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The IASB met in London on 13-17 December 2012. Topics discussed included conceptual framework, IAS 12, macro hedge accounting, insurance contracts, revenue recognition, IAS 36, agriculture and rate regulated activities. The revenue recognition session on Monday was discussed jointly with the FASB.
Agenda for the meeting
Thursday, 13 December 2012
IASB meeting (10:00-14:30)
Conceptual framework — Education session
IAS 12 - Recognition of deferred tax assets for unrealised losses
The Board held an education session regarding 'measurement' and 'liabilities/equity' within the conceptual framework project.
The IASB held an education session to discuss two topics within the conceptual framework project. The Staff presented two sets of slides to the IASB Board members:
Measurement – this paper provided some background information on the concepts of measurement within the Conceptual Framework and discussed whether there should be a mixed-measurement or single measurement approach; and
Liabilities/Equity – this paper provided some background information on the definitions of liabilities and equity in the Conceptual Framework and the possible approach to addressing the liabilities/equity boundary at a conceptual level.
The Staff provided some background information on the concepts of measurement and began by highlighting that measurement has an effect on both the statement of financial position and the performance statements. The Staff noted that there may be an effect on the performance statements due to initial recognition, on remeasurement, on de-recognition and consumption.
The Staff highlighted to the Board that the existing framework does not provide guidance and says very little on measurement and what it does say is not very helpful to users. They also highlighted that there were other problems with measurement such as:
Whether there should be one basis of measurement or many;
Defining the different measurement bases;
Understanding when the different measurement bases should be used; and
Whether initial and subsequent measurement should be the same
The Staff noted that in addressing the above problems with measurement, the Board should build on the work that has already been performed in chapters 1 and 3 of the Framework being the Objectives of Financial statements and Qualitative characteristics where previously at another Board meeting it was decided that these areas would not be addressed in the current project as they were considered adequate as they stand.
The Staff noted that in determining the solutions to the above problems consideration to the Objective of financial statements should be made, for instance the measurement basis selected should be able to meet the Objective criteria of Chapter 1, namely:
Should inform users about the entity’s resources and obligations;
Should inform users about the effect of transactions and other events on the resources and obligations; and
Should inform users how effectively management has discharged their responsibilities
The Staff also noted that the measure selected should also address the Qualitative characteristics mentioned in Chapter 3 of the Conceptual Framework such as relevance, faithful representation and be a useful measure. It was also noted that cost/benefit considerations would need to be addressed in selection of the measure.
The Staff then presented the advantages of using a single measurement basis (such as current value or cost) noting that this would increase comparability. However they noted that one measurement basis may not be suitable in all circumstances (such as derivatives where their initial cost is zero). They also noted that current value would be less relevant where the intention was to use an asset where cost may be more appropriate.
The Staff advocated that a mixed measurement basis would be their preference where the most suitable measurement basis could be selected depending on what was being measured.
One Board member favoured a single basis as he said that a mixed basis may lead to complexity in application.
Three main measurement bases were presented to the Board being:
Cost – based
By this the Staff meant that something starts at cost on day 1 and then moves over time with, for example, depreciation. Initial measurement for an asset would be cash paid (or fair value of the consideration) and the cost would then be reduced as the asset if consumed. Initial measurement for a liability would be cash received (or fair value of other consideration) and the liability would then be reduced as the obligation is satisfied.
The Staff gave an example of “building blocks” used in the Insurance contract project – cash flows, time value and risk. A current measure would keep each of these areas current and updated.
The Staff noted that there would be more than one current measure (fair value, replacement cost, fair value less costs to sell) and one question would be whether the number of current measurement bases should be reduced. The Staff grouped the current measures between a market participant and entity specific perspective
It was noted that the measure selected may be influenced by the availability of information.
By this the Staff meant that where there current values were used for some but not all aspects of the items being measure, for instance amortised cost for financial instruments. An example given by the Staff was fair value hedge accounting where the fair value is updated for changes arising from the hedged risk but is not updated for changes arising from other factors.
The Staff presented to the Boards examples where they thought that each measure would be used. They noted that a cost basis would be more likely to be used when consumption of service potential is relevant, when items are expected to be sold in a retail market (as opposed to a broker/dealer market) and when the costs associated with current measurement outweigh the benefits. The Staff noted that a current basis would be more likely to be used where an entity expects to sell assets (e.g. investment properties), where items are sold in a dealer market and for items whose value is expected to change significantly (consumer biological assets). Mixed measures were likely to be used where one aspect of an item is less relevant than other aspects (i.e. interest rates on debt instruments if the business model is to collect contractual cash flows) and where it helped to eliminate accounting mismatches.
One Board member emphasised that the entity’s business model should be taken into consideration when selecting the measurement basis and noted that he wanted this element to be introduced to the discussion. The Staff noted that the term “business model” could be used and emphasised that the above were only indicators to help determine which measurement basis to use and this would not be a straight forward decision making process.
The Staff noted that they considered that initial measurement and subsequent measurement should be the same. If this was not the case on day 1 and day 2 then there would be a gain or loss on day 2 purely as a result of a change in the measurement basis and is not a real-world event.
The Staff then highlighted to the Board other measurement issues. They noted that the framework does mention capital maintenance. They noted that this should not be dealt with in the discussion paper on the Conceptual framework.
A number of Board members agreed that the discussion paper should not cover capital maintenance. One member noted that in the discussion paper it could be noted that a stable measuring unit is assumed. The Staff agreed that this would be included in the discussion paper. One member expressed a concern on not addressing capital maintenance at all. Another Board member agreed and stated that the project should be problem focused only.
The Staff noted that recoverable amount and deprival value may also need to be considered in determining whether these were measures themselves or a means to determine which measure should be selected. These were not discussed these any further.
One Board member asked whether in the discussion paper there would be preliminary views on measurement and questioned how this would be achieved. The Staff noted that they would aim to get preliminary views in the discussion paper. This Board member also noted that it was important to get user views for the Staff to be able to form their conclusions/views in the discussion paper.
No Board decisions were taken on this paper.
The Staff presented a paper providing some background information on the definitions of liabilities and equity in the Conceptual Framework and the possible approach to addressing the liabilities/equity boundary at a conceptual level.
The Staff presented the current definitions of liabilities and equity to the Board and noted that, in practice, there are problems with applying these definitions and distinguishing between liabilities and equity.
A liability is currently defined as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Equity is currently defined as the residual interest in the assets of the entity after deducting all liabilities.
The Staff noted that within the liabilities definition there were two key elements that are important when considering the liability/equity boundary. These were
Obligation to transfer economic benefits
The obligation must be the obligation of the entity
Hence the entity must have an obligation for there to be a liability.
The Staff noted that there were a number of current problems with the liability/equity boundary and the definition was not always applied in practice. Those problems, stemming, from among other things, IAS 32 implementation issues (where specific rules that go against the basic liability definition are used which add to the problems in applying the liability/equity concept), included:
Puttable instruments – may be treated in some situations as equity even though there is a clear obligation for the entity to transfer economic benefits when these instruments are put
Transactions settled in an entity’s own shares – IAS 32 treats these transactions as liabilities (unless they represent an exchange of a fixed amount of shares for a fixed amount of cash) even though there is no obligation for an entity to transfer economic benefits
The Staff noted that these problems would need to be addressed when looking at the Conceptual Framework project.
It was noted that the Board had previously tried to resolve the issues of the distinction between liabilities and equity in their Financial Instruments with Characteristics of Equity (FICE) project. This attempted to define which financial instruments should be classified as equity. The Staff noted that this project did not use the definition of a liability and equity was not viewed as the residual. The project tried to define equity but was paused in November 2010.
The Staff noted that the current definition of a liability, as noted above, focuses on whether the entity has an obligation and that this causes concerns for some financial statement users. Where there are instruments that do not create an obligation but embody different rights from the rights of ordinary shareholders, these are classified as equity (for instance preference shares). Some financial statement users do not consider that this classification addresses the needs of ordinary shareholders and that equity should be more narrowly defined to address their information needs. The Staff noted that they did not consider that this would meet the objective of financial reporting to provide information to a wide range of users but did present to the Board an alternative that would expand the statement of changes in equity to display how future cash flows will be distributed between equity holders and would address some of these issues.
The Staff proposal for addressing the liability/equity problem would maintain the definition of liabilities and would continue to treat equity as a residual rather than defining equity. The statement of changes in equity would also be expanded to attempt to address the user concerns that they are not receiving the information they want for their particular class of equity. The Staff noted that this approach would be more consistent with applying the liability definition and would also still attempt to address user needs.
One Board member proposed that an equity instrument should be defined and would have to have three characteristics:
No stated maturity or mandatory redemption
No required fixed payment
Highest and same degree of loss absorption
The Board member noted that the first 2 characteristics were essential for something to be equity. This view to define equity was not shared by other Board members where equity being a residual was preferred.
Another Board member noted that the issues that were discussed had already been discussed in the liabilities/equity project where there was limited success in resolving them but acknowledged that they would need to be addressed in the Conceptual Framework project. He supported the Staff proposal to expand the statement of changes in equity and portraying the transactions between different classes of equity investors. This Board member noted that the statement of changes in equity could be split into two sections with one section showing transfers of wealth between different components of equity (non-controlling interest, preference shareholders etc.) and another section showing transactions with equity investors. This would then enable users to concentrate on the area of most relevance to them. The Staff agreed that this could be adopted or a one part statement of changes in equity with sub totals to the same effect
The Board discussed the Staff's project plan for developing the new chapters of the Conceptual Framework.
The Staff presented their project plan for developing the new chapters of the Conceptual Framework to the Board members. The main features of the plan were noted in the November 2012 education sessions. The IASB, in September 2012, decided to aim to finalise the new sections of the Conceptual Framework by September 2015. The discussion paper is due in July 2013.
The Staff noted that the discussion paper would encompass:
Elements of financial statements (including recognition and derecognition);
Reporting entity; and
Presentation and disclosure
The Staff noted that an initial draft discussion paper would be presented to the Boards in the February 2013 Board meeting. It was noted that some of the sections of the initial draft would lack detail and others are likely to present alternative approaches rather than a preliminary view. A revised version of the discussion paper will be presented to the Board in April 2013.
The Staff noted that small group meetings will be held with IASB members to brief them on sections of the Discussion paper. It was also noted that external consultation would be sought both internal and external. The Staff propose to use national standard setters and proposed to use the Accounting Standards Advisory Forum (ASAF) as the main consultative group. A public disclosure forum is also due to be held in January 2013 to provide input into the disclosure principles section of the conceptual framework.
The Staff acknowledged that the timetable was challenging and would be likely to be met if the project was restricted to the areas agreed in the September 2012 Board meeting. It was also noted that the framework would be updated rather than starting from a clean sheet of paper. The Objective and Qualitative Characteristics chapters would not be amended although would be looked at if the areas that were being worked on identified a significant impact/change that required amendment.
The comment period will be 120 days for the discussion paper. The other salient features of the Staff proposed plan are as follows:
Development and publication of the Exposure Draft
September – October 2013 – Public round-table meetings
November 2013 – End of Discussion paper comment period (120 days)
January 2014 – Comment letter analysis the Board
February – May 2014 – Decision making sessions
June – July 2014 – Sweep issues
August 2014 – Publish Exposure Draft
The Staff noted that they planned to hold public roundtable meetings during the comment periods and noted that if the Exposure Draft receives good support then the Exposure Draft development should be relatively straightforward.
Development and publication of the new Conceptual Framework
October – November 2014 – Public round table meetings
December 2014 – End of Exposure Draft comment period (120 days)
February 2015 – Comment letter analysis to the Board
March – June 2015 – Decision making sessions
July – August 2015 – Sweep issues
September 2015 – Publish new Conceptual Framework
The Staff asked the Board whether they supported the proposed approach to the Conceptual Framework.
One Board member noted that there will be a number of areas of the project that will take time and it is vital that dedicated meetings are in place with Board members to ensure that sufficient time is devoted to the project. He agreed that the parts of the Conceptual Framework that were considered complete should not be revisited but if issues did arise these should be addressed within those chapters. This Board member advocated a more detailed project plan and he proposed that the Staff perform extensive research to enable them to form the discussion paper. These views were shared by another Board member especially regarding the time spent by Board members on the project.
Another Board member agreed with the Staff proposal and noted that for most parts of the framework a lot of work has been performed and hence the Staff should make use of this.
Another Board member understood the concerns of the first Board member regarding time devotion and also a detailed project plan. He also questioned what the Board would be presented with for those parts where the Staff noted that there would be a lack of detail. He noted that the more complete the Discussion paper was in February the better and if there were a lot if open questions in February this may impact upon the overall project timetable. He also questioned the use of the ASAF as the consultative group bearing in mind that these have yet to be formed.
The Staff noted that a balance needs to be struck to ensure that the project was completed to schedule and if more extensive research was carried out then it would take at least another year to complete.
One member highlighted that discussions with the Capital Markets Advisory Group should be carried out sooner rather than later in order to test the ideas being put forward.
Another Board member asked what format the draft Discussion paper would be – would it present a range of views or one view and discuss why the other Board member views were not adopted. The member was concerned that the Staff should present the full range of views. The Staff noted that it is likely that the Discussion paper would follow the latter format but this would depend on the issue being addressed and the amount of differing views on it.
Notwithstanding the above Board comments, a vote was held and all 14 Board members tentatively agreed to the Staff’s project plan for the Conceptual Framework project.
The Board was provided a summary by the IFRIC staff on the results of the Committee's discussion on proposed amendments to IAS 12.
In May 2012, the IASB issued for public comment Exposure Draft ED/2012/1 Annual Improvements to IFRSs: 2010-2012 Cycle, which proposes amendments to 11 IFRSs under its annual improvements project. One of the proposed amendments was to IAS 12 clarifying:
the assessment of whether to recognise the tax effect of a deductible temporary difference (DTD) as a deferred tax asset should be made as a combined assessment of all temporary differences that, when they reverse, will give rise to deductions against the same type of taxable income;
taxable profit against which an entity assesses a deferred tax asset for recognition is the amount preceding any reversal of deductible temporary differences; and
only actions that create or increase taxable profit are representative of tax planning opportunities.
At its November 2012 meeting, the Committee considered constituent feedback to this proposed amendment. The Committee acknowledged questions from constituents regarding whether: an unrealised loss on a debt instrument measured at fair value gives rise to a DTD when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all the contractual cash flows; and an entity can assume recovery of an asset for more than its carrying amount when estimating probable future taxable profits against which DTDs can be utilised.
The Committee expressed concern regarding whether these issues could be addressed within the confines of the annual improvements process, or rather, should be undertaken as a narrow-scope amendment to IAS 12, and therefore, decided to consult with the IASB regarding the most appropriate course of action.
At the December IASB meeting, the Committee staff summarised the results of the Committee’s discussion, while also providing an analysis of the issues the Committee concluded required clarification before any clarification of the accounting for deferred tax assets for unrealised losses on debt instruments can be made. Those questions included:
Does an unrealised loss on a debt instrument measured at fair value give rise to a DTD when the holder expects to recover the carrying amount of the asset by holding it to maturing and collecting all the contractual cash flows?
The staff believed that DTDs could result from the unrealised loss on an available-for-sale debt instrument, if the unrealised loss reverses because the entity expects to recover the carrying amount of the debt instrument by holding it to maturity and collecting all the contractual cash flows (i.e., DTDs recognised on holding), although the Committee did not conclude on this issue.
Which adjustments need to be made to taxable profits as defined in paragraph 5 of IAS 12 for assessing the recognition of deferred tax assets?
The staff recommended that all tax deductions resulting from the reversal of DTDs should be added back to taxable profit when assessing deferred tax assets for recognition, although the Committee did not conclude on this issue.
Can an entity assume recovery of an asset for more than its carrying amount when estimating probable future taxable profits against which DTDs can be utilised?
The staff recommended that an entity should assume that it will recover an asset for more than the carrying amount when estimating future taxable profits against which DTDs can be utilised, provided that the recovery for more than the carrying amount is probable.
Are deductible temporary differences resulting from unrealised losses on available-for-sale debt instruments assessed separately from other DTDs for utilisation, or in combination with other DTDs of the entity?
The staff recommended the retention of the proposals in the exposure draft that clarify that the utilisation of deductible temporary differences has to be assessed only on the basis of tax law (i.e., the grouping is determined by tax law and only by tax law).
In seeking Board views regarding the staff’s analysis and whether these issues should be addressed in a separate narrow-scope project to amend IAS 12, many Board members expressed support for the staff’s proposals. However, a few comments and concerns were raised, including:
The timeliness of resolution of a narrow-scope project to amend IAS 12. Many Board members expressed concern that a narrow-scope project could not be completed timely. Therefore, some suggested that some of the less contentious issues should be addressed through the annual improvements project, while other issues should be considered as part of the narrow-scope amendment. However, other Board members expressed concern with this view for a variety of reasons including: a fear with addressing accounting issues ‘piecemeal’; and a fear that even the less contentious issues may not meet the annual improvements criteria.
Whether the response in the staff paper responds to the question raised in the submission. Those questions included whether: an unrealised loss on a debt instrument measured at fair value gives rise to a DTD when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all the contractual cash flows; and an entity can assume recovery of an asset for more than its carrying amount when estimating probable future taxable profits against which DTDs can be utilised. The staff noted that it would consider this feedback in future discussions with the Committee.
Divergence in views between the IASB and FASB. The staff summarised recent discussions of the FASB regarding the need for a valuation allowance related to deferred tax assets (DTAs) arising from unrealised losses recognised in other comprehensive income (OCI) on debt instruments classified and measured at fair value through other comprehensive income (FVTOCI debt instruments). Among the FASB’s proposals was that an entity should evaluate the need for a valuation allowance on deferred tax assets related to debt instruments classified and measured at FVTOCI separately from its evaluation of other deferred tax assets, and that separate assessment should only apply to deferred tax assets related to losses on FVTOCI debt instruments that have been recognised in OCI. Deferred tax assets that relate to losses that have been recognised in net income are assessed in combination with other deferred tax assets. Many Board members expressed concern that the FASB’s proposed approach differed from that of IAS 12 requirements.
Ultimately, the IASB tentatively decided that the accounting for deferred tax assets for unrealised losses on debt instruments should be clarified by a separate narrow-scope project to amend IAS 12. The Board noted that the issue of whether an entity can assume that it will recover an asset for more than its carrying amount when estimating probable future taxable profits should be addressed in a separate narrow-scope project and such a project is broader in scope than an annual improvement.
The IASB also tentatively agreed with the Committee that clarifying this issue requires addressing the question of whether an unrealised loss on a debt instrument measured at fair value gives rise to a deductible temporary difference when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all the contractual cash flows.
The staff intends to prepare an analysis of the different approaches to account for deferred tax assets for unrealised losses which will be discussed at a future Committee meeting.
The Board was provided an update on the IFRIC's current agenda and issues discussed at the 13-14 November 2012 Committee meeting.
The staff presented the Committee’s November 2012 IFRIC Update newsletter, providing an update of the issues discussed at the 13-14 November 2012 Committee meeting.
The staff highlighted to the IASB members the items on the Committee’s current agenda, finalised agenda decisions, tentative agenda decisions that are out for comment, issues considered for Annual Improvements and other work in progress.
In response to the staff’s high-level overview, Board members raised certain questions or comments, as highlighted below:
At its November meeting, the Committee discussed the accounting for employee benefit plans with a guaranteed return on contributions or notional contributions; considering, amongst other measurement areas, the measurement of the ‘higher of option’ in employee benefit plans (i.e., employee guarantee of the higher of two or more possible outcomes). At its meeting, the Committee tentatively decided that the ‘higher of option’ should be measured at the intrinsic value at the reporting date. At the December IASB meeting, one Board member disagreed with this tentative conclusion. He noted that measurement at intrinsic value was not measuring the option at all – it is just reflecting the outcome that is expected to give the higher value at the reporting date. The staff will provide this feedback to the Committee.
The Board discussed the Committee’s deliberations on a request to clarify the determination of the rate used to discount post-employment benefit obligations; namely, clarification of whether corporate bonds with a rating lower than one of the two highest ratings could be considered a ‘high quality corporate bond’ (HQCB) as defined in paragraph 83 of IAS 19 (revised in 2011). The Committee believed that judgement is required in the determination of what the current market yields on HQCB are, but also noted that it does not expect that an entity’s method of determining the discount rate so as to reflect the yields on HQCB will change significantly from period to period other than to reflect changes in the time value of money and the estimated timing and amounts of benefit payments. At the December IASB meeting, one Board noted feedback to the Committee’s tentative decisions suggesting that it provided conflicting statements (use judgement, but the Committee does not expect significant change). The staff noted that it is considering the development of guidance in application of this judgement; however, it acknowledged that there may be mixed views on what the application guidance should communicate.
The Board discussed how the proposed portfolio revaluation approach might be applied with respect to accounting for macro hedging activities for risks other than interest rate risk.
The IASB discussed how the proposed portfolio revaluation approach might be applied with respect to accounting for macro hedging activities for risks other than interest rate risk.
To date, the Board’s discussions on the accounting for macro hedging activities have focused on a portfolio revaluation approach where macro hedging activity for interest rate risk is undertaken by banks. At the September 2011 IASB meeting, it was discussed that the intention of the IASB was to develop an accounting model for macro hedging activities that would accommodate different types of risk (i.e., not limited to the accounting for macro hedging activities of interest rate risk or the needs of financial institutions). At this meeting, the staff presented their initial findings on the outreach undertaken to date in order to identify instances in which macro hedging activity for open portfolios is undertaken for risks other than interest rate risk, and to consider the relevance of a revaluation approach to that activity. The staff noted that some corporates do undertake macro hedging activity for foreign exchange risk and/or commodity price risk.
Providing possible solutions for macro hedging activity of these risks, the staff believed that although the revaluation approach is expected to be most widely applied by financial institutions managing interest rate risk on open portfolios, it should not be restricted to interest rate risk. The staff also noted similarities in different types of risk management activities which is expected to result in the majority of guidance on the revaluation approach being applicable to macro hedging activity of open portfolios regardless of the particular hedged risk. However, the staff acknowledged that some specific guidance may be required for particular aspects of different risks. The staff also noted that further outreach was required to understand the scope of risks managed in an open portfolio and the interaction of a macro hedging model with that of the general hedging model.
The Board was not asked to make any tentative decisions on this paper, but feedback was requested to the staff’s analysis. That feedback can be summarised as follows:
A need for more outreach. The staff highlighted that its outreach regarding the application of a revaluation approach to macro hedging activities for open commodity portfolios was limited in scope at this point. As a result, many Board members highlighted the need for more outreach (particularly outreach to corporates and users) to understand needs for solutions for macro hedging activity of other than interest rate risks. However, others expressed concern that continued outreach activity would extend the project completion date. Instead, they preferred that the Board move forward with issuance of a Discussion Paper as a source of constituent feedback.
Scope of the model. One Board member questioned whether the macro hedging model should capture only risks which result in an accounting mismatch (such as interest rate risk), or should also consider those risks which do not create an accounting mismatch (such as foreign exchange risk since recognised foreign currency monetary items are revalued for spot foreign exchange under IAS 21 The Effects of Changes in Foreign Exchange Rates). The Board member rhetorically asked whether the Board wanted pipeline trades, forecast transactions and firm commitments in the model. If so, he believed more outreach was needed.
Hearing this feedback, the staff expressed an intention to continue drafting the Discussion Paper, which will provide an overview of the revaluation model considering IASB discussions to date.
General hedge accounting
Subsequent to discussing macro hedge accounting, the IASB Chair requested a status update on the general hedge accounting proposals. In September 2012, the IASB published on its website a staff draft of the general hedge accounting section of IFRS 9 which was intended to illustrate the IASB's position while at the same time allowing constituents to familiarise themselves with the document. However, the staff noted that constituents had used the staff draft as an opportunity to comment on specific proposals. The staff does not intend to revisit previous tentative decisions of the Board. However, the staff noted two issues which it intends to bring to the Board at its January 2013 meeting; those issues relate to the interaction of the general hedge accounting proposals with the macro hedging project and IAS 39 Financial Instruments: Recognition and Measurement requirements, as well as the application of the model to cross-currency swaps.
The Board continued discussion of its proposed ‘three-bucket’ impairment model in discussing the following topics: 1) Transitional requirements; 2) Due process considerations; and 3) Re-exposure, comment period and permission to draft.
The IASB continued discussion of its proposed ‘three-bucket’ impairment model in discussing the following topics:
Due process considerations; and
Re-exposure, comment period and permission to draft
In November 2012, the IASB tentatively decided to modify the criteria for the recognition of lifetime expected losses (the lifetime loss criteria) in the proposed impairment model. Because the transition requirements tentatively decided on during the July 2012 meeting include consideration of the lifetime loss criteria, the staff presented updated requirements reflecting the Board’s most recent tentative decisions. Those requirements, summarised below, reflect the Board’s tentative decision to change the credit quality criterion:
if the credit quality at initial recognition is not used at the date of initial application, the transition provisions should require these financial assets to be evaluated only on the basis that the likelihood that contractual cash flows may not be collected is at least reasonably possible (i.e. on the basis of the credit quality criterion) of whether the credit quality is below “investment grade” at the date of initial application.
The Board’s previous tentative decision provided that entities who do not use the initial credit quality information for existing financial assets when applying the new impairment model should evaluate those assets using only the credit quality criterion. As a consequence of the clarifications to the lifetime loss criteria in November 2012, the staff’s proposed modifications are intended to ensure consistency with the modified lifetime loss criteria without fundamentally changing the transition requirement.
One Board member expressed concern that the IASB’s transition proposals would generally result in recognition of lifetime losses at transition (for financial assets below “investment grade”) given the absence of available credit quality information at initial application. He believed that entities may be incentivised, if the entity is well capitalised, to not seek credit quality information in order to recognise lifetime losses on day one and establish a ‘cookie jar’ reserve. Taking this view further, he noted a belief that retails loans would generally be subject to lifetime expected losses at transition given a lack of credit quality information even though the Board established a practical expedient based on delinquency at its November 2012 meeting (i.e., the Board tentatively decided in November 2012 that entities are permitted to consider delinquency information in assessing the need to recognise lifetime expected losses (in which a rebuttable presumption was proposed that the criterion for recognition of lifetime expected losses is met if an asset is 30 days past due)). Therefore, he suggested that for those entities assessing the need to recognise lifetime expected losses based on delinquency information, the proposals should require application of lifetime expected losses at transition if the asset is considered delinquent; and otherwise, a 12-month allowance should be required.
The staff believed that most entities would be incentivised to not recognise lifetime expected losses. They also noted a belief that the need to seek credit quality information was not meant to be a free choice on the part of the entity, but rather, was seen as a requirement unless such information requires undue cost or effort to obtain. However, they expressed support for the clarification regarding application of delinquency information when it serves as the basis for expected loss recognition.
When put to a vote, the Board tentatively supported the staff recommendation subject to the addition of an amendment regarding delinquency information as outlined above.
Due process considerations
The IASBDue Process Handbook (the Handbook) includes mandatory and non-mandatory due process steps to be undertaken before the publication of an exposure draft or the issue of a new IFRS or an amendment to existing IFRSs. Highlighting the steps that the Board has undertaken in development of the current impairment model, the IASB staff believed that the Board had complied with the requirements of the Handbook in the development of the model and sought confirmation from the Board that it too believed all necessary steps had been undertaken. Board members were satisfied that all necessary due process requirements had been met.
Re-exposure, comment period and permission to draft
The staff requested permission to publish a re-exposure draft of the impairment model, adopt a 120-day comment period for the re-exposure draft and begin the balloting process.
With little debate, the Board tentatively agreed with the staff recommendation to re-expose the current proposals given that the proposals differ significantly from previous model reiterations subject to comment.
In discussing the comment period of 120 days for the re-exposure draft, one Board member asked about the interaction between the comment period on the IASB’s proposed model as compared to the FASB’s proposed exposure draft. The staff noted the FASB intends to publish its proposals before the end of the calendar year with a comment period the later of 120 days or 30 April 2013. It is the IASB’s intention to publish its re-exposure draft by the end of February 2013. The IASB staff acknowledged that the difference in timing poses some difficulties in analysing constituent feedback collectively, but noted that it intends to continue to perform some joint outreach with the FASB staff.
With no additional debate, the Board tentatively decided to adopt a comment period of 120 days for the re-exposure draft consistent with the normal minimum comment period outlined in the IASB’s Handbook.
The Board also granted the staff permission to begin drafting the ballot draft.
The staff then asked whether any IASB members intended to dissent to the proposals.
One IASB member noted that he was uncertain whether he would dissent. He acknowledged certain positive aspects of the proposals, including a belief that the proposals were superior to those proposed by the FASB. However, he expressed both conceptual and practical concerns with the IASB’s proposals, including a belief that the 12-month allowance was conceptually flawed, practical concerns with applying the criterion for recognition of lifetime expected losses and an aversion for the free choice in applying the simplified approach for trade and lease receivables.
Other Board members, speaking to the conceptual flaws with the 12-month allowance and the fact that convergence with the FASB was not achieved, requested that the Basis for Conclusions to the re-exposure draft clearly articulate the reasons the IASB tentatively decided on its proposed model (following assessment of many different model iterations) despite some conceptual flaws, while also summarising circumstances in which the IASB and FASB’s models yield similar and different results.
The IASB staff noted an intention to take this feedback on-board in drafting.
proposals relating to the margin for participating contracts (paper 2B),
impairment of reinsurance contracts held by insurer (paper 2C), and
recent decisions the FASB has made in its insurance contracts project during meetings held in November 2012 (paper 2D) — an informative session to provide an overview on the recent decisions the FASB has made on its insurance contracts project without IASB involvement.
Unlocking the residual margin (Paper 2A)
The IASB had tentatively decided that the residual margin recognised when applying the building block approach should be ‘unlocked’ for changes in estimates of future cash flows. This means that changes in estimates of future cash flows would not be recognised in profit or loss immediately. Instead, they would be added to, or deducted from, the residual margin, and thereby recognised in profit or loss in future periods when the residual margin is released to profit.
This paper examines some consequences of this tentative decision and recommends that the decision is refined to avoid some unintended consequences.
The staff recommended that the residual margin should be unlocked for differences between current and previous estimates of cash flows relating to future coverage or other future services.
The staff are of the view that unless the decision is refined, problems could arise because the proposed tentative decisions seeks to distinguish purely between past cash flows and future cash flows. All differences in past cash flows (i.e., experience adjustments) are recognised immediately in profit or loss, whereas all changes in estimates of future cash flows are added to or deducted from the residual margin. Although this distinction works well for changes in estimates of claims for future insured events, it could have unintended consequences for other changes in estimates.
The Staff are of the view that the objectives of the unlocking decision could be met, and the unintended consequences avoided, by refining the tentative decision. Instead of distinguishing between past and future cash flows (i.e., experience differences versus estimates of future cash flows), the requirements should distinguish between past and future coverage, and between investment and service components.
After a short debate, the Board voted unanimously and has supported the Staff’s recommendations to refine the tentative decision as noted above.
Proposals relating to the margin for participating contracts (Paper 2B)
Paper 2B covered the proposals for adjusting and allocating the margin for participating contracts.
The Staff asked the Board to vote on its recommendations that:
the margin for participating contracts is adjusted for changes in the value of the premiums by adjusting the margin for changes in the value of the underlying items as measured using IFRS; and
the constraint on recognising revenue that is proposed in the revenue recognition project should not be applied to the allocation of the residual margin for insurance contracts.
The Staff explained that in their view the method of allocating changes in cash flows resulting from asset returns to the residual margin will actually treat the margin consistently from a day one. To estimate the margin on day one the insurer will need to forecast its cash flows including the future assets return which will fund the discretionary cash flows to the participating policyholders. As a result, the residual margin would be affected by the assumptions on future asset returns thus suggesting that when expected asset returns change the margin should be adjusted.
This argument distinguishes participating contracts from other contracts. However a number of IASB members noted that an insurer is exposed to the risk for the performance of underlying assets to some extent irrespective of the type of contract it issues. For participating contracts the recognition in the residual margin of the insurer portion of an investment return rather than in the earnings of the current period was rejected on conceptual grounds by these IASB members
Another IASB member supported the Staff view that the proposed allocation of the residual margin for participation contracts should be performed in accordance with the services provided, thus requiring the unlocking of the margin over the period during which services are provided based on changes in all cash flows including those from the expected asset returns. This IASB member added that the insurance business is not similar to an asset management business because the presence of guaranteed returns makes participating contracts economically different and adds risk to the insurer’s obligations compared to those of an asset manager. Revenue recognition guidance is not appropriate for insurance given that recognition and measurement is based on an expected value approach.
When the Board voted the majority rejected the Staff recommendations with 8 voting against it and only 7 in favour.
The Staff asked the Board to discuss and decide on its second recommendation of paper 2B regarding the allocation of the margin according to the services provided noting that the IASB tentatively decided that an insurer allocates the residual margin consistent with the pattern of transfer of the services provided. The staff recommended that a reasonable pattern for the allocation of the margin:
views the provision of services as satisfied over the life of the contract;
is based on the insurer’s expectations of total unearned profit and allocates that unearned profit in a reasonable, systematic way; and
if the bonuses are allocated in the same pattern as the estimate of the provision of services, the pattern of bonuses may be an acceptable proxy for the provision of services under those contracts.
Thus, the staff recommended that the IASB confirm the present decisions:
that the allocation of the margin for participating contracts is done according to the services provided; and
not to apply the Revenue recognition guidance on constraints to the allocation of the residual margin for all insurance contracts.
If necessary, application guidance could be developed on the appropriate pattern of allocating the margin. There was no further debate and this recommendation was unanimously approved by the Board.
Impairment of reinsurance contracts held by the insurer (Paper 2C)
At its meeting in June 2011 the IASB tentatively decided that the cedant should apply the impairment model being proposed under IFRS 9Financial Instruments (Impairment project) to the reinsurance asset.
The Staff are of the view that there is now a conflict between the IASB’s most recent proposals on impairment of reinsurance assets and the IASB’s decision on the unlocking of the residual margin and hence have provided paper 2C to discuss the two different alternatives that in their view could avoid this conflict.
Under alternative 1 the cedant should account for the initial estimate and subsequent changes in estimates of expected credit losses in accordance with the insurance contract decisions, with the cedant adjusting the residual margin for changes in cash flows as a result of expected credit losses.
Under alternative 2 the cedant will account for a portion of the initial estimate and subsequent changes in estimates of the expected credit losses in accordance with the impairment project decisions and would recognise upon initial recognition of the reinsurance contract a portion of the initial estimate or 12 month expected loss and subsequently the cedant should recognise in profit and loss changes in estimate of cash flows resulting from changes in expected credit losses
Staff recommended alternative 1.
A lively debate followed amongst the IASB members in which one member suggested that he would favour a combination of the two approaches which would involve unlocking the residual margin for changes in estimates of expected credit losses upon initial recognition of the reinsurance contract and then with any subsequent changes to the cash flows relating to the expected credit losses going to the profit and loss.
Another IASB member was in favour of alternative 1 since in his view changes in the cash flows resulting from expected credit losses should be treated consistently in the same way as changes in other cash flows and that alternative 1 is effective in avoiding double counting under the two different approaches.
Other Board members noted that the combined approach will need to be clearly articulated in the revised exposure draft and that the Staff should focus on this an important next step.
The combined approach suggested by the first IASB member received support from several more board members and also from the Staff. This resulted in the IASB voting unanimously to support the combined approach as discussed above.
The IASB held an education session to discuss allocating the transaction price to separate performance obligations, accounting for contract acquisition costs, applying the proposed model to bundled arrangements and constraining the cumulative amount of revenue recognised on licenses.
The IASB held an education session to discuss allocating the transaction price to separate performance obligations, accounting for contract acquisition costs, applying the proposed model to bundled arrangements and constraining the cumulative amount of revenue recognised on licenses.
No decisions were taken at this session. Observer notes for the session are incorporated into the meeting notes for the joint revenue recognition session held on Monday, 17 December.
The Board discussed disclosure requirements in IAS 36 regarding measurement of the recoverable amount of impaired assets. The staff proposed a narrow-scope amendment designed to clarify relevant disclosure requirements.
The IASB, as a consequential amendment to IFRS 13Fair Value Measurement, modified some of the disclosure requirements in IAS 36 regarding measurement of the recoverable amount of impaired assets. The amendments resulted from the IASB’s decision in December 2010 to require additional disclosures about the measurement of impaired assets (or a group of assets) with a recoverable amount based on fair value less costs of disposal. The IASB took this decision to make the disclosure requirements in IAS 36 consistent with the wording and some of the disclosure requirements in IFRS 13 and with the disclosures about impaired assets in US Generally Accepted Accounting Principles (GAAP).
However, the staff was recently made aware that one of the amendments made to IAS 36 potentially resulted in the disclosure requirements being broader than originally intended. Instead of requiring the disclosure of the recoverable amount of impaired assets, including goodwill, as intended, the amendment is perceived to require disclosure of the recoverable amount of any cash-generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) is significant in comparison with the entity’s total carrying amount of goodwill or intangible assets with indefinite useful lives.
As a result, the staff proposed a narrow-scope amendment designed to clarify relevant disclosure requirements. The staff recommended the amendment outside the Annual Improvements project in an attempt to finalise the amendment as timely as possible given that IFRS 13 is effective from 1 January 2013. The staff intend for the effective date for the proposed amendment to be 1 January 2014 with earlier application permitted, but not earlier than the date in which an entity first applies IFRS 13. The staff’s proposed amendments would:
add to paragraph 130(e) of IAS 36 a requirement to disclose the recoverable amount of assets, including goodwill, for which there was a material impairment loss recognised or reversed during the period (i.e., moving the requirement from paragraph 134(c) of IAS 36).
add a requirement (to paragraph 130(f) of IAS 36) to disclose the following:
a description of the valuation technique that is used to measure fair value less costs of disposal of the impaired asset and, if there has been a change in the valuation technique, the reason for making it (consistently with the requirements in paragraph 134(e) and 134(e)(iiB) of IAS 36);
the level in the fair value hierarchy in which the fair value measurement is categorised in its entirety (consistently with the requirement in paragraph 134(e)(iiA)); and
for the fair value measurements that are categorised within Level 2 and Level 3, the key assumptions used in the measurement (consistently with the requirement in paragraph 134(e)(i)).
to remove from paragraph 134(c) of IAS 36 the requirement to disclose the recoverable amount of any cash-generating units with a significant carrying amount of goodwill or intangible assets with indefinite useful lives.
With little debate, the Board tentatively agreed with the staff recommendations, including that the:
proposed amendments should be effective from 1 January 2014 with early application permitted;
proposed amendments should be applied retrospectively, but not earlier than when an entity first applies IFRS 13; and
exposure draft for the narrow-scope amendment should have a 60-day comment period.
the Board discussed issues to be addressed in the DP on rate-regulated activities, the need for an interim Standard and a proposed project plan.
In September 2012, the IASB decided to restart its project on Rate-regulated Activities with the development of a Discussion Paper (DP) to document different rate regulation regimes and identify whether any of those rate regulations create rights or obligations that meet the IFRS definitions of assets and liabilities. At this meeting, the Board discussed issues to be addressed in the DP, the need for an interim Standard and a proposed project plan.
Issues to be addressed in the Discussion Paper
The staff proposed that the following issues should be addressed in the DP (but subject to change):
What do we mean by “rate regulation” and should we define it (e.g., what features distinguish rate-regulated activities from non-rate regulated activities and do different forms of rate-regulation create different rights and obligations)?
What should be the scope of guidance on Rate-regulated Activities?
What characteristics of the rights and obligations created by rate regulation meet the definitions of assets and liabilities in the IFRS Conceptual Framework?
If the rights and obligations created by particular rate regulation do meet the definitions of assets and liabilities, what type of asset, liability or combination of assets and liabilities are created?
For any assets or liabilities identified, what are the relative advantages and disadvantages of alternative accounting models for recognition and measurement?
Does IFRS already include appropriate accounting models for recognition and measurement that can be applied to any regulatory assets or regulatory liabilities identified?
How should any regulatory assets and regulatory liabilities be presented in the financial statements?
What disclosures are needed to help users understand the impact of rate regulation on the financial position, performance and cash flows of the rate-regulated entity?
If the conclusion is that rate regulation does not create additional assets and liabilities to be recognised, what information about the rate regulation needs to be presented, and how should this be done?
Reviewing this summary, Board members highlighted other possible issues to consider on the project, including:
defining the unit of account (i.e., what is a customer), although the staff believed this issue would be considered naturally in discussing the above topics.
considering other possible presentation and disclosure possibilities rather than strictly analysing whether rate regulation creates rights or obligations that meet the IFRS definitions of assets and liabilities. For example, he mentioned use of disclosure or two separate balance sheets as possibilities to show the effect of rate-regulated activities.
The Board was not asked to specifically vote on this issue; however, no fundamental objections were expressed.
The staff recommended that a separate working group not be established for this project. Instead, the staff intended to make use of the Conceptual Framework consultative group (which consists of standard-setters) given the projects are closely interlinked.
Many Board members believed a separate working group should be established for rate regulation given the possible benefits stemming from engaging constituents with an expertise in this area. With little additional debate, the Board tentatively decided a separate working group should be established for this project.
Development of an interim Standard
The Board discussed possible development of an interim Standard for jurisdictions moving to IFRS pending the completion of the comprehensive project on Rate-regulated Activities. Possible approaches to an interim Standard outlined by the staff (assuming an interim Standard was viewed favourably by the Board) included a disclosure only standard, developing new interim requirements and some form of grandfathering of existing previous GAAP recognition and measurement accounting policies (although mandating certain presentation and disclosure requirements) for the accounting for the impacts of rate regulation for those rate-regulated entities that have not yet transitioned to IFRSs.
Many Board members expressed support for the development of an interim Standard; generally expressing preference for an interim Standard that permits some form of grandfathering. Some of the reasons for this support included that an interim Standard permitting grandfathering would: reduce the disruption to trend information for these entities on transition to IFRS until clearer guidance is developed; and avoid the entities applying these policies having to make a major change to their accounting policies that might be followed by another major change once the comprehensive project is completed. However, other Board members expressed concern with the development of an interim Standard – particularly on based on grandfathering. Reasons for this concern including a fear of the unknown (i.e., an incomplete understanding regarding what is being done in the area of rate regulation around the world); concern over the implications development of an interim standard may have on adoption of IFRSs (e.g., will entities defer adopting IFRSs until such point that an interim standard is issued given that the staff’s proposals were only relevant to those entities that have not yet transitioned to IFRSs); and a belief that the interim Standard would only apply to a small number of jurisdictions (Canada, India and possibly the US were mentioned as jurisdictions with significant rate-regulated entities where entities may be transitioning to IFRSs in the future), and therefore, should not be the immediate focus of the Board. Others questioned the benefits of an interim standard (asking whether it only served to claim compliance with IFRSs as issued by the IASB), or asked whether an interim standard would be viewed favourably by jurisdictions to which the interim Standard was intended to apply.
After a lengthy debate, the Board tentatively decided that an interim Standard should be developed which permits some form of grandfathering of existing GAAP recognition and measurement accounting policies for the accounting for the impacts of rate regulation for those rate-regulated entities that have not yet transitioned to IFRS. The interim Standard would include presentation and disclosure requirements designed to assist users in understanding the implications of rate regulation on the entity. The Board intends to discuss presentation and disclosure requirements at a future meeting.
The staff outlined their project timeline for both the longer term project to address accounting for the impacts of rate regulation and the shorter term project to develop an interim Standard to be applied by rate regulated entities that have not yet adopted IFRSs.
Under the project timeline:
deliberations for an interim Standard would commence in January 2013. The staff anticipates the Board publishing an exposure draft for the interim Standard during the first quarter of 2013 with a 120-day comment period.
deliberations on its comprehensive project on rate-regulated activities would resume in the second quarter of 2013, with an intention to publish a DP during the second half of 2013 with a 120-day comment period.
The Board discussed three fundamental issues related to the limited scope project on bearer biological assets (BBAs): (1) what definition of BBAs should be used, (2) how BBAs should be measured, and (3) how produce growing on the BBAs should be accounted for.
The Board discussed three issues identified by staff as fundamental to the IASB’s initial discussion on the limited scope project on bearer biological assets (BBAs):
What definition of BBAs should be used in the scope of the amendment to IAS 41Agriculture (i.e., identify the subset of biological assets for which biological transformation is not significant in generating future economic benefits — meaning they are not supported by the main principle in IAS 41 outlined in paragraph 6)?
How should BBAs be measured before being placed into production (i.e., before the BBAs reach maturity)?
How should the produce growing on the BBAs be accounted for (e.g., fruit growing on a fruit tree)?
On the first issue of what definition of BBAs should be used in the scope of the amendment to IAS 41, the staff believed the definition should describe the subset of biological assets that are not supported by the main principle in IAS 41 (i.e., those biological assets for which biological transformation is not significant in generating future economic benefits), and the staff considered the issue of whether to include livestock in the scope of the amendment as one of the more significant issues to consider.
The staff identified four alternative views for defining BBAs. These alternatives included:
View (1): No alternative use — BBAs would be defined as biological assets that are cultivated for use in the production or supply of agricultural produce to others; are expected to be used for more than one period; and are not agricultural produce themselves. The definition aims to define BBAs to be those biological assets that have no consumable attributes — they can only be used as bearer assets (i.e., they have no alternative use).
View (2): Predominant use — BBAs would be defined as biological assets predominantly used in the production or supply of agricultural produce to others and are expected to be used for more than one period. Under View 2, classification of biological assets that embody both consumable and bearer attributes would depend on the “predominant use” of the biological asset at the reporting date (a business-model test).
View (3): No alternative use — Plants only (same as View 1 but only includes plants, not livestock).
View (4): Predominant use — Plants only (same as View 2 but only includes plants, not livestock).
Many Board members expressed support for a ‘no alternative use’ model — either View 1 or 3. The primary reasons for this support related to the fact that the definition was considered easier to apply and more conceptually sound because it removed the need for decisions based on a business-model test and management intention. However, other Board members supported a ‘predominant use’ model — either View 2 or 4. Reasons for this support generally related to a view that Views 1 and 3 failed to capture practical reality that many biological assets have both consumable and bearer attributes.
Looking at whether the scope should be limited to plants (i.e., View 3 or 4) or should include plants and livestock (i.e., View 1 or 2), many Board members expressed concern with including livestock within the scope of the amendment. They noted that use of a cost model becomes more complex when applied to livestock. While it was considered theoretically possible to determine the cost of a newly born animal, for example, Board members noted that almost all the costs involved are indirect costs and must be allocated on an inherently arbitrary basis. However, others believed the practical concerns could be overcome and preferred either View 1 or 2.
When put to a vote on initial preference, the Board was split; four supported View 1, four supported View 2, seven supported View 3 and one supported View 1. The IASB Chair then asked who could ‘live with’ View 3, in which fourteen Board members were accepting. Therefore, the IASB tentatively decided the scope of the amendment to IAS 41 should be restricted to BBAs that are plants. Plants would be defined as bearer biological assets if they have no consumable attribute (i.e., can only be used in the production or supply of agricultural produce).
Application of a cost-based model
The IASB then considered how to account for BBAs before they are “placed into production” (i.e., before they reach maturity and bear produce).
Upon maturity, BBAs are no longer undergoing biological transformation. Some constituents therefore argue that the IAS 41 fair value model, which is based on the principle that biological transformation is best reflected by fair value measurement, is not appropriate for mature BBAs
The same argument is not true for immature BBAs. Until maturity, BBAs are in a growth phase (i.e., they are undergoing biological transformation).
The staff have identified four alternative views for accounting for immature BBAs:
View (1) — Cost accumulation: similar to accounting for a self-constructed item of property, plant and equipment;
View (2) — Fair value through profit or loss: the current approach in IAS 41 for BBAs over their entire life;
View (3) —Fair value through other comprehensive income; and
View (4) — Accounting policy choice between cost accumulation approach and fair value approach.
A few Board members believed that a fair value approach should be applied until maturity, consistent with the underlying principle in IAS 41. They also noted that in some cases, fair value is easier to apply than an accumulated cost model (citing an example of a tree plantation replaced in sections (instead of individual trees) where significant levels of indirect costs are incurred). However, others were concerned with the practical complexity in applying a fair value model. They noted that a cost accumulation approach would be easier to apply to immature BBAs than a fair value approach, as they noted the lack of an active market for immature BBAs which would result in subjective measurements. They also noted that constituent feedback which suggested that users want cost-based information and application of IAS 41 does not currently work.
When put to a vote, the IASB tentatively decided to develop a cost-based model for BBAs within the scope of this project. Before being placed into production, such assets should be measured at accumulated cost (i.e., View 1). This approach is similar to the accounting treatment for a self-constructed item of machinery before it is placed into production.
Accounting for produce growing on BBAs
The Board then discussed how to account for the produce growing on the BBAs (e.g., fruit growing on a tree). IAS 41 requires that while the produce is attached to the BBA, its value forms part of the fair value of the entire biological asset (e.g., the fair value of the tree includes the fruit growing on it). When the produce is detached from the BBA (harvested), it meets IAS 41’s definition of agricultural produce. IAS 41 requires agricultural produce to be measured at fair value less costs to sell at the point of harvest. This is the deemed cost of the item when applying IAS 2Inventories (or another Standard if appropriate). However, if a cost model is applied to BBAs, the biological transformation of the produce will not ‘automatically’ be incorporated into the carrying amount of the BBA (as it is under IAS 41).
The staff identified three alternative views for accounting for the produce growing on the BBA:
View (1) — Recognise the produce at fair value less costs to sell at the point of harvest.
View (2) — Measure the produce at fair value less costs to sell from the date it starts to grow.
View (3) — Account for the produce under IAS 2 from the date it starts to grow.
Many Board members expressed support for View 2 — the produce would be measured at fair value less costs to sell with changes recognised in profit and loss as the produce grows. View 2 was seen as consistent with the principle underlying IAS 41 that biological transformation is best reflected by fair value measurement.
However, a few Board members expressed support for other views. For example, one Board member supported View 1 because of a perception that the approach was easier to apply. Another Board member supported View 1, but with the addition of a practical expedient based on growing season length. Different accounting would result from produce growing season length.
When put to a vote, the Board tentatively decided the produce growing on BBAs should be measured at fair value less costs to sell with changes recognised in profit and loss as the produce grows. This method would ensure that produce growing in the ground (e.g., carrots) and produce growing on a BBA (e.g., apples) would be accounted for consistently.
The Boards discussed allocating the transaction price to separate performance obligations, accounting for contract acquisition costs, applying the proposed model to bundled arrangements and constraining the cumulative amount of revenue recognised on licences.
The Boards discussed allocating the transaction price to separate performance obligations, accounting for contract acquisition costs, applying the proposed model to bundled arrangements and constraining the cumulative amount of revenue recognised on licences.
Allocation of the transaction price
In its 2011 revised exposure draft (2011 ED), the Board proposed that an entity should allocate to each separate performance obligation the amount of consideration the entity expects to be entitled in exchange for satisfying that performance obligation. An entity would allocate the transaction price on a relative standalone selling price basis. In circumstances where there is a variable performance obligation (e.g., software licence arrangements), the use of the residual method would be appropriate. However, other methods of estimation may be suitable for estimating the standalone selling price of a good or service.
At this meeting, the Boards discussed possible refinements and clarifications to these proposed requirements – namely regarding use of a residual approach in allocating to each separate performance obligation the amount of consideration the entity expects to be entitled in exchange for satisfying that performance obligation.
The staff outlined feedback received from constituents regarding use of a residual approach. Many respondents requested clarification about how to apply the residual approach for estimating the standalone selling price in arrangements that contain more than one performance obligation for which the goods or services underlying those performance obligations have standalone selling prices that are highly variable or uncertain. The 2011 ED, as drafted, contemplated the residual approach applying when the price of one good or service is highly variable or uncertain, but it did not specifically address situations in which more than one good or service has a highly variable or uncertain price.
The staff, analysing the proposals in the 2011 ED, believed the rationale for using the residual approach to estimate a standalone selling price is the same regardless of how many goods or services to a contract have a highly variable or uncertain selling price. Therefore, the staff proposed that the Boards retain the proposals in the 2011 ED relating to the use of a residual approach to estimate the standalone selling price of a performance obligation where a variable performance obligation exists. However, the staff proposed that the Boards clarify that a residual approach could also be used when two or more performance obligations in a contract have standalone selling prices that are highly variable or uncertain. When two or more performance obligations have standalone selling prices that are highly variable or uncertain, the entity could estimate the standalone selling prices by first applying the residual approach to estimate an aggregate amount for the group of promised goods or services, and then using another method to estimate the standalone selling prices of the goods or services underlying each separate performance obligation.
The Boards generally supported the staff proposals, but a few concerns were expressed.
Specifically, one Board member, reviewing illustrative examples of application of the proposals provided in the staff paper, requested that the proposals specify that use of other methods to estimate the standalone selling prices of the goods or services underlying each performance obligation be subject to the objective for allocating the transaction price to separate performance obligations specified in paragraph 70 of the 2011 ED – that being, that use of other estimation methods should depict the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation. Most Board members agreed with this proposal.
Another Board member questioned whether the use of ‘other’ measurement options, such as an adjusted market assessment approach, expected cost plus a margin approach or a residual approach, as outlined in the 2011 ED, is subject to any consistency requirement. The staff noted that the 2011 ED specifies that judgements and estimation methods should be applied consistently, with disclosure of the methods, inputs and assumptions used to determine the transaction price and the amounts allocated to performance obligations.
With little additional debate, the Boards tentatively agreed with the staff proposals, subject to specifying that use of ‘other’ estimation methods should depict the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation.
The Boards then discussed possible clarifications on the application of the proposals in paragraphs 75-76 of the 2011 ED related to allocating a discount and allocating contingent consideration.
Some respondents disagreed with the proposals in paragraph 75 of the 2011 ED for allocating the discount in a contract specifically to one (or some) performance obligations. Those respondents commented that the proposals are too restrictive and would not yield an outcome that reflects the economics of their transactions. A few of those respondents suggested the entity should be allowed to allocate the discount specifically to a performance obligation if it is able to demonstrate where the discount belongs.
The staff believed that any proposal to expand the criteria in paragraph 75 of the 2011 ED created a risk of unintended consequences and raised a question of how that expanded criteria can be appropriately limited so as to not diminish the rigor of the allocation process. Therefore, the staff recommend no change to the criteria in paragraph 75 of the 2011 ED. However, the staff believed the Boards should clarify that paragraph 75 of the 2011 ED should be applied before using the residual approach to estimate the standalone selling price for promised goods or services with a highly variable and uncertain selling price. The staff believed that the resulting allocation from making this clarification would be more consistent with the core allocation principle described in paragraph 71 of the 2011 ED.
Further, some respondents requested clarification of the proposal in paragraph 76 of the 2011 ED for allocating contingent consideration. Those respondents interpreted paragraph 76 to mean that the contingent amount could be allocated either to one distinct good or service or allocated proportionately to all of the distinct goods or services promised in the contract, but not to any combination in between.
The staff believed that those respondents interpreted the wording of paragraph 76 of the 2011 ED too narrowly because the proposal was intended to apply to, among other things, repetitive services contracts in which each increment of service would have been distinct.
As a result, the staff proposed to retain the proposals in paragraphs 75-76 of the 2011 ED, while also clarifying that discounts and contingent consideration should be initially allocated on the basis of paragraphs 75 and 76 of the 2011 ED before applying a residual approach to estimate the standalone selling price of any other performance obligations. Likewise, an entity can allocate contingent consideration to more than one distinct good or service in the contract.
Board members tentatively supported the staff recommendation.
Contract acquisition costs
The Boards then discussed possible modifications and clarifications to the proposed requirements in paragraphs 91-103 of the 2011 ED relating to the accounting for contract acquisition costs. The 2011 ED proposed that incremental costs expected to be recovered should be capitalised, however, a practical expedient would permit the recognition of contract acquisition costs as a period cost (as opposed to capitalised costs) for contracts with an expected duration of one year or less.
Respondents to the 2011 ED expressed concern with these proposals relating to reduced comparability between sales from the direct channel and from the indirect channel given application of the 2011 ED proposals, while others expressed practical or cost-related challenges associated with continuous assessment of contract acquisition costs.
The Boards considered different alternatives to responding to these concerns, including amending the proposals to expense all contract acquisition costs, allowing a policy choice to expense or recognise contract acquisition costs as an asset or retaining the proposals in the 2011 ED but expanding the practical expedient. While some expressed support for expensing all contract acquisition costs consistent with the proposals in the Boards’ 2010 exposure draft on revenue – based primarily on a belief that contract acquisition costs do not meet the definition of an asset – most Board members supported retention of the 2011 ED proposals based primarily on consistency of such an approach with decisions reached taken to date on the leasing, insurance and financial instruments projects.
Therefore, the Boards tentatively decided to retain the proposals in the 2011 ED which require capitalisation of contract acquisition costs if they are incremental and the entity expects to recover the costs. Likewise, the practical expedient would be retained permitting the recognition of contract acquisition costs as a period cost (as opposed to capitalised costs) for contracts with an amortisation period of one year or less.
The Boards then discussed the application of the proposed revenue recognition model to bundled arrangements when an entity promises to transfer services to the customer together with a distinct good that relates to the provision of those services. The proposals in the 2011 ED require an entity to allocate the transaction price to the separate performance obligations on a relative standalone selling price basis and to capitalise costs to obtain a contract subject to a one-year practical expedient.
Feedback to the proposals in the 2011 ED have primarily come from the telecommunications and cable or satellite television industries. Concerns have been raised relating to the effect of the allocation proposals on the usefulness of the information that would result from applying the proposals to bundled sales arrangements in the telecommunications industry; the resulting disparate accounting for sales through the direct and indirect channels; and the cost of applying the proposals. Many respondents have suggested modifying the proposals for allocating the transaction price to introduce a contingent cap (as discussed in BC193-BC197 of the 2011 ED), or expanding the use of the residual approach for estimating the standalone selling price of a good or service (paragraph 73(c) of the 2011 ED) or allowing an entity greater freedom to allocate a discount entirely to one performance obligation if they have evidence about where it belongs (paragraph 75 of the 2011 ED).
The Boards considered multiple alternatives including retaining the proposals in the 2011 ED, modifying the proposals for populations of contracts that meet specified criteria (for example, a large portfolio of contracts with multiple deliverables) and expanding the use of the residual approach. However, most Board members struggled to conceptually support alternatives other than what was proposed in the 2011 ED given concern that such alternatives were inconsistent with the objectives of the overall revenue recognition model. Thus, the Boards tentatively decided to retain the proposals in the 2011 ED for allocating the transaction price to distinct performance obligations to all types of contracts.
The Boards discussed the introduction of an illustrative example regarding how an entity would apply the proposals to a bundled arrangement. However, many Board members were uncomfortable with the example presented by the staff, either as a result of concerns that the example would appear to dictate prescriptive application or concerns with the fact pattern included in the staff example. Instead, multiple Board members preferred that any application guidance specify that the above proposals could be applied to a portfolio of contracts rather than only individual contracts. Both Boards tentatively supported this view when a portfolio of contracts or performance obligations with similar characteristics is not expected to yield materially different outcomes from that which would result from applying the proposals to an individual contract or performance obligation.
Constraint on recognising variable consideration on licences
Finally, the Boards discussed whether to retain paragraph 85 of the 2011 ED, and if retained, whether to revise the scope of that paragraph. Paragraph 85 in the 2011 ED constrains the amount of revenue that can be recognised from licenses of intellectual property that are subject to sales-based royalties, until the uncertainty related to those sales-based royalties is resolved, and follows from paragraphs 81-84 of the 2011 ED which sets out the proposed requirements that an entity would follow to determine whether an amount of variable consideration can be recognised as revenue prior to the uncertainty associated with that variable consideration being resolved.
Notwithstanding the general requirements in paragraphs 81-84 of the 2011 ED, the Boards previously decided to include paragraph 85 in the 2011 ED to provide specific guidance related to revenue recognition for licenses given concerns that paragraphs 81-84 of the 2011 ED might not always result in an appropriate application of the constraint for licenses of intellectual property where the consideration is based on a sales-based royalty.
Respondents to the 2011 ED expressed different views on paragraph 85, including a view that it was an unnecessary exception that should be deleted (given paragraphs 81-84), as well as a view that the scope of paragraph 85 of the 2011 ED should be expanded to become a general principle that would always apply when the consideration is dependent on the customer’s future actions.
A few Board expressed support for the retention of paragraph 85. These Board members believed paragraphs 81-84 were more difficult to apply for licences that transfer a right (as compared to the transfer of other goods or services at a point in time with cost bases that could help in the determination and estimation of the transaction price).
However, most Board members were supportive of eliminating the specific exception in the 2011 ED which would have constrained revenue from licences of intellectual property where payments vary based on the customer’s subsequent sales. These Board members requested that clarifications be made to the indicators that an entity’s experience (or other evidence) is not predictive of the amount of consideration to which the entity will be entitled for purposes of applying the constraint to contracts where consideration is uncertain (i.e., paragraph 82 of the 2011 ED). Specifically, they believed that when consideration is highly susceptible to factors outside the entity's influence (including judgements and actions of third parties including customers), the entity's experience for determining the transaction price might not be predictive. They also preferred that the proposals explain that when an entity applies the general principles of the constraint on revenue recognised in paragraphs 81–84 of the 2011 ED (as revised by the Boards’ tentative decisions in November 2012) and is required to recognise a minimum amount of revenue based on its estimate of the amount of consideration to which it expects to entitled, that minimum amount may, in some cases, be nil. The Boards directed the staff clarify these points in the final standard.
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