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The Boards agreed to a 60 day comment period for supplementary exposure draft expected to be issued at the end of January, and considered other outreach activities planned during the comment period.
The IASB and FASB staffs are currently drafting the supplement for exposure and intend to issue the supplement near the end of January. The Boards agreed to a 60 day comment period for exposure.
The Boards also held a brief discussion on outreach activities planned during and after the close of the comment period. The IASB staff mentioned that the plan for outreach was still being determined. Multiple FASB Board members expressed their desire that outreach go beyond that of the Expert Advisory Panel and that large and small financial institutions are included. A FASB Board member also reiterated that the outreach needs to be performed as a team between IASB and FASB staff so that both Boards receive consistent messages.
The IASB and FASB considered a summary comment letter analyses arising from their consultative documents and identified several first level issues identified in the comment letters and as a result of other outreach activities during the exposure period.
The IASB and FASB staff for Insurance Contracts introduced the summary comment letter analyses for the ED/2010/8 (IASB) and the Insurance Contracts Discussion Paper (FASB). The staff and the Boards identified several first level issues identified in the comment letters and as a result of other outreach activities (including Round-table meetings with constituents, field tests and other meetings with constituents) during the exposure period.
The Boards, and in particular the IASB, are faced with a desire and need expressed by IFRS users, to issue an IFRS as quickly as possible. However, balancing that are concerns that high-quality financial reporting standards are issued by both Boards and that quality not timeliness should be the overriding objective of the Boards.
Board members noted that there was no clear consensus emerging from those who did not like the Boards proposals. There were a number of strong minority views, but there was no preponderance of any particular alternative.
Critical issues identified by the staff include the discount rate; risk margins and risk adjustment; unbundling components of insurance contracts; the modified/simplified approach for short-duration contracts; and presentation.
When asked whether the staff had been able to identify an anchor issue around which strategic direction could be achieved and the amount of revisiting issues during redeliberations could be minimised, it was apparent that there was no such issue, although presentation and the risk margin/risk adjustment might together provide some direction.
No decisions were made during the meeting. However, several Board members from both Boards gave indications of areas in which they had strong views. For example, financial statement presentation: that any IFRS should portray economic mismatches accurately and that accounting should not mask the economics.
Detailed redeliberations are expected to begin in February 2011, with some of the first order issues likely to be discussed, including risk adjustment vs composite margin and composite vs residual margin approaches. Both are issues on which the IASB and FASB have fundamental disagreements.
The IASB and FASB began redeliberations on the revenue recognition project, considering: (1) determining the transfer of goods and services (2) reconsidering the 'two step' process for separating a contract (3) the criteria for the determination of separate performance obligations.
The IASB and FASB began redeliberations on the proposals within their respective exposure drafts (for the IASB ED/2010/6 Revenue from Contracts with Customers) after receiving a summary of comment letter feedback during the December 2010 joint meeting.
The staffs began the discussions by providing a flowchart diagram of their intentions for the flow of the decision making process for recognising revenue when goods or services are transferred to a customer. From the flowchart, one would first identify whether separate performance obligations exist within a contract and then determine whether the performance obligation meets the description of a service. If the performance obligation is a good then one would perform the Exposure Drafts guidance on control. If the performance obligation is a service, then one would apply the Exposure Drafts guidance on continuous transfer of goods or services. The deliberations during this meeting would focus on these components of the revenue recognition model.
Determining the transfer of goods and services
The Exposure Draft proposed that a good or service is transferred when the customer obtains control of the good or service. However, nearly all respondents felt that the proposed guidance on control was insufficient and would result in significant diversity in practice. Respondents were concerned with the removal of "risk and rewards of ownership" as a consideration for transfer of control. Respondents also overwhelmingly felt that the control guidance was insufficient for service and construction-type contracts and requested specific indicators for continuous-transfer contracts.
To address these concerns, the staffs recommended that the Boards develop separate recognition requirements for service arrangements. The staffs proposed that in order to determine if the performance of a task transfers a benefit to a customer and would meet the description of a service 1) the task would not need to be reperformed if the obligation were transferred to another entity, 2) the customer owns the work-in-process, or 3) the performance of the task would not create an asset independent of the contract and the customer cannot avoid paying for performance of the task (any of these conditions would be indicative of a task meeting the description of a service).
The Boards were supportive of supplementing the guidance in the Exposure Draft with separate recognition requirements for service arrangements. However, certain Board members expressed concerns with the proposals by introducing various example transactions ranging from commercial aircraft production to a financial statement audit engagement. One FASB member mentioned he thought many of these concerns were related more towards the method of recognising revenue under a services continuous transfer approach rather than whether the performance is a service. The staffs also clarified that the proposed continuous recognition approach for services does not automatically result in a straight-line recognition pattern, but rather the appropriate recognition method (using the output method, the input method or the passage of time method) will be based on facts and circumstances.
The Board also discussed whether reasonably measuring progress towards completion should be a requirement in order to recognise revenue for a service under the continuous transfer approach. The staffs provided the Board with three examples of services where measurement towards completion could, or could not, be reasonably measured. As part of this discussion, the Board discussed the recognition methods under the continuous transfer approach (the output method, the input method or the passage of time method). One FASB member mentioned concern over permitting a policy choice over the recognition method. An IASB member mentioned research performed during development of the SME standard. From that research it was noted that a majority of companies utilise an input approach because it is easier to apply.
The Boards tentatively agreed to provide separate recognition requirements for services and generally supported the concept of a service being based on any of the following type of criteria existing: 1) the task would not need to be reperformed if the obligation were transferred to another entity 2) the customer owns the work-in-process, or 3) the performance of the task would not create an asset independent of the contract and the customer cannot avoid paying for performance of the task.
The staffs agreed to further refine these criteria based on the feedback provided during the meeting. The Boards also tentatively agreed to the requirement that the progress towards completion be reasonably measurable in order to recognise revenue under the continuous transfer approach. The Boards requested the staffs to further develop guidance around which recognition approach (the output method, the input method or the passage of time method) would be applied under various circumstances.
The Boards also discussed the requirements in the Exposure Draft around transfer of a good under the control notion. Some comment letter respondents were concerned about the use of control and the interrelations with control concepts in other sources of GAAP (lease accounting, derecognition and consolidation). Additionally, respondents questioned the removal of "risk and rewards" from the control indicators and questioned the inclusion of the indicator related to the "design or function of the good or service is customer-specific".
The staffs recommended retaining the control notion but describing rather than defining control. Additionally, the staffs recommended that "risk and rewards" be included as an indicator of control and removing "design or function of the good or service is customer-specific" as an indicator. One IASB member questioned why control would not be defined referencing paragraph 26 from the Exposure Draft and the control discussion within that paragraph. The staffs clarified this language would be retained, and their proposal is that control would not be a defined term in the glossary of terms within the final Standard. The Board tentatively agreed with the staffs proposals.
The final topic discussed under transfers of goods or services related to contracts that involve the transfer of both goods and services. With the decision to provide separate recognition requirements for services, the Boards now need to provide guidance on which approach an entity would apply when a contract includes the bundling of goods and services. The Boards tentatively agreed that an entity would first need to assess whether the goods and services were distinct for purposes of identifying separate performance obligations. If the goods and services are distinct, the entity would account for them as separate performance obligations but if the goods and services were not distinct, then the entity would account for the bundle as a service.
Separating a contract
The Exposure Draft proposed that a contract would be separated under a two-step process. First, a contract would be separated if the prices of some goods or services are independent of other goods or services in the contract in order to "ring fence" allocations of the transaction price. Then, an entity would identify any separate performance obligations within a contract.
Comment letter responses felt the two-step process was confusing and unnecessary. Respondents felt that the principle for segmenting a contract overlaps the criteria used to identify separate performance obligations and that segmenting a contract would be unnecessary if the Boards clarified how an entity should allocate discounts and changes in the transaction price.
The staffs clarified that the discussion on allocating discounts and changes in the transaction price was not part of the current discussion and would be discussed separately during a future Board meeting. The Boards tentatively agreed to require separation of a contract in a one-step process rather than segmenting a contract for price allocation purposes as well as identifying separate performance obligations.
Identifying separate performance obligations
The Exposure Draft proposes that an entity should identify the performance obligations to be accounted for separately based on the good or service being distinct. The Exposure Draft included guidance on what constitutes distinct, specifically that 1) the entity, or another party, sells an identical or similar good or service separately, or 2) the entity could sell the good or service separately because it has a distinct function and distinct profit margin.
The comment letter respondents generally agreed with the principle of "distinct goods or services" for identifying separate performance obligations. However, they also did not interpret the proposed criteria in the manner intended by the Boards.
The Boards tentatively agreed to retain the principle of "distinct goods or services" for identifying separate performance obligations but to emphasise the objective for identifying separate performance obligations in order to address the confusion of constituents. The staffs mentioned that the Basis for Conclusions of the Exposure Draft included the following:
"the boards objective was to develop requirements that would result in an entity recognising revenue and profit margins in a manner that faithfully depicts the transfer of goods or services to the customer and that would be practical."
The Boards tentatively agreed to move this language into the body of the final Standard to help emphasise the objective of identifying separate performance obligations.
Comment letter respondents also had concerns over the proposal on a good or service being distinct if another entity sells an identical or similar good or service separately, or the entity could sell the good or service separately because it has a distinct function and distinct profit margin. In particular, they felt these criteria would result in the requirement to account for performance obligations at a level that does not accurately characterise the economics of a contract.
In considering these comments, the staffs reconsidered the distinct criteria in the Exposure Draft of having a distinct function and distinct profit margin and thought that criteria of a distinct function, distinct risks and distinct timing of transfer may be more appropriate. Additionally, the staffs provided the Boards with indicators that may assist constituents in applying judgement as to whether a good or service is distinct, rather than the Exposure Drafts proposals that had specific criteria in making the determination. Those indicators included:
The goods or services are clearly specified in the contract or there is other evidence available that suggests that the customer considers the good or service to be a distinct component of the contract.
The promised good or service was negotiated separately and the customer could have chosen to purchase, or not purchase, that good or service without materially affecting the scope and pricing of the remainder of the contract.
The entity sells identical or virtually identical goods or services separately.
Another entity sells the good or service separately.
A reasonable basis exists for estimating the standalone selling price for the good or service.
The Boards had various concerns with both the distinct criteria (distinct function, distinct risks and distinct timing of transfer) and the indicators provided. One FASB member mentioned that the guidance needs to emphasise that the assessment would be a top-down approach considering all the criteria rather than a criterion-by-criterion assessment. He also had concerns with including the indicator of goods or services provided by another entity as they would not necessarily be subject to the same risks as the entity performing the revenue recognition assessment (using the example of a home builder, he questioned the fact that hardware stores sell lumber and nails separately, therefore would the home builder need to look at the hardware store business model in making the distinct assessment).
Other Board members raised additional examples of a security business that manufactures, installs and monitors security systems and telecom companies that sell smartphone devices and cellular service contracts. The staff emphasised that the analysis would depend on whether those items outside of the continuous service arrangements are distinct. One IASB member mentioned that perhaps rather than distinct risks they should focus on rewards (benefits) being provided to the customer. Other IASB Board members also had concerns with the distinct risk criterion and how it would be applied.
The staff concluded the discussion by stating they would take the feedback from this meeting and further refine the proposals. In particular, there seemed to be broad agreement over the distinct function criterion, and then they would look at overlaying the distinct risk and perhaps the distinct timing criteria on to the distinct function component. They will bring back the revised proposals at a future meeting along with the analysis applied to different examples.
The IASB and FASB: (1) considered a preliminary comment letter analysis of feedback to the August 2010 exposure draft (2) held a preliminary discussion on how to differentiate between a contract that is within scope of the leases standard and one that is accounted for as an executory contract (service).
Preliminary comment letter analysis and redeliberation plan
The staff presented a summary of respondents' comment letters to the Boards' exposure draft published in August 2010 as well as feedback received from the various outreach activities undertaken by the Boards during the exposure period.
Overall, most respondents supported the Boards' efforts to jointly develop a single, comprehensive and converged lease accounting model for US GAAP and IFRSs. There was general support for the efforts to address the 'bright-lines' that exist in current lease accounting literature and most respondents supported the recognition of lease obligations and related assets on the lessee's statement of financial statements. However, significant concerns were expressed with regards to the following matters:
Complexity and cost of implementing the proposals, specifically the initial and subsequent measurement of lease assets and liabilities
Reduced comparability arising from the level of estimation and judgement required by the proposals
Definition of a lease and whether all arrangements meeting the proposed definition should be accounted for in accordance with the proposals
Direction and objectives of the proposals on lessor accounting.
The staff also reported that a number of respondents recommended that further field-testing should be performed on matters such as the differentiation between a lease and a service, which elements of a lease contract should be disclosed rather than recognised and revisions to the current lessor account model.
Some Board members were surprised and also concerned about the lack of responses from users and that it appears that the users could not reach consensus on the need to change the current lease accounting model.
The Boards acknowledged that pressure is being put on the definition of lease and how it is distinguished from a service contract because the ED requires all leases to be recognised in the statement of financial position. Under the current literature, the distinction was not important as the accounting for operating leases and service contracts were basically the same. The Boards were in agreement that the definition of a lease should reflect the position from both the lessee and lessor's perspective.
Many respondents observed that the proposals with regards to the lessor model were less developed than for the lessee model and recommended that the Boards perform significant additional work as part of the due process, including field-testing, before finalising any changes to lessor accounting.
With regards to the lease term, the staff reported that almost all respondents disagreed with the definition as the longest possible term that is more likely than not to occur, with many respondents either supporting the Alternative view in the ED or increasing the threshold for taking into account options to renew to 'reasonable assured' or 'reasonably certain'.
In summary, the main issues for the Boards to redeliberate, are:
Definition of a lease
Lessor accounting model
Variable lease payments
Profit or loss recognition pattern.
As the definition of a lease is such a pervasive issue that has implications on a number of other mains issues, the Boards would start their redeliberations by focussing on this.
The Boards did not make any decisions during this session.
How to define a lease and how to distinguish it from a service
The Boards had a preliminary discussion during an education session on how to differentiate between a contract that is within scope of the leases standard and one that is accounted for as an executory contract (service).
In order to formulate the underlying principles for the definition of a lease, the Boards were asked to consider the following questions:
What is a lease?
Are all leases:
A form of financing?
Different from executory contracts?
Should be uniquely accounted for?
What is the asset acquired by a lessee? Is it the right-of-use asset or the underlying asset that is subject to the lease?
Should the development of the definition of a lease reflect both lessee and lessor perspectives?
Board members were in agreement that the definition of a lease should reflect both the lessee and lessor's perspective and that the definition of a service should be consistent with the Revenue Recognition project. Board members also agreed that the asset acquired by the lessee, is a right-of-use asset and not the underlying asset. A physical asset can be unbundled into its various components and all a lease does is to unbundle the benefits embodied in the physical asset into a right-of-use and a residual value.
With regards to the question on executory contracts, most Board members were in agreement that leases are a subset of executory contracts and that although the Boards are not trying to account for all executory contracts in this project, they are addressing leases. Several Board members were of the opinion that once a lessor has delivered the asset to the lessee, the performance obligation has been satisfied if the lessor is not required to perform any other activities/services.
When discussing whether all leases are a form of financing, several Board members were uncomfortable with the implications of concluding either way. Some Board members acknowledged that in certain cases, the primary objective of a lease is to finance the acquisition of the right-of use asset, whereas in other cases that may not be the case. When asked why the question was put to the Board, the staff explained that respondents have identified certain situations where the profit or loss recognition pattern as proposed in the ED, would not reflect that substance of the lease arrangement. Respondents felt that in some situations the substance would be better reflected by presenting a straight-line rental payment rather than the amortisation of the right-of-use asset and unwinding of the lease obligation.
One Board member suggested an alternative view whereby all leases are recognised in the statement of financial position, but the profit or loss recognition pattern should be different depending on certain factors. The Boards requested the staff to develop criteria and guidance to consider at a future meeting.
The IASB and FASB held an education session on the choice of the discount rate.
Education session: The discount rate
The Boards held an education session on the choice of the discount rate. Introducing the session, the IASB staff noted that the IASB's ED/2010/8 (and the related FASB Discussion Paper) had two proposals for the discount rate. For participating insurance contracts, for which some or all of the amount and timing of cash flows arising under the contracts may depend on the performance of the assets, the performance of the assets needs to be considered in measuring the corresponding insurance contract liability, either in the discount rate or elsewhere in the building blocks. For non-participating business, the boards proposed that the discount rate should be a risk-free rate plus a liquidity adjustment and to disregard the insurers' own non-performance risk.
As a result of outreach activities and comment letters, the staff identified three groups of discount rates that might be candidates for the most appropriate discount rate:
building a discount rate bottom up starting at a risk-free rate and then adding certain factors that are relevant to the measurement of the liability
starting top-down from actual or estimated asset earnings and then eliminating certain factors identified that are irrelevant to the measurement of the liability, or
use an observable discount rate (for example high quality corporate bond rate) as a practical expedient to approximate either a bottom-up or a top-down approach.
The Boards received three presentations in support of different 'top-down' approaches from Robert Esson (NAIC); Francesco Nagari and Andrew Smith (Deloitte LLP); and Nick Bauer (Eckler Ltd). Each presentation was designed to answer:
How does this discount rate reflect the characteristics of the liability?
Which factors/risks are included and excluded by this discount rate?
What are the sensitivities of both assets and liabilities to these factors in the rate?
How complicated is it to derive this rate in practice?
Board members challenged each presenter over certain aspects of their presentation, seeking clarification or expressing concerns about the method suggested.
The IASB considered whether the existing language in IAS 28 regarding potential voting rights should be amended to be consistent with the forthcoming IFRS 10 'Consolidated Financial Statements'.
As part of the drafting of IFRS 10 (the forthcoming Consolidation Standard), Board members questioned whether the language in paragraphs 8 and 9 of IAS 28 regarding potential voting rights when assessing significant influence should be amended so that it is consistent with IFRS 10. The inconsistency results from the fact that IAS 28 discusses consideration of potential voting rights which is consistent with the current guidance in IAS 27 but would no longer be consistent with the amended consolidation guidance in IFRS 10.
The Board has intentions of re-examining the guidance in IAS 28 in the near future and therefore the Board tentatively agreed to wait until a decision has been made on if and how to amend IAS 28 rather than conforming IAS 28 now in order to be consistent with IFRS 10.
One Board member expressed significant reservations with the decision and thought the Board should address these inconsistencies now rather than waiting for future agenda decisions but stated he would not dissent from the forthcoming Consolidation and Joint Arrangements Standards as a result.
The IASB and FASB (1) considered whether to include guidance on inconsequential or perfunctory obligations in the revenue standard (2) continued their discussions on determining the criteria for a performance obligation being a service rather than a good.
Perfunctory obligations, incidental obligations and marketing incentives
The Boards continued their discussions on revenue recognition from Wednesday. The Exposure Draft did not include specific guidance on inconsequential or perfunctory obligations as contained in U.S. GAAP's ASC 605-10-S99. A few comment letter respondents requested retaining the guidance on incidental or perfunctory obligations in the final Standard.
That guidance provides that if an entity's remaining performance obligation is inconsequential or perfunctory then the entity could conclude it has met the delivery or performance criteria. A few respondents also commented that entities should not identify separate performance obligations for goods and services provided as marketing incentives. Additionally, a few respondents (primarily from the telecommunications industry) requested that incidental obligations be excluded in identifying the performance obligation (e.g., discounted headsets with contract service).
However, the Board tentatively agreed to retain their prior decision in the Exposure Draft not to provide specific guidance related to incidental or perfunctory obligations or marketing incentives. For inconsequential or perfunctory obligations, the Boards had concerns over the view that some have which equates inconsequential or perfunctory obligations to a materiality assessment. They also felt that incorporating guidance on inconsequential or perfunctory obligations may also require including guidance on costing. For marketing incentives, the Boards felt that all goods and services provided to a customer give rise to performance obligations as they were a component of the negotiated exchange with the customer. And finally, with respect to incidental obligations, the Boards felt that the concerns here primarily related to the allocation of revenue which will be addressed when the Boards discuss allocation of the transaction price.
Determining the transfer of goods and services
The Boards also continued their discussions from Wednesday on determining the criteria for a performance obligation being a service rather than a good. The staffs provided the Boards with revised language on the description of a service. Yesterday, the staffs proposed criteria for a performance obligation being a service if any of the following exist:
the task would not need to be reperformed if the obligation were transferred to another entity
the customer owns the work-in-process, or
the performance of the task would not create an asset independent of the contract and the customer cannot avoid paying for performance of the task.
The staffs' revised language changes the criteria for work-in-process from "owns" to "controls" and added to the criteria of avoiding payment to read "the customer cannot avoid paying for performance of the task to date".
The Boards discussed the revised criteria provided by the staffs. The discussion was intended to focus solely on the criteria of what performance obligations represent a service; however, the Boards had difficulty in separating the discussion between what constitutes a service and over what period revenue should be recognised. The Boards used various examples in their discussion but primarily focused on the example of a financial statement audit engagement because of the fact the tangible "benefit" being transferred to the client only occurs at the end of the engagement when the audit opinion is issued. However, many Board members felt that benefits were actually being provided throughout the engagement period. The Board eventually took a poll to gauge views on the example of the audit engagement and whether revenue should be recognised as a continuous transfer of benefit or whether revenue should only be recognised upon the eventual benefit of the issuance of the audit opinion. A majority of both Boards were in favour of the continuous transfer of benefit approach with one FASB member and three IASB members instead believing that revenue should not be recognised until the end of the engagement. The FASB member with this view clarified that he viewed the audit opinion as the delivery of a good rather than delivery of a service under the criteria provided by the staffs.
The staffs will take the feedback provided during the two days of discussions to further refine the criteria around a service and will bring the issue back to the Boards at a future meeting.
The IASB and FASB held an education session on how to best approach lessor accounting.
Education session on the way forward for lessor accounting model(s)
The Boards discussed how to best approach lessor accounting. The staff presented the comments received on the proposed accounting models. Many constituents noted that the lessor accounting models proposed in the ED are less developed than the lessee accounting model. Some constituents have urged the Boards to perform additional field testing of the new proposals prior to finalising the leases guidance. The staffs presented the following three approaches on how to proceed with lessor accounting:
Continue deliberating the proposed approach to lessor accounting in the Exposure Draft, revised to address constituents' concerns over aspects of the performance obligation and derecognition approaches as well as the guidance to distinguish when to use each of the approaches. Redeliberations would include both lessee and lessor issues towards the issuance of a final leases standard addressing both lessees and lessors.
Retain the current guidance for lessors under Topic 840/IAS 17 (with perhaps some updates, which could be minor or may end up being substantial) and recognize that there will not be symmetry between lessees and lessors.
Continue redeliberating both lessee and lessor accounting initially but limit the issues in lessor accounting to those that are critical to both lessees and lessors (for example, options to renew, contingent rent, definition of a lease, etc.). This will allow time to assess how the revenue recognition project, the FASB's investment property project, and the revised lessee model align with current US GAAP/IFRS lessor accounting. The Boards could then decide later in the current leases project whether changes to the present lessor accounting model are needed, and if so, whether these changes should be made as part of the current leases project or as part of a separate project.
The staff recommended the approach in (c). The Boards discussed each of these approaches and were in general agreement with a modified (c) approach whereby the Boards will continue redeliberating both lessee and lessor accounting but will not necessarily limit the issues in lessor accounting to those that are critical to both lessees and lessors. Rather, the Boards will consider the implications to the lessor accounting model of any decisions made relating to lessee accounting.
The staff presented the Board with an overview of the forthcoming IFRS on Joint Arrangements.
The staff presented the Board with an overview of the forthcoming IFRS on Joint Arrangements, to refresh the Board's memory on the decisions taken over the life of the project. No decisions were taken during the session.
The IASB considered a number of issues related to the IFRS Foundation's proposals for amendments to the IASB's 'Due Process Handbook' related to the criteria necessary to be met in order for an issue to qualify for inclusion in annual improvements.
Amendments to Due Process Handbook
The staff raised a number of issues with the Board related to the IFRS Foundation's proposals for amendments to the IASB's Due Process Handbook. The staff discussed the feedback received through comment letters on the Consultation Document with the IFRS Interpretations Committee during their January 2011 meeting.
During this meeting the staff brought various proposed changes to the Due Process Handbook, and when the staff's view differed from that of the Committee, the staff brought both proposals to the Board for consideration.
The comments primarily focused on the guidance in paragraph 65 of the proposal related to the criteria necessary to be met in order to qualify for inclusion in annual improvements. While considering the comments received, the Board has tentatively agreed on the following:
to eliminate language that suggested annual improvements could create an exception from an existing IFRS principal
to change the proposed wording from "there must be a pressing need to make the amendment" and instead provide language that the IASB will consider if annual improvements are the appropriate process or whether amending through another project would be a "quicker or more efficient" method
to retain the language in paragraph 65(a)(ii); one respondent had requested clarification of "resolving a conflict" and "addressing an oversight" as they felt this could be beyond the scope of the annual improvements process
to not provide further clarification on the language in paragraph 65B related to the Board's assessment of annual improvements against the criteria before the exposure for public comment,
to amend the proposed language in paragraph 65A(b) on the proposed amendment being narrowly focused to now read "the proposed amendment is well-defined and sufficiently narrow in scope such that the consequences of the proposed change have been considered"
to retain the language in paragraph 65A(c) on the inability to reach a timely conclusion may be indicative of an issue that cannot be addressed through the annual improvements process.
The Board also tentatively agreed to provide further distinction between an annual improvement and an interpretation by providing more detailed language around the objectives of the annual improvements process. The Board also tentatively agreed to provide a single set of qualifying criteria for assessing an issue for inclusion as an annual improvement or as interpretive guidance.
The IASB considered a number of possible amendments to its 'Due Process Handbook' to more clearly define the annual improvements process, and considered an annual improvement proposal to amend IAS 1 to conform with the 'Conceptual Framework 2010'.
Amendments to IAS 1 to reflect the Conceptual Framework
With the issuance of the Conceptual Framework in September 2010, there are portions of IAS 1 that are based on superseded guidance from the Framework.
The first issue relates to the objective of financial reporting as the Conceptual Framework describes while IAS 1 discusses the objective of financial statements. The Board tentatively agreed to amend IAS 1 to reflect that the objective of financial statements should be replaced with the objective of financial reporting.
The second issue relates to the definition of understandability in IAS 1. The Board tentatively agreed updating the definition of understandability in IAS 1 to be consistent with the definition included in the Conceptual Framework.
The IASB (1) reconsidered an earlier tentatively decision to retain the option of presenting the remeasurement component in either profit or loss or other comprehensive income (2) interactions between the projects on IAS 19 and IAS 37.
Presentation of components of defined benefit cost
As part of the exposure draft Defined Benefit Plans the Board intended to reduce the options in IAS 19 related to the presentation of components of defined benefit cost in either profit or loss or other comprehensive income.
The Exposure Draft proposed the remeasurement of the defined benefit cost be recognised in other comprehensive income and eliminate the option of recognising in profit or loss. However, a certain number of comment letter respondents expressed concern with the elimination of the ability to recognise these costs in profit or loss because of the presentation mismatch that would be created.
Examples cited of this situation included:
unfunded plans where the assets are recognised as part of the corporate entity rather than in a separate off-balance sheet plan
entities engaged in hedging as part of their plan management.
During the November 2010 meeting, the Board withdrew their proposal in the ED and tentatively agreed entities could retain the option of presenting the remeasurement component in either profit or loss or other comprehensive income. The staff raised this issue to give the Board a chance to reconsider that previous tentative decision.
The IASB Chairman began the discussion stating that 90% of comment letter respondents supported the proposal for presentation in other comprehensive income; however, there were a few that raised the accounting mismatch concern. He does not support providing a full option approach and noted that the basis for conclusion in the Exposure Draft states that "perpetuating options in IAS 19 would not improve financial reporting". His belief is that retaining that option would open the Board up for criticism.
The Board considered whether to require recognition in other comprehensive income but to permit an option to recognise in profit or loss under certain circumstances, analogising to the fair value option presentation for financial liabilities within IFRS 9.
Multiple Board members expressed their continued belief the presentation in profit or loss was the preferable method but acknowledged that such a view was not supported by a majority of the Board. In discussing whether to permit an option to recognise in profit or loss under certain circumstances, one Board member questioned how they would not allow a presentation method than many thought was a better alternative (recognition in profit or loss) and noted that many investors share that view.
One Board member stated his support for allowing recognition in profit or loss under certain circumstances but rather than permitting an option for recognition in profit or loss would instead require recognition in profit or loss when an accounting mismatch exists. The staff noted that such an approach would be operationally more burdensome as it would require all entities to determine whether an accounting mismatch exists rather than simply permitting those entities with identified mismatches to elect an alternative presentation. Several Board members also expressed concern over what specific criteria would be used for determining whether an accounting mismatch exists.
One Board member proposed an approach with a default presentation in other comprehensive income but permit a one-time, irrevocable election on a plan-by-plan basis to present the remeasurement component in profit or loss. Unlike the fair value option within IFRS 9, this election could be made either at inception of the plan or at anytime going forward. However, once the decision to present in profit or loss has been made, there would be no ability to change the election. The basis for the Board permitting an election would be to allow entities to eliminate an accounting mismatch and the Standard would provide examples of instances where a mismatch may exist (the unfunded plan and hedging examples were specifically mentioned as indicators) but would not provide specific criteria for identifying a mismatch or a requirement that a mismatch exists in order to apply the election. His rational was to avoid having to detail specific criteria in order to utilise the option. The Board tentatively agreed (9 votes supporting the proposal) with this approach and also tentatively agreed that entities would need to disclose the use of the election as well as information on the reason for making the election.
Interaction of IAS 19 proposals and IAS 37
Because of the interactions between IAS 19 and IAS 37, and the fact that both standards have pending projects to amend their respective requirements - albeit separate time tables, some coordination is needed in order to align their requirements. The discussion specifically focused on the timing of recognition for plan amendments, curtailments, settlements and termination benefits and their interaction with the timing of recognition for restructuring costs in IAS 37.
IAS 19 currently states that termination benefits should be recognised when the entity is "demonstrably committed" either to terminating employment before the normal retirement date or to providing termination benefits as a result of an offer made in order to encourage voluntary redundancy. The term "demonstrably committed" was also used in the exposure draft that preceded the issuance of IAS 37 but the language in IAS 37 was changed prior to issuance. However, the Board has made the tentative decision that entities shall recognise gains or losses when they occur and proposed removing the "demonstrably committed" language.
In order to align the recognition requirements for plan amendments, curtailments, termination benefits and settlements with the restructuring guidance in IAS 37, and to prevent having to make consequential amendments to IAS 19 once the amendments to IAS 37 are complete, the Board has tentatively agreed on the following:
If a curtailment or plan amendment is linked to a restructuring or termination benefit, the gain or loss should be recognised when the related restructuring costs or termination benefits are recognised. Otherwise, the gain or loss should be recognised when the curtailment or plan amendment occurs,
If termination benefits are part of the detailed plan or restructuring, they should be recognised when the related restructuring costs are recognised if that is earlier. Otherwise, termination benefits should be recognised when the entity can no longer withdraw the offer of the benefits, and
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