Multiple Board members of the IASB, its staff and the incoming vice-chairman of the IASB met with members of the European Financial Reporting Advisory Group (EFRAG) to discuss the following agenda topics:
- the status of the major projects
- new standards on consolidation, joint arrangements and disclosures;
- the timeline for completion of major projects.
EFRAG, noting the re-deliberation process of the IASB has resulted in several significant changes to its original project proposals in order to respond to comments received in public consultation, highlighted the recent completion of outreach events throughout Europe in May 2011 to provide European constituents with an opportunity to express concerns regarding tentative decisions to date.
Highlighting key issues and concerns surrounding the revenue recognition project as identified through outreach activities and general EFRAG views:
- Participants continued to question whether a complete overhaul of the existing standards on the revenue recognition was really needed, and some respondents suggested that the direction taken by the IASB in the re-deliberations would bring the proposals quite close to the current requirements
- Participants generally supported the direction of the IASB's re-deliberations on the criteria for determining if a performance obligation is satisfied continuously. However, multiple constituents expressed concerns that proposals might result in revenue being recognised when an entity had not established a right to receive consideration subject to continued performance (e.g., customer has the ability to cancel the contract so consideration is uncertain)
- Certain respondents questioned whether the "alternative use of an asset" was a necessary criterion for determining whether the percentage of completion accounting could be applied
- Some industry specific concerns were highlighted, including:
- the software industry, where concerns were noted that under the proposals, entities would not be able to recognise revenue continuously as work progresses
- the telecommunications industry, where concerns were noted that the proposals would result in revenue being recognised even when payment is contingent (e.g., recognition of revenue associated with a handset delivered in conjunction with an annual subscription service at delivery of the handset as opposed to recognition over the subscription service period)
- Multiple participants noted that the direction taken by the IASB in the re-deliberations deviated from the original proposals in many respects, and therefore, requested re-exposure of the proposals, while other participants did not see re-exposure as a requirement. Some participants instead requested only adequate time for constituents to review staff / near-final drafts of the standard (with a request to have the basis and effect studies available at such time) before issuance of a final standard.
IASB representatives acknowledged the feedback outlined by EFRAG and noted that many of their concerns are expected to be resolved in drafting, while also clarifying interpretations of decisions reached to date on the project to address some of the above concerns. The staff also noted certain matters, such as industry-specifics (e.g., telecommunications) and re-exposure conclusions are subject to future Board meeting discussion. The incoming vice-chairman of the IASB highlighted an intended staff draft being available on the project in July, with a Board vote in October (assuming no re-exposure). While EFRAG questioned the adequacy of this timing for purposes of constituent review, the incoming vice-chairman reiterated the purpose of the release of a near final draft was not full re-exposure, but rather, identification of any consequential amendments.
Highlighting key issues and concerns surrounding the leases project as identified through outreach activities and general EFRAG views:
- Unlike the revenue recognition project, the new proposals on leases did not receive much support, and a large number of participants believed that it would be preferable to keep IAS 17 Leases rather than to proceed with the new model
- Many participants believed that not all leases were financing arrangements, and that from an economic perspective, it was sound to distinguish between two types of leases.
IASB representatives quickly pointed out that general support existed for the right-of-use approach as part of the comment letter process; both from EFRAG and constituents as a whole, and thus, expressed confusion as to the perception that the IAS 17 model was the preferred model when it did not draw on this concept. While EFRAG members agreed with the concept of a right-of-use approach, they noted that support was in the form of leases constituting primary financing transactions and they did not view all leases to constitute primarily financing transactions. Likewise, EFRAG members noted that their comment letter outlined practical issues with the right-of-use approach, including the need for a more robust rationale to support recognition of a right-of-use, which EFRAG members noted had not been sufficiently provided to date.
Ultimately, the key message expressed by EFRAG was that the current line distinguishing executory and service contracts from a lease had not advanced from that which was specified in IAS 17, and consequently, barring a significant review of the "line" distinguishing transaction types for lease treatment, EFRAG preferred the retention of IAS 17. One IASB Board member reiterated the reason the leases' project was undertaken — to reflect assets and liabilities arising in all leases in the statement of financial position to meet needs of investors, provide comparability in lease accounting across entities and provide consistency with the Boards' conceptual framework — and thus, felt that a move back to the IAS 17 model would be a large step back.
Highlighting key issues and concerns surrounding the insurance project, EFRAG requested clarity as to whether the project was considered a joint project between the IASB and FASB. Specifically, EFRAG considered the IASB and FASB to be at different stages of development of the respective standard, but as noted in the Basis for Conclusions expressed in the IASB's Insurance Contract exposure draft, this project has more recently taken the form of a joint decision-making project between the IASB and FASB. For this reason, EFRAG expressed a desire for clarity as to whether the IASB would (a) delay issuance of a final standard until the completion of the FASB's due diligence procedures or (b) issue a final standard at completion of its own due diligence. Likewise, EFRAG sought clarity that the entire project would not be revisited at the completion of the FASB's due diligence if a final standard was issued by the IASB prior to FASB's completion of due diligence procedures (i.e., EFRAG believes that the IASB's due diligence should consider U.S. (and other) constituent feedback, and the IASB should not consider this to be an open project for reassessment at completion of the FASB's project).
Members of the IASB noted that no specific insurance contract guidance currently exists in IFRSs, and thus, the need for standard issuance in the short-term appears necessary. However, the incoming vice-chairman of the IASB noted that significant re-deliberations are ongoing on the insurance project, and thus, the Board would need to reassess timing at a future date.
Highlighting key issues and concerns surrounding the financial instruments' project as identified through outreach activities and general EFRAG views:
- Hedging: EFRAG expressed a desire for the micro- and macro-hedge models to be completed jointly as opposed to in isolation. In response, IASB staff noted that project deliberations were continuing but it would consider this feedback.
- Offsetting: EFRAG expressed a desire to not re-open fundamentals of the model as they were generally supportive of views to date. In response, IASB staff noted that it was not the intention to re-open the fundamentals of the offsetting project, but acknowledged that further consideration of the conditional and unconditional approaches was required.
- Impairment: EFRAG expressed concern with making the proposed models operational. In response, IASB staff acknowledged that further deliberations and constituent feedback would likely be required before moving forward.
New standards on consolidation, joint arrangements and disclosures
EFRAG requested effects study information such that it could consider further its endorsement due diligence procedures with respect to the recently issued consolidation and joint arrangement standards. An employee of the IASB anticipated that effects study information would be available by the end of June.
Timeline for completion of major projects
EFRAG requested clarity on timing of major projects, and in providing general comments, an employee of the IASB noted that timing is largely contingent on future deliberations as well as an assessed need for re-exposure. The following general timing was noted:
- Revenue: A staff draft is expected to be available in July, assuming no re-exposure.
- Leases: Timing of staff drafts and future outreach are largely contingent on decisions reached in redeliberation and the need to re-expose.
- Insurance: Timing of staff drafts and future outreach are largely contingent on decisions reached in redeliberation, but a staff draft is anticipated in the third or fourth quarter.
- Financial instruments: Impairment is generally considered the highest priority at this point, and timing of staff drafts and future outreach are largely contingent on decisions reached in redeliberation.