both groups and thus the model will be amended.
2. How many board members from each board are in favour of promoting the 4' model with the inclusion of the criteria indicated in (1) above?
   • IASB – 13 members voted in favour
   • FASB – 4 members voted in favour

Forward looking plan

The ED will include both 2 and 4' models but will indicate a preference to 4'. The Boards indicated that the period for comment will be two months and should include examples of the application of each model.

This concluded the meeting on the financial instruments - impairment project.

Disclosure requirements

The information below represents a follow-on discussion from that held by the IASB and FASB on Tuesday 14 December 2010. Specifically, the IASB proposed that an entity should provide information about offsetting and related arrangements (such as collateral agreements) and the effect of those arrangements on an entity's exposure to financial contracts. That information should be presented in a single note and in a tabular format, unless another format is more appropriate. The following proposed disclosures were discussed at the meeting:

For each type of financial instrument (financial assets and financial liabilities to be separately disclosed), an entity shall disclose:

1. the gross carrying amount (i.e. before taking into account amounts offset in the statement of financial position and other mitigating factors)
2. amounts deducted as a result of the offset criteria in XX to derive the carrying amounts in the statement of financial position
3. the portion of the exposures that is covered by a legally enforceable netting agreement (other than in (ii))
4. the amount of collateral (cash collateral and fair value of non cash financial asset collateral should be separately disclosed) obtained or pledged in respect to those assets and liabilities
5. the net exposure after taking into account the effect of the items in (ii) – (iv).

The IASB staff provided two different approaches to the above disclosure requirements in the form of appendices for purposes of the discussion.

A member of the IASB had concerns that the wording in the paper and the wording in the appendices was inconsistent and, amongst other things, it was unclear whether the starting point was "fair value" or "fair value less amortised cost". It was confirmed by the staff that the starting point should be the carrying value of the assets and liabilities as indicated on the balance sheet. Another concern of the IASB with the proposed model was that assets/liabilities held at amortised cost and assets/liabilities held at fair value would be combined and provide for less adequate disclosure than envisioned. The IASB staff responded that it was necessary to have some aggregation to prevent the inclusion of an overly complex disclosure requirement. One IASB member questioned the inclusion of cash and non-cash financial collateral into the table.

The Boards discussed this topic and ultimately decided by a majority vote (IASB - 15 yes; FASB - 5 yes) to include cash and non-cash financial collateral in the table. The Boards will move forward with a plan to amend the wording in the appendices and redistribute to the Boards for discussion at a later date.

This concluded the meeting on asset and liability offsetting.

The IASB discussed the final two topics on the fair value measurement project, both related to disclosure of fair value measurements.

IAS 19 plan assets measured at fair value

The exposure draft Fair Value Measurement had originally proposed to require fair value measurement disclosures for each category of plan assets under IAS 19, unless the deferred recognition model were utilised.

However, in the IASB's project to amend IAS 19 the Board has decided that disclosures about the fair value of plan assets were unnecessary because the entity did not hold those assets directly and therefore does not necessarily have information about the assumptions, inputs and a valuation techniques used. This decision contradicts the FASB's requirements for fair value disclosures related to employee benefit plans; however those disclosure requirements are part of ASC Topic 715 Compensation - Retirement Benefits rather than part of ASC Topic 820 Fair Value Measurements and Disclosures.

As a result, the Board tentatively agreed to exclude plan assets measured at fair value in IAS 19 from the scope of the fair value disclosure requirements. Doing so will not create a divergence in the fair value Standard issued by each Board.

IAS 36 asset impairments

The exposure draft Fair Value Measurement did not distinguish between recurring and non-recurring fair value measurements as IFRS does not have non-recurring fair value measurements (e.g., impairments are recorded at recoverable amount which is the higher of fair value less cost to sell and value in use). Comment letter respondents have requested similar information to be provided for impairments under both US GAAP and IFRS.

The IASB staff recommended that when the recoverable amount of an asset is determined based on fair value less costs to sell in IAS 36, an entity should disclose:

• the amount of the fair value measurement
• the level within the fair value hierarchy
• any changes to the valuation technique and reasons for the change
• quantitative information about significant inputs used in measuring fair value,
• whether the highest and best use differs from the current use.

Certain Board members expressed varying level of concern with the proposals. Those concerns included that IAS 36 already proscribed disclosure requirements to the proposals requiring information that may not be overly relevant. For example, the requirement to disclose the change in the valuation technique would likely have no relevance for an impairment measurement as there would not be a recurring fair value measurement. However, the Board ultimately agreed with the staff proposals.

Next steps

These discussions finalised the Board's decisions with respect to the fair value measurement requirements. The Board approved the staff's request to begin drafting of the final Standard and no Board members expressed their intent to dissent. The staff will come back to the Board in early 2011 to discuss the effective date of the Standard.

Confirmation of previous decisions

During the 1 December 2010 IASB-only meeting, the Board provided the staff with tentative direction on how to further develop the impairment model for financial assets measured at amortised cost. However, the Board had not officially voted on those positions.

During this meeting, the Board tentatively agreed with their previous guidance that:

• short-term trade receivables would be excluded from the scope of the forthcoming supplement being exposed for comment,
• the supplement being exposed for comment will primarily focus on application for open portfolios but would not exclude individual instruments or closed portfolios and would specifically ask a question addressing application to these items,
• a straight-line allocation of undiscounted expected losses would be the most operational method, but other more sophisticated approaches (such as straight-line discounted expected losses or an annuity approach) would also be permitted; if using a discounting approach, the discount rate could be between the risk free rate and the effective interest rate as calculated under IAS 39, and
• the determination of transfers from the "good book" to the "bad book" would be based on an entity's internal credit risk management process.

Loan commitments and guarantees

Loan commitments are currently either outside the scope of IAS 39 and therefore accounted for under IAS 37, or for those commitments issued at below market interest rates and within the scope of IAS 39, still subject to impairment under IAS 37. Certain comment letter respondents to the exposure draft Amortised Cost and Impairment requested a similar impairment approach for both loans and loan commitments. The IASB staff asked the Board if they would like to include a question in the forthcoming supplement being exposed for comment regarding loan commitments. As the original exposure draft did not specifically ask a question on this issue, the responses originally received on the topic were fairly limited.

Two Board members asked for clarification on what the rationale for asking the question would be since the Board has not yet addressed the issue and therefore does not have a view. However, the staff and Board were concerned that not seeking input may result in having to separately expose the issue at a later date. The Chairman suggested that the staff add some clarification in the supplement prior to asking the question so respondents have more context in understanding the issue.

Similarly, financial guarantee contracts have been proposed as within the scope of the exposure draft Insurance Contracts. As such, the Board agreed to postpone any decision with respect to credit guarantees while the comments received in the insurance contract exposure draft are being redeliberated.

Presentation and disclosures

As part of the Board's decision to utilise a "decoupled" approach for allocating lifetime expected losses, the Board has also changed its proposed presentation requirement from the exposure draft and will now propose to present interest revenue and impairment expenses in separate line items.

The Board tentatively agreed that impairment disclosures should be provided at least by class of instrument (if not a lower level of detail) and will provide examples of classes of instruments for financial institutions and corporate entities. The Board is also permitting cross referencing when the required disclosures are already incorporated in an entity's disclosures.

Allowance account for credit losses — The Board tentatively agreed on separate reconciliations for the "good book" allowance and the "bad book" allowance. When the "floor" of losses expected to occur over the near term exceed the time proportionate amount, disclosure of the additional provision from use of the "floor" would also be required. Additionally, a reconciliation of the nominal amounts in the "bad book" would be required. These disclosures would be presented in a comparative tabular format by asset class. Additionally, if an entity writes-off assets directly from the "good book" information on those write-offs should be disclosed.

Factors impacting credit losses for the "good book" — The Board tentatively agreed to require tabular disclosures providing five years of information for the "good book" of 1) lifetime expected losses, 2) balance of the outstanding nominal amount, 3) the time proportionate allowance balance, and 4) any additional provision necessary to reach the floor.

Significant gains and losses — The Board tentatively agreed to require quantitative and qualitative information should a specific portfolio or geographic area experience significant gains or losses.

Credit risk management and application to the "good book"/"bad book" — The Board tentatively agreed to require information on the "good book" and "bad book". Those disclosures would include qualitative information about how loans within the "good book" and "bad book" are managed, the criteria for transfers from the "good book" to the "bad book", and if internal credit rating systems are used - information on that system such as comparisons to external ratings, a description of the various grades used, and information on how a "watchlist" is managed if an entity employs the use of a watch list.

Credit risk management and assessment of expected losses — The Board tentatively agreed to require information on the nominal amount and information about expected losses (both lifetime and those expected to occur in the near term) across credit risk rating grades (at a minimum of "good book" and "bad book").

Management judgment and estimate — The Board tentatively agreed to require information on both lifetime expected losses and those expected to occur in the near term including the basis of inputs and estimation technique used, explanations on changes in estimates, and information about when a change in estimation technique occurs.

Comparison of expected losses with actual outcomes — The Board also tentatively agreed that if an entity utilises back testing of its credit loss estimates, then it should disclose quantitative information that compares actual outcomes to previous estimates. However, if an entity does not perform back testing, then a qualitative analysis of the actual outcomes and previous estimates would be required.

While the Board agreed to all of the above disclosure requirements, certain Board members did express various concerns with the proposals. One Board member had concerns with the requirement to provide five years of information for the "good book" allowance feeling the time period requirement was arbitrary and exceeded the comparative period disclosures. That Board member also had concerns with the requirement to provide comparative information of the internal credit risk rating system to external ratings as that may be more available in advanced capital markets but not as available in other jurisdictions. Another Board member praised the disclosure proposals but requested information on when loans have been modified including when loans may have been transferred back from the "bad book" to the "good book" after the modification. The staff responded that IFRS does not have a definition of a troubled debt restructuring as contained within US GAAP, and therefore putting parameters around the disclosure for modifications would be difficult.

The Board also discussed whether to proscribe a particular method for transferring provisions for credit losses from the "good book" to the "bad book". The Board considered:

• a full depletion approach (100% of expected losses would be transferred from the "good book" to the "bad book"),
• a partial depletion approach (an allowance for credit losses reflecting the age of the loan would be transferred from the "good book" to the "bad book" with a provision recognised to meet the needed target allowance), and
• a no depletion approach (no transfer of allowance from the "good book" to the "bad book" and a provision for the full amount of expected losses would be recognised).

The Board agreed to include the partial depletion approach in its proposals (supported by vote of eight Board members).

Finally, based on concerns expressed by comment letter respondents and the Expert Advisory Panel, the Board tentatively agreed not to require a sensitivity analysis of the estimated expected losses.

Next steps

These discussions finalised the Board's decisions for their anticipated supplement to be released for public comment. The Board agreed to the staff request to begin drafting of the supplement. Two Board members expressed their intent to dissent to the proposals in the supplement.

The IASB Technical Director provided the Board with an update of the November IFRS Advisory Council meeting.

The Council expressed concerns that the Board was putting target dates ahead of quality standards and that not enough progress had been made on the conceptual framework. The Council also referred to a "period of calm" which was not entirely clear as to exactly what the term referred to, but was presumed to be the period post-2011 when the Memorandum of Understanding projects had been completed. The Council also mentioned their desire for the Board to spend more efforts and resources dedicated to implementation rather than solely standard setting.

The Council is next scheduled to meet on 21 February 2011.