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The Boards discussed what revenue disclosures should be proposed in the forthcoming exposure draft (ED).
The Boards discussed what revenue disclosures should be proposed in the forthcoming exposure draft (ED).
The Boards discussed whether the ED should contain a disclosure objective similar to that in IFRS 7. While not agreeing explicitly to provide such an objective, the Boards did not support the approach suggested by the staff and requested that any disclosure objective should tie disclosure to the drivers of revenue-generation in the business: what affected the timing, nature, and amount of revenue; significant estimation uncertainty; etc.
Nature of and accounting policies applicable to contracts with customers
The Boards discussed but did not approve a staff suggestion related to the disclosure of the nature of and accounting policies applicable to contracts with customers. Board members thought the staff suggestions were too vague to be operational.
Linking performance with financial position
The Boards agreed that an entity should disclose a roll-forward of opening and closing balances of the net contract position. In doing so, Board members were extremely concerned that the Boards would be forcing on preparers meaningless disclosures that would not be useful to users and urged that greater clarity be provided. The staff should find a way to ensure that the disclosure was required only when the movement in the net contract position was a meaningful measure - such as in the aeroplane manufacture or shipbuilding industries, in which the order book was as important as the annual performance.
The Board referred a proposal that an entity should disclose a roll-forward of the opening and closing balances of the additional liability for onerous contracts back to the staff. Board members noted that any such disclosure had to integrate a larger data set: what was included in onerous contracts; what was added to the category and what was removed; information about similar contracts in the same class as those classified as onerous; etc.
Level of disaggregation
The Boards discussed but did not conclude on the level of disaggregation of revenue recognised during a financial period and how it should be achieved. The staff proposed an approach that would require disaggregation for each category of significant goods and services identified in its accounting policies. Board members thought that the economic characteristics of the goods and services should be a determining factor, not the accounting policies. Other Board members were concerned that the staff needed to be more rigorous in its analysis before adding more disclosures.
Extent of judgement exercised
The Boards discussed but did not conclude on a disclosure principle for significant judgements with the objective in ASC Topic 605-25-50 (Multiple Element Arrangements: Disclosures).
The Chairman asked the staff to work with a team of three IASB and two FASB advisors to develop revised proposals for revenue disclosures in general.
The IASB and the FASB discussed several issues connected with their efforts to issue converged fair value measurement guidance based on ASC Topic 820 and the IASB's exposure draft Fair Value Measurement.
The IASB and the FASB discussed several issues connected with their efforts to issue converged fair value measurement guidance based on ASC Topic 820 and the IASB's exposure draft Fair Value Measurement.
Definition of fair value
The Boards confirmed individually to define fair value as an exit price. The definition would be 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'.
Although some IASB members would prefer the Standard to refer to 'exit price' (both to avoid the emotive term 'fair value' and to be explicit about the measurement objective), the Boards agreed to retain 'fair value' as the term the Standard will use.
Fair value at initial recognition
The Boards discussed whether to confirm the proposals in paragraph 36 of the Fair Value Measurement ED, which contains a list of situations indicating when a transaction price might differ from fair value, is sufficient; and whether a comment that the 'list is not exhaustive' should be added.
The IASB agreed to conform the forthcoming IFRS to the language used in ASC Topic 820-10-30-3 that 'a transaction price might not represent the fair value of an asset or liability at initial recognition if any of the following conditions exist:
(a) the transaction is between related parties;
(b) the transaction takes place under duress or the seller is forced to accept the price in the transaction;
(c) the unit of account represented by the transaction is different from the unit of account for the asset or liability measured at fair value; and
(d) the market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability.'
The Boards explicitly refused to make any comment about the list not being exhaustive: in the view of many around the table, to do so would be to invite abuse.
Board members also discussed condition (b) and observed that the wording should be more explicit that an orderly transaction in an inactive market may still represent fair value as defined. When there is a lack of market activity, it may be that more work is required to determine that the transaction price does represent fair value.
Recognition of Day 1 gains and losses
The IASB did not agree with a staff proposal that he IASB should address the recognition of Day 1 gains and losses in the fair value measurement project. A majority of the IASB thought that addressing 'when' to recognise a Day 1 gain or loss represented scope creep in a 'how to do fair value' Standard and created unnecessary noise in that Standard.
Measuring liabilities at fair value
After a long discussion, the IASB agreed that the IFRS should:
(a) require an entity to measure the fair value of a liability, in the absence if a quoted price in an active market representing the transfer of a liability, as follows:
(i) using the quoted price of the identical liability when traded as an asset (that is, a Level 1 measurement), if that price is available
(ii) if that price is not available, using quoted prices for similar liabilities or similar liabilities when traded as assets (that is, a Level 2 measurement)
(iii) if observable inputs are not available, using another valuation technique such as:
(1) an income approach (for example, a present value technique) or
(2) a market approach (for example, using the amount that a market participant would pay to transfer the identical liability or receive to enter into the identical liability)
(b) describe the compensation a market participant would demand for taking on an obligation in the application of a present value technique
(c) clarify that the transfer of a liability assumes that a market participant transferee has the knowledge and ability to fulfil the obligation.
In making this decision, some IASB members were uncomfortable about the implications of this guidance on the measurement of non-financial liabilities (see the Alternative Views expressed in ED 2010/01).
Without substantial discussion, the IASB agreed:
(a) that the fair value of a liability includes the effect of non-performance risk; and
(b) the IFRS should clarify what non-performance risk represents.
Restrictions on the transfer of a liability
The IASB agreed that the fair value of a liability should not be adjusted for the effect of a restriction on its transfer.
Measuring own equity instruments at fair value
The IASB agreed to include guidance in the IFRS for measuring the fair value of an entity's own equity instruments. That guidance should reflect the proposal in the IASB's ED, paragraphs 32 and 33.
Measuring fair value when markets become less active
Following the earlier discussion, the Boards agreed that the converged Standard should:
(a) provide guidance for measuring fair value when markets become less active, specifically that the guidance to be provided shall be used when there has been a significant decline in the volume or level of activity for the asset or liability;
(b) state that when measuring fair value when markets are less active, the issue is whether an observed transaction price represents fair value, not about the level of market activity (although changes in market activity may be an indication that an observable price does not represent fair value, and that an entity may need to make further efforts to determine fair value). The IASB's exposure draft and Topic 820 do not address this explicitly.
(c) state that it is the nature of the transaction and not the state of the market that is important. An orderly transaction in a disordered market may still represent fair value as defined; simply because the transaction took place when the market was disordered is not sufficient to move away from the transaction price.
The Boards will continue their discussions later in the week.
The Boards continued their discussion on the classification approach for instruments that an entity is required to settle (and has the ability to settle) by issuing its own shares.
Classification of instruments an entity will settle by issuing its own shares
The Boards continued their discussion from the December IASB/FASB meeting on the classification approach for instruments that an entity is required to settle (and has the ability to settle) by issuing its own shares.
The Boards discussed the Approach 4.2 that would require classification as equity for more instruments than Approach 4.0 and fewer instruments than Approach 4.1 (as defined during previous joint meetings). This Approach was developed as a compromise that should alleviate IASB and FASB differences. The particular instruments that would be classified as equity under Approach 4.2 (and not Approach 4.0) would include rights issues and 'regular-way' forward contracts to issue shares that are outstanding for a relatively short time, stock-purchase warrants issued solely for the purpose of raising additional capital as well as mandatorily convertible preferred shares (convertible to ordinary shares). The requirements of Approach 4.2 would result in classifying convertible instruments as liabilities in their entirety.
Some IASB members were troubled that these exceptions to the classification criteria have no conceptual basis. The staff replied that they were exceptions to accommodate the concerns by both of the Boards. The IASB members were particularly concerned that some of these exceptions might lead to otherwise identical stand-alone instruments to be treated differently based on to which other instruments they were attached.
One IASB member was particularly troubled by the basic principles underlying the classification approach and expressed his view that first the answer to a more fundamental question whether writing an option on own shares should be classified as equity or as a derivative liability should be addressed. Based on his view, answer to this question should be the basis for the development of a classification approach.
In an indicative vote, the IASB supported classification of forwards/options to issue fixed amounts of shares for cash as equity (15 votes), whereas the FASB was opposed (two votes against three).
Another IASB member suggested that the basis for the classification should be whether there is a 'determinable obligation' of the entity and should be not dependent on the short-term/ long-term horizon.
The FASB Chairman pointed out that the issue took the Boards back to the 'dilution' versus 'solvency' perspective the Boards already discussed many times. He underlined that this was the tension point between the FASB and the IASB as the IASB was in the 'solvency view' whereas the FASB was in the 'dilution view'. As the IASB was unanimous in this view and the FASB was split, the FASB Chairman expressed his support for the classification approach 4.2 on the conditions that overall classification principles were tightened and additional disclosures that show dilution effects were provided. The FASB chairman acknowledged that the IASB was 'not particularly unhappy with IAS 32' but the US GAAP needed a change. Therefore, he expressed his willingness to work for a converged compromise.
In a protracted debate, various IASB members argued for the 'solvency' view. In particular these members were concerned by the impact of the classification of these instruments as liabilities on the performance statement and negative impact that could have on usefulness of the information provided. The IASB chairman and FASB Chairman tried to find a common ground that the majority of both Boards would be able to support. They agreed that the dilution issue could be addressed by a set of comprehensive and consistent disclosures that would capture wealth transfers and address the issue of using operating cash flows to re-purchase the shares (based on issued call options).
One FASB member was particularly worried that the IASB members come to each meeting with a new larger set of items that should be classified as equity. The IASB members responded that they become concerned with the implication of the classification principles when they see particular application on a set of examples.
Another FASB member was troubled by the effect of the proposed classification approach on convertible debt and possible arbitrage. She proposed a classification approach based on the improvement of IAS 32 (that is, bifurcation) and not based on a completely new classification approach. Several IASB members agreed. Nonetheless, other IASB members disagreed as they believed that IAS 32 had its own problems that needed to be addressed. They agreed that the result of the classification might be very similar but urged the Boards to develop a new approach.
Finally, both Boards asked the staff to develop a modified classification approach ('Approach 5') based on improved and modified IAS 32 requirements, particularly for cash-settled instruments and better articulation of the fixed-for-fixed rule (the Boards briefly discussed the 'specified-for-specified' rule, a modification of the fixed-for-fixed rule designed to make it more granular). The Boards agreed that the staff should include in its analysis the classification of these instruments in the consolidated financial statements as well as treatment of convertible instruments. In addition, at the same time the staff should prepare an analysis of disclosure requirements that would address the dilution aspects of the issue (including wealth transfer and its disclosure in the Statement of Changes in Equity) and granularity of these disclosures.
The Boards will discuss the new classification approach at the regular February meeting. The remaining issues that were not discussed during the January meeting will be addressed at a separate special meeting in February).
The Board briefly considered possible changes to the IFRS 8 Operating Segments following the discussion during the joint meeting. The Board disagreed with any changes to IFRS 8 that would lead to changes in fundamental principles of IFRS 8. The Board noted that the FSP project was not the right place for changes to IFRS 8 and that the relevant issues should be addressed as part of the post-implementation review of IFRS 8 that should start during the following year.
Financial services entity issues
The Board considered specific issues related to the financial services entities. The Board noted that of the raised concerns, most of the issues were resolved during the re-deliberation process (line-by-line cohesiveness, short-term liquidity disclosures, and reconciliation schedule and category definitions).
The Board considered the requirement to present a direct method Statement of Cash Flows so that the Statement of Cash Flows reflected the substance of its transaction. The Board discussed the gross presentation of transactions (that is, whether to separately depict the transactions from and to depositors' accounts). Some Board members held the view that gross depiction of these transactions was not particularly useful as it related to hypothetical transactions. On the other hand, other Board members noted that it might provide some useful information.
Some Board members reiterated their view that Statement of Cash Flows was not useful for financial services entities. They proposed to require a 'statement of flow of funds' that would consider issues as volume of transactions, credit quality, and liquidity.
After a considerable debate during which the Board tried to assess the impact of various transaction on the Statement of Cash Flows, the Board asked the staff to prepare a further analysis that would include examples of application of some of the transactions on the Statement of Cash Flows prepared using the proposed direct method as well as analysis of the 'statement of flow of funds'.
Costs and benefits
The Board briefly considered the costs of the proposal. The Board agreed to seek input from constituents on the estimated cost of the overall proposal and its components (the Board would try to identify which requirements are most costly and difficult to implement). The Board also agreed to undertake outreach to assess the estimated costs considering one-off and ongoing costs, indirect costs of implementation, and on the internal control systems.
Net debt presentation
After a brief debate, the Board agreed to require disclosure of an analysis of the changes in the balances (roll-forward) of line items that normally constitute net debt (long-term debt, short-term debt, interest payable, cash, marketable securities, interest bearing deposits). The Board agreed to require disclosure of these data in a single note.
The Board also agreed not to specifically define 'net debt' and asked the staff to find suitable name for this disclosure (and not refer to it as 'net debt').
The Board discussed (1) the building block approach, (2) measurement objectives, (3) risk adjustment, (4) policyholder behaviour, (5) residual margins, (6) subsequent release of the residual margin to the income statement, (7) changes in expected present value of cash flows and (8) the timetable for Board discussions.
Measurement objective and risk adjustment
The Boards discussed:
(a) whether the proposed building block approach would apply (i) to both future cash inflows and cash outflows arising from insurance contracts, or (ii) only to future cash outflows.
(b) whether the measurement objective should reflect the cost of fulfilling the obligation (as proposed by staff in December papers) or a different fulfilment notion and how the proposed risk adjustment relates to the measurement objective.
(c) further guidance on the risk adjustment, including the sources of information an insurer might use to estimate it.
Building block approach
The Boards agreed (IASB: 2 opposed; FASB: 2 opposed) that a building block approach that includes a risk adjustment for the effects of uncertainty about the amount and timing of future cash flows should be used for measuring the net combination of rights and obligations of insurance contracts. This implies measuring the gross cash flows rather than the net obligations. Getting to that decision was difficult. Board members from both the IASB and FASB expressed concerns that measuring the risk margin separately from other cash flows and options in the insurance contract. Some were concerned that the model proposed by the staff introduced one-way bias and lacked sufficient rigor to prevent it from being a 'pick a number' measurement. There was a long debate during which the staff tried to clarify what it was proposing. Some Board members were less than convinced and thought that they owed it to their constituents to evaluate the measurement methods identified, especially with respect to the measurement of risk. Other Board members thought that it would be impossible to prescribe one approach; however robust disclosure would provide some discipline that might, over time, improve measurement.
The Boards agreed that the contract position of an insurance contract should be presented net rather than gross.
The Board discussed a staff proposal that the measurement objective for insurance contracts should be expressed as '[an entity's current estimate of] the present value of resources required to fulfil the net obligation created by the insurance contract'.
Board members criticised the proposed measurement objective for several reasons. An IASB member disliked the lack of specificity in 'present value', noting that the discount rate must be specified. A senior member of staff noted that, unless otherwise indicated, IFRSs required use of the default risk-free rate. In proposing this measure, the discount rate did not take into account any risk adjustment - that was measured separately.
Other Board members criticised the proposed measurement objective as lacking any rigor sufficient to eliminate some of the more extreme measurement candidates identified in the agenda papers.
The Board did not conclude on this topic and will need to debate it again later.
In a very contentious debate, the Boards discussed whether the risk adjustment should be the amount the insurer would require for bearing the uncertainty about the resources it would require fulfilling the (remaining) net obligation from insurance contracts; and whether that risk adjustment should be re-measured throughout the life of the contract.
Several Board members expressed concerns about aspects of the proposals, although some defended them as the best possible solution available. The comments rehearsed many of the misgivings expressed in previous parts of this session. The Boards finally concluded that they would accept the staff recommendations (IASB 8 in favour; FASB: 3 in favour).
The Boards discussed the treatment of contractual features that permit policyholders to take actions that change the cash flows that will result from a contract. The discussion was focussed mainly towards the FASB, because the IASB had already reached tentative conclusions on the issues.
By a majority of 3 opposed; 2 in favour the FASB did not agree a staff recommendation that policyholder options be measured on a 'look through' basis using the expected value of future cash flows related to the option (to the extent they are within the boundary of the existing contract). As the IASB had previously accepted this recommendation, (and the consequence that no 'deposit floor' would apply), this issue will need to be resolved between the Boards.
The FASB agreed that expected cash flows from options, forwards, and guarantees not related to the contractual coverage in the insurance contract should be excluded from the expected insurance cash flows for that contract in measuring that contract.
The FASB also agreed that these options, forwards, and guarantees should be accounted for in accordance with IFRS or GAAP for that instrument, e.g., insurance contract accounting for those options which themselves result in insurance contracts.
The Boards agreed that if the initial measurement of an insurance contract results in a negative day-one difference, an entity should recognise that difference in profit or loss. In doing so, the Boards expressed unease about calling such contracts 'onerous', which some saw as a distraction.
Subsequent release of the residual margin to the income statement
The Boards discussed but did not conclude on how the residual margin should be recognised in the income statement. The Boards noted that the residual margin number was essentially a plug to avoid a Day 1 gain. The Boards did agree that the forthcoming exposure draft should specify how the plug should be amortised (i.e. the entity would not have the discretion to decide). The staff was asked to return to a future meeting with proposals.
Changes in expected present value of cash flows
The Boards agreed (IASB: 9 in favour; FASB: 4 in favour) that changes in the expected present value of cash flows should be recognised in income immediately.
Timetable for Board discussions
The Board was presented with, but did not discuss, a timetable for future Board discussions assuming that the exposure draft is issued in May 2010. The staff noted that 'several' of the additional Board meetings being scheduled would be needed if the timetable were to be met.
The Boards considered whether the incremental borrowing rate used to calculate the lessee's obligation, and the interest rate implicit in the lease used to calculate the lessor's receivable, should be revised. The Boards also discussed whether to provide a scope exclusion for short-term leases and how a lessor should account for leases of investment properties as the proposed lessor accounting requirements does not provide users of financial statements with useful information when applied to investment properties.
Subsequent measurement of leases with options and contingent rentals under amortised cost
At their November 2009 meeting, the Boards tentatively decided that the subsequent measurement of the lessee's obligation and the lessor's receivable should be measured at amortised cost using the effective interest method. The Boards considered at this meeting whether the incremental borrowing rate used to calculate the lessee's obligation, and the interest rate implicit in the lease used to calculate the lessor's receivable, should be revised where there are a subsequent reassessment of:
the expected lease term, and/or
Staff presented the following three approaches with regards to the revising of the incremental borrowing rate for subsequent changes in the expected lease term:
Approach 1: No reassessment of the incremental borrowing rate;
Approach 2: Reassess by updating for the current incremental borrowing rate for the remainder of the lease term; and
Approach 3: Reassess the incremental borrowing rate with the corresponding rate at initial recognition for the revised expected lease term.
The staff explained that they are split between approaches 1 and 2.
When discussing the staff's proposals with regards to changes in the expected lease term, several Board members expressed their surprise at the split views the staff presented. One Board member supported approach 3 as this would take the lessee back to what the answer would have been if all the estimates were known at the inception of the lease. Some Board members felt that this approach will involve hindsight and rather supported approach 2 as the expected lease term applied at inception of the lease is an estimate and all changes in estimates are accounted for prospective from the date of the change. These Board members also noted that the option to extend the lease term already existed at inception and that the exercise of the option does not result in a new lease being entered into. As a result they would not allow approach 3.
One Board member remarked that amortised cost and the effective interest rate method are defined in IAS 39 and IFRS 9. If the Boards decided to have separate accounting requirements for lessees, the methodology for measuring the lessee's obligation should not be labelled 'amortised cost' as amortised cost implies that the incremental borrowing rate is not reassessed for changes in estimates. Several other Board members expressed their sympathy with approach 1 although in their minds approach 2 represents the technically correct answer. It was also noted that approach 2 may result in frustration and additional burden on preparers.
The Boards discussed the issue at great length and were reminded by one Board member that if the requirements for lease accounting are being made too complex and result in overburden on preparers, the progress made to date on the project would be lost. When put to a vote, the Boards tentatively agreed on approach 1.
With regards to revising the incremental borrowing rate for changes in contingent rental payable, the staff identified five possible approaches and proposed that the effective interest rate is not adjusted unless all or part of the rate is contractually reset to current conditions [approach 2 in the agenda papers] as this approach is the most consistent with the strict application of amortised cost under IFRSs. Without much discussion, the Boards tentatively agreed with this approach.
For accounting by lessors, the staff recommended the same approach to be followed as for lessees, that is, no revision of implicit interest rate for changes in the estimated lease term. One Board member was curious as to why the staff had split views from the lessee's perspective but not from the lessor's perspective. The staff explained that for lessors, the implicit interest rate already takes into account options to extend the lease term, whereas the incremental borrowing rate of lessees does not. The Boards did not discuss the matter any further and unanimously agreed with the proposal not to adjust the implicit interest rate [approach 1 in the agenda papers].
With any discussion on the matter, the Boards also unanimously agreed that the lessor should not reassess the interest rate implicit in the lease for changes in contingent rentals receivables, unless the rental payments are contingent upon variable reference interest rates.
Scope - Exclusion of short-term leases
At their previous meetings, the Boards discussed whether to provide a scope exclusion for short-term leases. When presenting their analysis to the Boards, the staff explained that a materiality threshold is applied to all accounting requirements and that immaterial lease assets and liabilities are not required to be recognised. The staff then asked the Boards whether there should be an additional exclusion for short-term leases beyond the materiality principle.
The Boards discussed the matter and mixed views were expressed by the Board members. Some Board members are of the opinion that the materiality threshold is the only appropriate measure and that no additional scope exclusion should be applied. They also noted that not recording material lease assets and liabilities would allow opportunities for the structuring of leases. One Board member pointed out that to determine whether a lease asset and lease liability are material, one has to perform all the calculations, and once an entity has done the calculations, they have already performed everything that would be necessary to apply lease accounting. In this Board member's view, an exclusion based on the materiality threshold will not achieve the relief asked for by preparers.
Several other Board members were of the opinion that there should not be a scope exclusion, but rather some form of simplified lease accounting for short-term leases, by not requiring the discounting of the lease obligation. An extended discussion followed on real-life examples from various jurisdictions and how the proposed relief from lease accounting would apply in those circumstances. Various alternatives for simplified lease accounting were also discussed.
One Board member questioned specifically what was meant by materiality and repeated the question as to whether other Board members would be comfortable with material lease transactions not being recognised because they are short-term leases. It was suggested that the Board expose a proposal for allowing relief for a specified period with an explanation to constituents on what they are trying to achieve and ask whether the proposal will provide the relief requested.
A vote was taken, and the Boards tentatively agreed to allow for simplified lease accounting for lessees rather than a scope exclusion for leases with a lease term of 12 months or less.
On the question of how the lease term should be determined, the Boards agreed that it should be the maximum possible lease term achievable under the existing lease agreement, and that any option to renew or extend a lease beyond 12 months would be excluded from the simplified accounting.
The Boards then turned their discussion to accounting by lessors and whether similar relief should be provided. Some Board members noted that for lessors the matter is different than for lessees as the lessor has already recognised an asset and that there should be no difference from what was agreed to in the revenue recognition project. One Board member felt that lessors should be applying accrual accounting rather than lease accounting. The Boards then agreed that for lessors, a scope exclusion will be provided for short-term leases and that the same period, that is, 12 months and restrictions, will apply to lessors.
Lessor accounting - investment properties
The Boards discussed how a lessor should account for leases of investment properties as the proposed lessor accounting requirements does not provide users of financial statements with useful information when applied to investment properties. The Boards were presented with three alternatives:
Alternative A: Lessor accounts for all investment properties using the proposed lessor accounting guidance (recognition of lease receivable and performance obligation with revenue recognised over lease terms as interest income and amortisation of performance obligation);
Alternative B: Lessor accounts investment property using either the cost or fair value model (accounting policy choice). Where fair value is used, a lease receivable and performance obligation are not recognised and lease income in recognised over the lease term.
Alternative C: Same as B, except that lessor is required to measure investment property at fair value. If lessor is unable to determine fair value reliably, the lessor would apply approach A.
Several Board members questioned why there is a difference in the accounting for investment properties carried at fair value and other items of property, plant, and equipment carried at fair value. Those Board members felt that since under the proposed lease accounting requirements, the unit of account is the right of use and not the underlying asset, how the underlying asset is accounted for should not make a difference to the lease accounting. Other Board members also questioned why the concerns from only one industry are addressed, while the Boards are not developing accounting standards for specific industries.
Several Board members expressed strong support for approach C. In their view, the fair value of investment property already takes into account the fact that the investment property is leased out, and if a lease receivable is to be recognised as well, it will result in double accounting. However, in the light of the accounting policy choice currently allowed by IAS 40, it would require an amendment to IAS 40 to remove the choice. Some Board members felt that this project is not the right place to consider amendments to IAS 40 and that approach B is, therefore, the most appropriate approach at the moment.
Other Board members were of the view that by not applying lease accounting the economic reality of the transactions of the entity is not presented in the financial statements. In their opinion lease accounting should always be applied, and the fair value of investment property should be based on the property without the existing lease arrangements in place.
It was noted that the viewpoints of the Boards on this matter are different as there is no equivalent for IAS 40 under US GAAP. After a long deliberation, it was decided that the FASB and the IASB would each consider this matter independently.
When asked to vote, the IASB members expressed a preference for approach B, with a significant majority of the IASB members indicating that they would allow approach B to be applied.
The FASB members requested the staff to prepare an agenda request on the item to analyse the possibilities open to the FASB in addressing the accounting for investment properties and their related leases.
The Boards discussed (1) control through voting rights, (2) effects of options and convertible instruments on the control model, (3) the role of kick-out rights and (4) agency relationships.
Control through voting rights
Both Boards agreed that, when assessing control of entities controlled through voting rights, in the absence of other arrangements, a reporting entity that holds more than half of the voting rights in an entity meets the power element of the control definition.
The Boards also decided that a reporting entity with less than half of the voting rights in an entity that has the legal or contractual ability to direct those activities of the entity that significantly affect the returns meets the power element of the control definition.
The real point of the discussion was whether an entity with less than half of the voting rights meets, in absence of other contractual arrangements, the power element of the control definition. Different opinions were expressed by various Board members in this respect.
Some Board members preferred the 'contractual view' that assumed that in such situation the reporting entity would not meet the power element of the control definition without the contractual ability to direct the activities of the entity. Supporters of this view were particularly concerned with the possibility of change of assessment from one period to another resulting in frequent consolidation and de-consolidation. In addition, they expressed their concerns that consolidation in these circumstances would lead to multiple reporting issues, mainly related to a significant increase in Non-controlling interest (NCI) balances in the financial statements and would confuse the users which assets are available to which shareholders.
Other Board members preferred the 'dominant shareholder' approach (based on holding significantly more voting rights than any other party as well as wide dispersion of the other shareholders). In response to the proponents of the contractual view these Board members argued that this approach better depicted economic reality. They were of the view that this approach would not lead to frequent changes of consolidation/de-consolidation as this did not reflect economic reality. They cited the experience from some countries where similar changes were adopted and these changes led to decrease in structuring opportunities for entities. In addition, some of these Board members believed that this approach was conceptually sounder as it was in line with the definition of an asset.
In response to the concerns that the 'dominant shareholder approach' would not be practicable they argued that usually it is very clear from the individual facts and circumstances who was in control. These members also believed that large NCI balances in the financial statements depicted economic reality and disclosures would address the concerns raised in that respect.
In the following discussion, two particular modification of the 'dominant shareholder approach' were discussed. Some, mainly IASB members supported the 'pure' view that would not require the dominant shareholder to demonstrate that it actually directed the activities significantly affecting returns. These Board members were of the view that the ability was sufficient to qualify for the consolidation and this ability did not have to be exercised.
Other Board members believed that the definition of the dominant shareholder should be strengthened to include evidence of actual exercise of the power element. They noted that the power element should not be assessed only in the short term but should be perpetuated.
On voting, both Boards supported the 'dominant shareholders approach' (IASB unanimously, FASB 3:2), with majority of the IASB members in the pure dominant shareholders view. On the other hand, the FASB narrowly supported the dominant shareholders view based on the need for additional evidence of exercise of control. The Boards noted that the differences between these two approaches should not be insurmountable as it related only to a narrow subset of cases.
Options and convertible instruments
The Boards briefly discussed the effects of options and convertible instruments on the overall control model developed. Most Board members agreed that options and convertibles were used in many different situations. They noted that these instruments were often used in structuring and expressed their view that these instruments were evidence of power; nonetheless, they differed whether these instruments should be currently exercisable.
Finally, the Boards agreed that options and convertible instruments should be considered when assessing power. In this assessment, the entity should consider all facts and circumstances not limited to these instruments and their impact on voting rights.
The Boards continued their discussion with considering the role of kick-out rights in determining which entity should consolidate another entity and whether kick-out rights should be considered in determining whether a reporting entity was agent or principal.
Although the Boards discussed this issue separately, they agreed that assessment of kick-out rights was dependent on all the economic and contractual facts and circumstances and that it was only one of the factors to be consider when deciding whether to consolidate an entity.
In general, two views were shared by the Board. The first view ('View 1') was based on the guidance in FASB Statement No. 167 that limits the consideration of kick-out rights in the power analysis to situations in which only a single entity had a unilateral ability to remove the decision maker.
On the other hand, the second view ('View 2') would not limit the consideration of kick -out right to these situations but would include all the relevant facts, thus in effect allowing kick-out rights held by more than one party to be considered in determining which reporting entity had the power over another entity.
Some Board members felt uncomfortable to consider this issue in isolation as they did not believe that holding of substantive kick-out rights would necessarily lead to consolidation of an entity by holder of these rights. Other Board members were of the view that they would support 'View 2' if the shareholders having these kick-out rights were organised, but would otherwise prefer 'View 1'.
One IASB member suggested that the reporting entity should consider what the incentive is for shareholders to exercise these kick-out rights and include these considerations in the power analysis.
One FASB member suggested that the whole power and benefit analysis has to be performed to consider the agency relationship. Finally, most of the Board members agreed that decision on which view to support really depended on analysis of control through voting rights already discussed (i.e. which of the views is consistent with the dominant shareholder view). The Board thus asked the staff to provide additional analysis of these considerations for the next Board meeting.
In an indicative vote, majority of the IASB members preferred 'View 2', whereas majority of the FASB members supported 'View 1'.
The Boards very briefly discussed the issue of agency relationship. This was an initial session on the topic, no decisions were taken.
From the discussion it was clear that the Boards would prefer the view in which the overall relationship was considered, including, but not limited, to the range of decision made and latitude in decision making, kick-out rights as well as benefits (e.g. amount of fees and overall fee structure, other interests, guarantees). In addition, most of the Board members suggested that this analysis should include also explicit consideration of the fee variability (to consider whether the fees varied in the same way or differently with the other investors) as well as any disproportionate exposure to losses below the most senior investors.
Most of the Board members did not support the view that would be based solely on the significant variability of returns from its involvement in the entity.
In the subsequent discussion, some Board members suggested that the staff considered in its analysis also the following factors with particular impact on the fund managers: consequences of the consolidation of funds and whether their consolidation would result in providing more useful information to investors, existence of significant leverage as well as loss recoupment.
The staff would provide its additional analysis at the next joint meeting in February. At that meeting the Boards would also consider application of the consolidation guidance to investment companies.
The Boards discussed the status of the project on classification and measurement of financial liabilities.
The Boards briefly considered the status of the project on classification and measurement of financial liabilities. The purpose of the session was to update Boards, and no decisions were taken.
The staff summarised the approaches so far discussed by both Boards. The FASB gave update on its tentative decision to require a separate measurement attribute for core deposits (present value of the average core deposits amount discounted by the difference between alternative funds rate and the all-in-cost-to-service rate over the implied maturity).
From the initial discussion the FASB seemed to prefer fair value measurement of liabilities as the FASB believed that it better captured the risks embedded in financial assets and liabilities.
The Boards will start joint deliberation of this topic in February.
The Board discussed offsetting of financial assets and financial liabilities and whether to include offsetting in the scope of the derecognition project.
Offsetting of financial assets and financial liabilities
This was an educational session. No decisions were made.
The Board considered offsetting of a financial asset and a financial liability and presentation of the net amount on the face of the statement of financial position. Despite being a presentation rather than derecognition issue, the Board considered whether to include offsetting in the scope of the derecognition project.
The Board noted that offsetting rules were different in US GAAP and IFRSs. Those different requirements were particularly challenged due to current discussion over the new regulatory leverage ratio.
The Board agreed that convergence on this particular issue would be more than needed. Nonetheless, the staff noted that from the preliminary discussion with the FASB members, the FASB was reluctant to address that issue in the foreseeable future. The Board agreed to discuss the issue at the next joint meeting.
Some Board members were reluctant to include this issue in the derecognition project as they feared it might jeopardise convergence on derecognition.
The Board discussed some of the differences between the US GAAP and the IFRSs in the area of offsetting. From the discussion it was obvious that a clear majority of the IASB members strongly preferred the IFRS requirements on offsetting to the FASB rules, especially with respect to the right to set off.
The Board also discussed the impact of single-agreement provisions in master agreements (for example, ISDA master agreement). There were divergent views how this single agreement provision should be accounted for, whether it should be considered for accounting, and if so, then under which conditions.
The Board agreed first to discuss the issue with the FASB and only then to consider whether it needed to address any of these issues separately.
The Boards discussed which issues related to hedge accounting should be addressed as part of the Financial Instruments project.
Timetable for hedge accounting discussions
The Boards discussed which issues related to hedge accounting should be addressed as part of the Financial Instruments project. The Boards noted that according to the project plan, both Boards pledged to publish a comprehensive ED on Financial Instruments in March 2010. Nonetheless, based on the discussions with the project team, any comprehensive review of hedge accounting would not be finished before end of May 2010 at the earliest.
The Boards therefore discussed possibilities of delaying the hedge accounting part of the project or addressing only a narrow set of issues related to hedge accounting.
Most of the Board members were concerned that the Board promised a comprehensive review of hedge accounting and anything less than a full comprehensive review would be criticised as unsatisfactory by constituents.
Moreover, some Board members believed that this time provided a unique opportunity for review of hedge accounting that might not be repeated for many years.
Consequently, the Boards decided to tackle the hedge accounting in its entirety, but to divide the hedge accounting part of the Financial Instrument project into two phases.
The Boards agreed to include in the FASB comprehensive ED to be published in March (as well as corresponding IASB ED) the parts of the hedge accounting that directly relate to the classification and measurement of financial assets and liabilities (that would most probably include the overall model for the fair value and cash flow hedging, effectiveness consideration as well as bifurcation by risk). On the other hand, issues related to non-financial items as well as portfolio hedging would be addressed in the second phase of the project. The IASB tentatively discussed that the second phase should be completed by June 2011.
The Boards would discuss at the next meeting the precise timetable of deliberations. The staff noted that special sessions would be necessary for completing the proposed timetable.
The IASB also held an IASB-only session on hedge accounting on Thursday 21 January 2010.
The Board analysed the comment letters received. As the majority of the comment letters were supportive, the Board decided to proceed to the ballot.
The Board considered whether the effective date should be brought to the start of 2010. Some Board embers noted that an earlier effective date might cause unintended legal issues in some jurisdictions. Therefore, the Board decided to retain the original proposed effective date (1 July 2010).
The Board decided to clarify in the amendment that the exemption from providing additional IFRS 7 disclosures relate to all comparative periods, including the opening statement of financial position. The Board also clarified that these requirements should be consistent for the first-time adopters as well as current users of the IFRSs.
The Director of IFRIC and Implementation Activities made an oral report of the IFRIC meeting held 7-8 January 2010 (click here for our Notes of that Meeting).
In particular the Board discussed the amount of items related to IFRS 2 and noted that it would work closely with the French standard setter to analyse the requirements of IFRS 2 as well as possible Implementation review of IFRS 2 beyond 2011.
The Board discussed the objective of hedge accounting.
This is an IASB-only continuation of the hedging session held on Tuesday 19 January 2010.
The objective of hedge accounting
The Board discussed the objective of hedge accounting. Some Board members expressed their concerns that this issue was being discussed at a separate meeting and not at the joint meeting. In their view, this approach would not lead to perception of joint project. The staff responded that the FASB was not prepared to discuss this issue at the joint meeting earlier this week, and the staff believed that a kind of educational session was required to start the discussion given the ambitious project plan. The FASB would have held a separate educational session. Finally, the objective of hedge accounting would be deliberated jointly at one of the following joint meetings.
The Board decided that this would be an educational session. As a consequence, no decisions were taken.
The Board considered two possible objectives of hedge accounting:
to provide a link between entity's risk management and its financial reporting, or
to mitigate the recognition and measurement anomalies between the accounting for hedged items and to manage the timing of the recognition of gains or losses on derivative hedging instruments used to mitigate cash flow risk.
In general, the Board members expressed divergent opinions on this subject. They perceived the first objective as being too broad and thought that it needed to be scaled down, whereas on the other hand, the second objective seemed to be too narrow. Even though the Board members agreed that the objective of hedge accounting should be defined at a high level and should be further limited by additional principles, many members of the Board believed that the first objective was defined too broadly.
Some Board members believed that the first (broad) objective did not capture sufficiently the difference between hedging activities (economic hedging) and hedge accounting. Moreover, they believed that the objective should focus on financial risks, as risk management might address a variety of risks that could not be captured in the financial statements.
Other Board members believed that objective of hedge accounting should tie more closely with risk mitigation. They expressed their view that currently proposed first objective was more appropriate for comprehensive risk disclosures project rather than for hedge accounting.
In further discussion on application/illustration of this objective, the Board tentatively agreed that a possibility to designate risk components should be retained if the risk component was separately identifiable and measurable for the purposes of determining the hedge ineffectiveness. The Board nonetheless asked the staff to consider how operational would these criteria be.
The majority of the Board also expressed a preliminary view that consistent principles should be applied for eligibility of risk components for financial and non-financial items.
The Board will continue its discussion at the following Board meeting.
The staff presented proposed disclosure requirements on the disaggregation of information about actuarial gains and losses arising on the defined benefit obligation and to the total amount of post-employment benefit expense in the period.
Post-employment benefit disclosures
In response to a request from the Board at the December meeting, the staff presented proposed disclosure requirements on the disaggregation of information about actuarial gains and losses arising on the defined benefit obligation and to the total amount of post-employment benefit expense in the period.
The Board deliberated theses proposed disclosure requirements in context of the package of disclosure requirements to be included in the forthcoming ED. The staff explained that disclosure requirements have been incorporated from IFRS 7 and the Fair Value Measurement guidelines to address requests from the Working group and other user groups to provide more information on the risks related to pension plans.
Several Board members expressed strong disagreement with the volume of disclosures and urged for the staff to eliminate some requirements as they are not relevant to the employer's interest in a pension plan and to streamline the remaining disclosure requirements in some way.
After a long discussion as to which disclosures are core to the understanding of the risks an employer is exposed to in relation to its pensions plans, it was agreed that a sub-group of Board members will review the disclosures and identify those that are essential. The revised list of disclosure requirements will be presented at the February Board meeting.
As part of the process of finalising the amendments to IAS 19 relating to termination benefits, the Board had to consider whether to amend the definition of termination benefits to include only benefits provided in exchange for termination of employment and not include benefits provided in exchange for employee service.
The staff is of the opinion that benefits that are provided in exchange for employees' future services should be regarded as post-employment benefits and not termination benefits. The Board noted that treating such benefits as post-employment benefits results in the same recognition as is required under SFAS 146, but that the labelling of the benefits would be different.
One Board member questioned whether the amendments would result in the amount of once-off severance packages being disclosed. The Board noted that the disclosure of termination benefits paid to key management personnel is an explicit requirement of IAS 24 and that no additional guidance needs to be incorporated in IAS 19.
The Board agreed with the amendment proposed by the staff and requested that clarification should be added that materiality is assessed both from the perspective of the entity and the individual employee.
The discussion then turned to the timing of the recognition of voluntary termination benefits. The Board agreed that voluntary termination benefits are not given in exchange for future service and that an entity should recognise the termination benefits when it no longer has the ability to withdraw an offer of those benefits. Where there is a timing difference between the date an entity cannot withdraw an offer and the date that employees accept the offer, measurement of the termination benefits will be based on the best estimate of the number of employees expected to accept the offer.
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