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The IASB discussed four issues for potential inclusion in the next Improvements to IFRSs exposure draft: IFRS 8 (aggregation criteria and identification of the chief operating decision maker, CODM), IAS 7 (classification of interest paid that is capitalised), IAS 16 (meaning of receivable), and IAS 24 (key management personnel).
The IASB discussed four issues for potential inclusion in the next Improvements to IFRSs exposure draft.
IFRS 8 Operating Segments – Aggregation criteria and identification of the CODM
The IASB received a request to make improvements to IFRS 8Operating Segments about the application of the aggregation criteria and the identification of the chief operating decision maker (CODM). More specifically, the request asked the Board to:
include an additional disclosure in paragraph 22 of IFRS 8 requiring a brief description of both the operating segments that have been aggregated and the economic indicators that have been assessed in order to conclude that the operating segments have 'similar economic characteristics' in accordance with paragraph 12 of IFRS 8; and
to emphasise in paragraph 7 of IFRS 8 the 'operating nature' of the function of the CODM and to clarify in paragraph 1 of IFRS 8 that there is a presumption that management reviews the information that is reported to it.
At its September 2011 meeting, the IASB acknowledged the similarities between the requirements in IFRS 8 and the equivalent guidance in US GAAP in Topic 280 Segment Reporting in the FASB Accounting Standards Codification® from which IFRS 8 was developed. Thus, the Board asked the staff to research further how similar concerns had been addressed in US GAAP and to consider whether this might help to identify how these concerns about IFRS 8 might be addressed.
The IASB staff presented its analysis which observed that the US Securities and Exchange Commission (SEC) staff considers segment reporting to be an area of primary focus given observation of inappropriate aggregation and identification of operating segments. On the basis of SEC staff observation, the original request received by the IASB and underlying discussions by both the IASB and IFRS Interpretations Committee, the staff recommended amending through an annual improvement disclosure requirements regarding the aggregation of operating segments and clarifying that non-executives are not included as part of the CODM as they do not make operating decisions.
Considering these recommendations, Board members generally supported the proposed addition to paragraph 22 of IFRS 8 (to disclose the judgements made by management in the application of the aggregation criteria in paragraph 12 of IFRS 8). However, concerns were expressed regarding the proposed amendments to paragraph 7 (to clarify that non-executives are not included as part of the CODM if they do not make operating decisions). Specifically, Board members noted the clarity in current guidance; observing that under paragraph 5 and 7 of IFRS 8, the CODM is actively involved in reviewing information of an operating nature and fulfils two distinct but related functions of performance assessment and resource allocation. Also, paragraph 9 of IFRS 8 notes that the CODM generally discusses operating activities, financial results or other plans for the segment with the 'segment manager'. Based on this available guidance, the principle of defining the CODM was considered sufficiently clear (including the notion that non-executive directors are not considered part of the CODM if they do not make operating decisions), and thus, Board members did not recommend adding any specific guidance which might distort the underlying principle of defining a CODM.
While one Board member expressed concern that a failure to amend paragraph 7 may lead to continuing uncertainty regarding the identification of the CODM (as was raised in the original submission), Board members noted a preference to retain the principle as opposed to defining more explicit rules given that board structures and general management is unique around the world.
Thus, the Board tentatively decided to include the proposed amendments to paragraph 22 in the next Improvements to IFRSs exposure draft, which would require disclosure of judgements made by management in the application of the aggregation criteria in paragraph 12 of IFRS 8 if operating segments have been aggregated.
IAS 7 Statement of Cash Flows – Classification of interest paid that is capitalised
As part of its September 2011 Board meeting, the IASB discussed proposed amendments to IAS 7Statement of Cash Flows to clarify the classification in the statement of cash flows of interest paid that is capitalised into the cost of property, plant and equipment.
The amendments proposed that the example guidance in paragraph 16(a) of cash flows arising from investing activities should explicitly include interest paid that is capitalised into the cost of property, plant and equipment and clarified that interest paid that is capitalised in accordance with IAS 23 Borrowing Costs should be classified in conformity with the classification of the underlying asset to which those payments were capitalised.
As its September 2011 meeting, the Board tentatively decided to include the proposed amendments in the next Improvements to IFRSs exposure draft, subject to certain editorial amendments. While the staff assessed the proposed amendments against the enhanced annual improvements criteria, it failed to supply the IASB with the details of the criteria assessment as part of the September 2011 meeting. Therefore, the staff presented its assessment at the November 2011 Board meeting. The Board tentatively agreed with the staff's assessment, and thus, the proposed amendments tentatively agreed in September will be included in the next Improvements to IFRSs exposure draft.
IAS 16 Property, Plant and Equipment – Meaning of receivable
The staff presented a request previously considered by the IFRS Interpretations Committee to clarify the guidance in paragraph 65 of IAS 16Property, Plant and Equipment concerning when the compensation for property, plant and equipment that has been impaired, lost or given up (for example, as a result of a natural disaster) becomes receivable (i.e., the point at which the insured loss occurs or at the point when the reimbursement is agreed with the insurer). The staff paper, following the recommendations of the IFRS Interpretations Committee, recommended that the Board not add this issue to the Annual Improvements process for 2010-2012 based on the fact that the term 'becomes receivable' is sufficiently understood within IFRSs.
Contrary to the IFRS Interpretations Committee recommendation, one Board member expressed a preference to align the wording in paragraph 65 of IAS 16 with paragraph 53 of IAS 37Provisions, Contingent Liabilities and Contingent Assets (i.e., IAS 16 could be modified to state that compensation from third parties when an asset is impaired, lost or given up is recognised when the compensation is virtually certain to be received instead of when compensation 'becomes receivable'. He noted that it promoted consistency between the standards (IAS 16 and IAS 37) and made the requirements in IAS 16 more robust. However, other Board members noted that the requirements of IAS 16 were not intended to be consistent with the requirements of IAS 37. Specifically, IAS 16 acknowledges that an unconditional agreement has already been reached with the insurer to compensate the policyholder for an event related to asset impairment or for lost profits and that the recognition of the compensation right is only awaiting for that event to happen whereas IAS 37 waits for the reimbursement to be agreed by a third party and for the policyholder to settle the obligation to which the compensation relates (in order to eliminate any avoidance of doubt or uncertainty that the reimbursement will be received).
When put to a vote, the Board tentatively agreed not to add this issue to the next Improvements to IFRSs exposure draft.
IAS 24 Related Party Disclosures – Key management personnel
At its September 2011 meeting, the Board discussed a proposed amendment to clarify the disclosure requirements for related party transactions that are identified when a management entity provides key management personnel (KMP) services to a reporting entity in the specific circumstances where the management entity does not control, jointly control or have significant influence over the reporting entity. Some Board members raised concerns about potential unintended consequences of the proposed amendments. The Board therefore asked the staff to consider these concerns and to bring the proposals back to a future meeting.
At the November 2011 meeting, the staff presented its analysis in the context of the queries raised in the original submission: can key management personnel as defined in IAS 24Related Party Disclosures include an entity as opposed to individuals and should the reporting entity disclose the remuneration paid by the management entity to the individuals providing the KMP services or the service fees paid by the reporting entity to the management entity for the KMP services?
Based on this analysis, the staff made the following recommendations:
IAS 24 should be amended to include management entities providing any key management services within the definition of related entities.
Compensation costs relating to KMP not employed by the entity should be excluded from the disclosure requirements of paragraph 17 of IAS 24. However, paragraph 18 of IAS 24 should be amended to require that transactions with related parties for the compensation of KMP or the provision of KMP services be disclosed separately (i.e., disclosure of the service fee paid to the management entity that employs, or has as directors, the persons that provide the key management services).
The existing definition of KMP would be retained in IAS 24 to prevent any unintended consequences of excluding management entities from related parties (i.e., to prevent double-counting of service fees under both paragraph 17 and 18 of IAS 24).
Further research should be performed regarding relevant disclosure of variable payments to related parties (e.g., bifurcation of variable and fixed payment components) for purposes of a potential amendment to IAS 24 as part of the 2011-2013 annual improvements project.
The Basis for these recommendations included:
IAS 24 is unclear as to what information to disclose with respect to key management personnel when those persons are not employees of the reporting entity.
Because key management personnel would still be identified as a related party, the reporting entity would be required to disclose compensation to key management personnel by category of benefits in accordance with paragraph 17, along with other direct transactions between key management personnel and the reporting entity as required in paragraph 18. Given concern about the impracticability of accessing the detailed information that is required in paragraph 17 when compensation is paid to separate managing agent as fees, the proposal provides relief in that the reporting entity would not be required to disclose compensation to key management personnel paid through another entity. Instead payments in respect of KMP compensation or services payable to another entity would be separately disclosed in accordance with paragraph 18 of IAS 24.
In consideration of these recommendations, one Board member requested that the research regarding disclosure of variable payments be performed more timely and included as part of the 2010-2012 annual improvements project. He preferred that annual improvements to IAS 24 be addressed holistically. However, the staff highlighted that the impending timing of the Improvements to IFRSs exposure draft did not allow adequate time to address potential consideration of variable lease payments.
With little debate, the Board tentatively agreed with the proposed recommendations of the staff (subject to editorial changes). As such, the next Improvements to IFRSs exposure draft will include proposed changes to IAS 24 including:
extending the definition of a related party to include management entities;
extending the disclosure requirements of IAS 24 to require the separate disclosure of transactions for the provisions of KMP services.
excluding from the disclosure requirements of paragraph 17 of IAS 24 the KMP compensation provided through managing entities.
Because the proposed changes relate to the disclosure of financial information, entities would apply the amendments retrospectively in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors.
The Board considered a request to clarify the meaning of 'the date of initial application' in the transitional requirements of IFRS 10 'Consolidated Financial Statements'.
The Board considered a request (which was previously assessed by the IFRS Interpretations Committee at its September 2011 meeting) to clarify the meaning of 'the date of initial application' in the transitional requirements of IFRS 10Consolidated Financial Statements. IFRS 10 does not provide a definition of the date of initial application and the submission received noted that this term is used with different meanings in different IFRSs. The issue considered is whether the date of initial application in IFRS 10 is: the beginning of the reporting period in which the entity adopts IFRS 10 or the beginning of the earliest period presented in the financial statements in which the entity adopts IFRS 10.
The staff presented an analysis of the issue, including details of the IFRS Interpretations Committee's recommendation that the Board should consider this issue for separate amendment (given concerns in timing if included in the annual improvements project). Staff recommendations to IFRS 10 included:
adding a definition of the date of initial application in IFRS 10, which would be the beginning of the reporting period in which IFRS 10 is applied for the first time.
making it clear in paragraph C4(a) and C4(b) of IFRS 10 that any adjustment to the accounting for the investor's involvement with the investee should be recognised in equity at the beginning of the earliest comparative period presented (when practicable).
making it clear in paragraph C4(c) of IFRS 10 that any adjustment to the accounting for the investor's involvement with the investee should be recognised in equity at the deemed acquisition date (when impracticable).
making it clear in paragraph C5 of IFRS 10 that any adjustment to the accounting for the investor's involvement with the investee should be recognised in equity:
either at the beginning of the earliest comparative period or, if control was lost at a later date, on the date the investor lost control of the investee (if practicable); or
if practicability issues exist, at the beginning of the earliest comparative period for which application of this IFRS is practicable.
While specific amendment wording was provided to the Board in the agenda paper, the staff asked that the Board consider the principle of the amendments as opposed to specific proposed wording given that the staff had received 'offline' feedback on the proposed wording which has resulted in edits to the proposed amendments. While specifics of the 'offline' feedback were not discussed during the meeting, feedback received by the staff appears to be based on clarifying that any adjustment to the accounting for the investor's involvement with the investee should be recognised in equity at the beginning of the earliest comparative period presented or date at which control was obtained, if later. The staff intends to provide amended wording to the Board at a later date.
Considering the staff analysis, one Board member preferred to evaluate the definition of 'the date of initial application' more holistically than in specific response to IFRS 10. Specifically, he preferred that this be a defined term in the Glossary of Terms and used in future standard issuances. However, the staff noted that the term has not been used consistently in existing literature, and thus, could not be addressed more holistically at this stage. With little additional debate, the Board tentatively agreed with the principle of the amendments proposed; subject to review of final amendment wording.
The staff also presented analysis as to circumstances in which paragraph C3 of IFRS 10 (an exemption to retrospective application) applies. The staff recommended that the meaning of the sentence 'when applying IFRS 10 for the first time' is the beginning of the reporting period in which IFRS 10 is first applied. Thus, an entity would not be required to adjust the accounting for its involvement with an investee if the consolidated conclusion is not changed at the beginning of the reporting period in which IFRS 10 is first applied. With no debate, the Board tentatively agreed with the staff's recommendation.
Following this tentative decision, the Board was asked to consider whether the exemption is paragraph C3 would apply to a 'temporary consolidation'. For example, Entity D applies IFRS 10 for the first time in its annual financial statements ending 31 December 2013 and presents one year comparative period. Entity D holds an investment in Entity X. Entity X is not consolidated under IAS 27 but would be consolidated under IFRS 10. Entity D disposes of its investment in Entity X during 2012. In this example, the consolidation conclusion is the same between IAS 27/SIC 12 and IFRS 10 on 1 January 2013 because of the disposal of Entity X during the comparative period (but not because of the control requirements of IAS 27/SIC 12 and IFRS 10).
The staff noted that if the exemption in paragraph C3 does not apply to this fact pattern, restatement of comparative information would be required (i.e., consolidation of the entity at the beginning of the comparative period and then accounting for its disposal later in that period), and questioned whether that was the Board's intention. As Board members generally agreed that the incremental benefits to users of requiring full retrospective application in this case did not outweigh the costs for preparers, the Board tentatively agreed with the staff's recommendation to clarify paragraph C3 to state that when applying IFRS 10 for the first time, an entity is not required to make adjustments to the accounting for its involvement with an entity that was disposed of in the comparative period(s) or for which control was lost in the comparative period(s).
The IASB met on the 15 November for an educational session on residual margin, discussing two papers: (1) 'Which changes in estimate adjust the residual margin?' and (2) 'Residual margin — two approaches'.
The IASB met on the 15 November for an educational session on residual margin. During the two hour long meeting, the IASB staff presented the papers and asked the Board their views on certain questions without formally asking for decisions to be taken. Although the FASB staff joined by teleconference, it did not participate in the discussions as FASB prefers the route of a single composite margin.
The first paper, "Which changes in estimate adjust the residual margin?", discusses the changes in estimate that would adjust an unlocked residual margin, assuming that the tentative decision of unlocking the margin to reflect changes in cash flows still holds. The staff asked the IASB its views on whether all the changes in estimates used to measure the insurance contract liability should adjust the residual margin and if not, which changes should / should not.
After quite a lengthy discussion, there was a clear preference among the Board members for unlocking only non-financial estimates (i.e., any changes relating to the discount rate and the risk adjustment should not be taken through the residual margin (assuming the tentative decision to unlock remains)). It was however made clear to the staff that many questions still remain unanswered and that developing concrete examples would make the discussions much more productive.
The second paper, "Residual margin — two approaches", contrasts the approaches of locking in the residual margin at inception, as per the exposure draft, and the approach of adjusting the residual margin to reflect some or all changes in estimates. After summarising the paper, the staff asked the IASB what approach it favoured. Views were split; approximately half of those members who spoke up had a preference for unlocking the margin whereas the other half preferred to retain the approach from the exposure draft. We noted that similar arguments were raised to support both views; in particular, the degree of complexity was raised as a negative feature of the other approach by both camps. IASB staff appeared to provide support to the unlocking camp when they pointed out that locking the residual margin is not as simple as it may appear and that respondents to the exposure draft were indeed concerned about the practical implications of locking in the residual margin.
The other papers on allocation of residual margin and interest accretion were not discussed. Another session on insurance is taking place on 16 November and will address disaggregation of explicit account balances.
The IASB discussed whether to initiate a review of IFRS 9 and also discussed the effective date of revised disclosure requirements in light of the IASB's decision to defer the application of IFRS 9.
Limited reconsideration of IFRS 9
The IASB discussed whether to initiate a review of IFRS 9. The staff told the Board they believed that based on feedback received to date the IFRS 9 was fundamentally sound and operational but they raised the issue of a limited reconsideration of IFRS 9 with the Board for a variety of reasons. The primary reason for the reconsideration of IFRS as presented by the staff was the interaction with the insurance contracts project and classification and measurement of financial assets under IFRS 9. Specifically, the decisions to date in the insurance project would recognise the re-measurement of insurance liabilities with components through profit or loss and other components through other comprehensive income. Meanwhile the financial assets backing those insurance liabilities would either be recognised at either amortised cost or fair value through profit or loss resulting in an accounting mismatch with the associated liabilities. Another reason the staff has raised this issue relates to application issues that some constituents have incurred with specific instruments when early adopting or undergoing implementation efforts of IFRS 9. And finally, the staff notes that the FASB has now completed their redeliberations around financial instrument classification and measurement but with several significant differences to IFRS 9 limited reconsiderations of IFRS 9 could potentially resolve some of those differences and increase the level of convergence.
However, the staff acknowledged that any reconsideration of IFRS 9 should keep in mind that some entities have already early adopted IFRS 9 while other entities have already dedicated significant time and resources to the implementation of IFRS 9. As a result, it recommended that any reconsideration of IFRS 9 be as targeted as possible.
All of the Board members generally agreed that a limited reconsideration of IFRS 9 was appropriate. However the reasons the Board members gave for their support and the level of their support varied. Most Board members also acknowledge the issue with interaction of the insurance contracts project with IFRS 9 and the need to reconsider how best to facilitate that interaction. Several Board members expressed concern about scope creep and emphasised that the reconsideration must be limited and focused. Some Board members mentioned the opportunity for further convergence as an important benefit of a reconsideration of IFRS 9 while other Board members were more sceptical of opening IFRS 9 for the sake of convergence citing other difficulties in financial instrument projects and expressing concern over the FASB's decision to go in another direction even though IFRS 9 was already issued.
Ultimately, the Boards tentatively agreed in a unanimous decision to a limited reconsideration of IFRS 9.
Effective date of revised disclosure requirements
Last week the IASB decided to delay the mandatory effective date of IFRS 9 until annual periods beginning on or after 1 January 2015. The Board also decided that rather than require retrospective application upon initial application of IFRS 9, they would require modified disclosures on transition from the classification and measurement requirements of IAS 39 to IFRS 9. These disclosures would be required even if an entity chose to restate its comparatives.
However, Board members were also concerned over 'punishing' those in the process of applying IFRS 9 early. To address those concerns, the staff brought recommendations to the Board of how to apply the disclosure requirements based on the period of early adoption.
The Board tentatively agreed with the staff recommendations that:
entities with a date of initial application before 1 January 2012 should not be subject to the disclosure requirements as they were included in the original scope out of comparative information in IFRS 9
entities with a date of initial application of 1 January 2012 until 31 December 2012 would not be required to provide the disclosure requirements if they provided comparative information but would be permitted to present the modified disclosures instead of restating their comparative information
entities with a date of initial application of 1 January 2013 or thereafter would be required to present the modified disclosures irrespective of whether they restate their comparatives to reflect IFRS 9.
The IASB considered the effective date for the forthcoming clarifying amendments to IAS 32 'Financial Instruments: Presentation' and the new disclosures requirements on offsetting financial instruments.
Reconsideration of effective dates
The IASB had previously tentatively decided that both the clarifying amendments to IAS 32 and the new disclosures requirements on offsetting of financial instruments should be effective for annual periods beginning on or after 1 January 2013.
The staff has subsequently received concerns by preparers regarding the effective date of both the disclosure requirements and the clarifying amendments to IAS 32.
With respect to the new disclosure requirements, some IFRS constituents believe that an effective date of 1 January 2013 with retrospective application would be overly burdensome given the likely issuance date of late 2011. They cited the fact that when the offsetting criteria in IAS 32 are not met, those entities may not have such information readily available in their financial reporting systems. They also noted that information on collateral is typically kept within credit systems rather than the financial reporting system.
However, the Board had little sympathy in providing and relief regard effective date voting 14-1 in favour of retaining an effective date of 1 January 2013 with retrospective application for the new disclosure requirements.
Constituents have also raised concerns on the clarifying amendments to IAS 32 and the 1 January 2013 effective date with retrospective application required. They assert they will have to go back and obtain additional evidence to applying offsetting. Additionally, some believe that the clarification may have a material impact on the statement of financial position as they may not be able to obtain appropriate evidence for prior years and therefore would need to unwind amounts that have previously been offset, which could result in additional reporting requirements such as presentation of as many as five years' of comparative data. They have also raised the issue of systems modifications that will be required in order to comply with the clarifying amendments.
The Board had mixed views with respect to providing additional implementation time for the clarifying amendments to IAS 32. Some supported the staff recommendation to delay the effective date for the clarifying amendments to 1 January 2015 in order to synchronise with the implementation of IFRS 9. One Board member cited his recommendation during the September 2011 board meeting that these amendments should be subject to re-exposure because of the potentially significant change they may have for some constituents. Another Board member expressed his support saying that the feedback he had received was that certain constituents would require systems modifications. However, other Board members were strongly opposed to delaying the effective date until 2015 citing that this project was resulting from the financial crisis and that implementation should not be delayed. Some of them preferred an effective date of 2013 but not requiring retrospective application if that would alleviate the constituent concerns. However, the staff said they viewed have comparative periods restated as essential for comparability purposes. One Board member suggested an alternative effective date of 1 January 2014 which received some amount of support.
The Board first voted on the staff recommendation to delay the effective date until annual periods beginning on or after 1 January 2015 but did not support the recommendation. The Board then considered whether it could support an effective date of 1 January 2014 and the Board tentatively agreed on such an approach with 9 Board members supporting this recommendation.
The IASB discussed the transitional requirements for a first-time adopter of IFRSs regarding leases; considering whether some of the transitional requirements and relief provided for existing IFRS preparers should also be provided to a first-time adopter of IFRSs.
The Board discussed the transitional requirements for a first-time adopter of IFRSs regarding leases; considering whether some of the transitional requirements and relief provided for existing IFRS preparers should also be provided to a first-time adopter of IFRSs.
Considering proposals provided in the August 2010 exposure draft Leases, the staff noted that when first applying the new leases standard, they believed that a first-time adopter of IFRSs would face similar issues to those faced by existing IFRS preparers. To that end, and considering existing requirements set out in IFRS 1First-time Adoption of International Financial Reporting Standards and IAS 17Leases, the staff recommended that a first-time adopter of IFRSs (regarding leases) should be permitted to:
apply the general transitional provisions (available to existing preparers) in the leases standard.
use the fair value of a right-of-use asset as its deemed cost, if that first-time adopter uses the revaluation model to measure right-of-use assets after adoption.
apply the following reliefs:
do not require evaluation of initial direct costs for contracts that began before the opening IFRS statement of financial position.
permit the use of hindsight in periods before the first IFRS reporting period, including when determining whether or not a contract is, or contains, a lease.
A first-time adopter that elected any of those reliefs would disclose the reliefs elected in its first IFRS financial statements.
One Board member suggested that the fair value option should not be limited to those circumstances in which the first-time adopter uses the revaluation model to measure the right-of-use asset after adoption (i.e., a fair value option should be permitted regardless of future revaluation intentions). Other Board members agreed with this view and noted that IFRS 1 permits a one-off fair valuation regardless of any intention to depreciate the asset in the future (as opposed to revalue). Consequently, the Board tentatively decided to amend the staff's recommendation regarding use of the fair value option such that such an option is not limited to circumstances in which the first-time adopter uses the revaluation model to measure right-of-use assets after adoption.
Another Board member requested that the relief provided by paragraph 9A of IFRS 1 (in reference to IFRIC 4Determining whether an Arrangement Contains a Lease) be extended for first time adopters of IFRSs under this project. However, when put to a vote, Board members did not elect to amend proposed first-time adopter transition provisions for this request given that paragraph 9A of IFRS 1 was seen as a very targeted exemption that should not be carried forward more broadly.
The Board voted not to amend the scope of IAS 32 to exclude put options over non-controlling interests. However, the Board expressed support for considering clarifying the accounting for subsequent changes in the measurement of such puts rather than by changing the measurement basis of the non-controlling interest.
The IFRS Interpretations Committee (the 'Committee') has been dealing with a request for clarification regarding the accounting by a parent for put options written over the non-controlling interest ('NCI') of a consolidated subsidiary. In September, based on a recommendation from the Committee, the Board discussed a possible scope exclusion to IAS 32 for put options written over the NCI in the consolidated financial statements of a group.
The objective of the scope exclusion would be to address a potential inconsistency between the requirements of IAS 32, IAS 39 and IFRS 9 for measuring financial liabilities and the requirements in IAS 27 and IFRS 10 for accounting for transactions with owners in their capacity as owners; that is, whether the offsetting entry for subsequent measurement changes should be to profit or loss or to equity.
The Board voted not to amend the scope of IAS 32 to exclude these put options over non-controlling interests. However, the Board expressed support for considering addressing the potential inconsistency, by clarifying the accounting for subsequent changes in the measurement of such puts rather than by changing the measurement basis of the non-controlling interest. The Board asked the staff to obtain feedback from the IFRS Interpretations Committee on whether they wanted to be involved in further considering this issue.
During the November Interpretations Committee meeting, the Committee confirmed its willingness to continue consideration of this issue but requested clear instructions from the Board on what matters the Committee should consider.
In obtaining this feedback for the Committee the staff requested the Board consider whether the Committee should address the diversity in accounting for the subsequent measurement of the liability recognised for NCI puts and the scope of instruments to which any amendments should apply. Regarding clarifying IFRSs to address the diversity in practice of accounting for NCI puts, the staff presented the Board with three possible alternatives of where the remeasurement of the liability should be recognised: 1) profit or loss, 2) equity, or 3) other comprehensive income ('OCI'). Regarding the potential scope of any clarifications on subsequent remeasurements, the staff asked the Board to consider whether the Committee should focus on 1) only NCI puts, 2) NCI puts and NCI forwards, or 3) all put options and forward contracts.
One Committee member questioned the presumption that these transactions should fall within the scope of IAS 27 as being transactions with shareholders, arguing instead these are transactions with co-investors of an investment rather than the reporting entity's own shareholders. However other Board members and the staff said that such a view would require an entire reconsideration of the scope of IAS 27.
Some of the Board members questioned whether including OCI as one of the alternatives for the Committee to consider was appropriate, preferring instead to limit the Committee's consideration only to profit or loss or equity. They felt that if the Board was opposed to using OCI then they should not allow the Committee to spend their time developing a recommendation that the Board would ultimately not support. However, other Board members felt that no alternative should be taken off the table and that all possible approaches should be open for the Committee's consideration. One Board member questioned if OCI were to be considered by the Committee, if the Committee had given any consideration to whether OCI should be recycled. The staff responded that the Committee had not previously considered an OCI alternative as their previous efforts were focused on interpreting IFRSs while this new mandate would be more of a research type of role. The Board took an informal poll of where the Board members preferences lie with nine Board members preferring recognition of subsequent changes in the liability in profit or loss and six Board members preferring equity. The Committee will consider the Board's preliminary views in their further consideration of the issue.
In discussing the potential scope of the issue to be considered by the Committee, one Board member questioned if the Committee preferred recognition in profit or loss whether the scope would be relevant. However, his view was that if equity was the route taken then keeping the scope sufficiently narrow would be important. Ten of the Board members expressed preliminary support for the Committee to focus on application to both NCI puts and NCI forwards while four Board members were supportive of limiting only to NCI puts.
The Board finished the discussion by emphasising that they were looking for a pros and cons analysis from the Committee on both issues.
The staff presented the Board with two agenda papers on the topic of macro-hedging: (1) alternatives for developing a business oriented macro-hedging mode and (2) the use of non-GAAP information in the financial reporting of hedging activities.
The staff presented the Board with two agenda papers on the topic of macro-hedging. The first paper discussed alternatives for developing a business oriented macro-hedging model, continuing with the scenario of hedging interest rate risk as discussed in previous Board discussions. The second paper discussed use of non-GAAP information in the financial reporting of hedging activities.
The staff asked the Board to consider both the areas of the financial statements primarily affected by interest rate risk management and what should be the effect of risk management activities on those financial statement areas.
Alternatives for developing a business oriented macro-hedging model
The staff introduced two possibilities for accounting for hedging instruments under a macro hedging model.
The first alternative was titled the 'accrual accounting concept' under which the hedging instrument is accounted for on an accrual basis (either on an amortised cost or full deferral of all fair value changes) consistent with the hedged risk.
The second alternative was titled the 'valuation concept' under which the hedged risk position would be valued to offset the measurement of the hedging instrument.
The staff noted that one of the limitations of the accrual accounting concept is that when the hedging instrument does not perfectly offset the hedged risk the resulting mismatch would not be visible while under the valuation concept would reflect the imperfect offset to be reflected as valuation elements providing increased transparency. Other reasons the staff presented for supporting the valuation concept included 1) that financial institutions commonly identify interest rate risk on the basis of fixed rate financial instruments using present value based methods and 2) it is in line with long standing treatment under IFRSs that derivatives are accounted for at FVTPL.
Based on the staff view that the valuation concept was preferential to the accrual accounting concept, the staff went on to detail two possible approaches for the valuation concept.
The first approach is a 'separate valuation concept' that changes the measurement for elements of the risk position and allows accounting mismatches to be overcome that otherwise arise due to the fair value measurement of the hedging instruments.
The second approach is a 'coverage concept' where the risk position is valued to determine the portion of the fair value change of the hedging instruments that are covered by an offsetting effect and therefore not recognised in profit or loss.
In considering the valuation of the risk position, the staff identified the following eleven steps that would be need to be considered:
Full fair value measurement
Fair value attributable to interest rate risk
Net interest margin as risk management objective
Portfolio as unit of account
Open portfolios to be included
Applying repricing risk for periods rather than days
Multi-dimensional risk objectives
Valuation of floating rate instruments
Counterparty risk of hedging instruments
The Board expressed their general preference for further development of a valuation concept and the changing of hedged risk position over an accrual accounting concept and changing the measurement of the hedging instrument. One Board member felt that if macro hedging were going to be permitted then the full fair value of the instrument being hedged should be presented on the balance sheet. Another Board member expressed concern with a variety of issues in the staff analysis including the fact that the entire premise of the macro hedging was anchored to risk management yet risk management was not defined. He also thought it was fundamental the unit of account be addressed in the model. Another Board member requested the staff present the Board with numerical examples at a future board meeting as it would help to illustrate the topics being discussed. Another Board member requested the staff to better understand financial statement users' expectations with regard to macro hedging as that would also be an important consideration. Another Board member questioned, if the Board were able to agree on a macro hedge accounting model, whether it would be required or optional.
The Board made no decisions during this session, the staff will continue its work in developing a macro hedge accounting model under the valuation approach.
The Board discussed whether anyone planned to dissent from the amendment to IFRS 9 delaying the mandatory effective date to annual periods beginning on or after 1 January 2015.
During the previous day's discussion on the mandatory effective date of IFRS 9, the Board did not discuss whether anyone planned to dissent from the amendment to IFRS 9 delaying the mandatory effective date to annual periods beginning on or after 1 January 2015.
One Board member expressed that she may dissent from the amendment to IFRS 9. Her rationale for opposing the amendments included the fact that she does not believe that a mandatory effective date should be set given the uncertainty with other phases of the project, she does not believe the Board should continue to permit early application in light of the Board's decision to perform a limited review of IFRS 9 and an overall concern with the decision not to require comparative information. No other Board members expressed intent to dissent.
The staff received permission from the Board to proceed with balloting the amendments.
The IASB and FASB discussed the disaggregation of explicit account balances (previously been referred to as the unbundling of non-insurance components).
Disaggregation of explicit account balances
The IASB and FASB met to discuss the disaggregation of explicit account balances. This topic has previously been referred to as the unbundling of non-insurance components.
Prior to opening the debate on this issue, the IASB staff summarised the feedback received from the Insurance Working Group (IWG) received on 24 October 2011, when two representatives of the insurance industry presented their proposals for an other comprehensive income (OCI) solution for insurance accounting. The staff reported that IWG members expressed a preference for assets and liabilities to be measured on a consistent basis - either on a current or cost basis ("current-current" or "cost-cost" approaches). The "current-current" approach seemed to be favoured if something along the lines of the OCI solutions proposed is included in the final IFRS to reduce volatility from accounting mismatches. The staff acknowledged that in spite of the significant support observed among the IWG members, a number of questions on the OCI solutions remain unanswered; in particular on the subject of liability adequacy testing and residual margin unlocking.
Moving to the paper on the explicit account balances accounting, the staff highlighted its recommendation that an account balance was explicit if it was an accumulation of the monetary amount, credited with an explicit return. They also clarified that they would distinguish between unbundling and disaggregating non-insurance components. The disaggregation of an explicit account balance would be for presentation purposes only and the insurer would measure the cash flows of the explicit account balance together with all the other cash flows from the insurance contract under the building blocks approach. Subsequent to the completion of the measurement, it would present any explicit account balance separately. The staff asked their first two questions:
Do the Boards agree that all explicit account balances should be presented separately from the insurance contract liability?
Do the Boards agree with the following criteria for identifying explicit account balances? A contract has an explicit account balance if both of the following conditions are present:
The balance is an accumulation of the monetary amount of transactions between the policyholder and the insurer.
The balance is credited with an explicit return. A return is explicit if it is determined by applying either of the following to the balance: (1) a contractual formula in which the insurer may have the ability to reset the return rate during the life of the contract or (2) an allocation determined directly by the performance of specified assets.
The FASB chair asked for a vote on the first question noting that they would need to assume that the staff proposal would be a de minimis in terms of disaggregation of account balances and conceding that members may wish to expand it. Both Boards agreed; however, some said that other items would need to be considered and explored further. The Boards decided to avoid the second question because of the underlying issues around what should be included and how it should be measured and preferred to consider the staff's other questions. The staff then put forth the next three questions:
Do the Boards agree that all explicit account balances and the related assets should be recognised in an insurer's financial statements and that they should not be offset against each other?
Do the Boards agree that an insurer shall measure explicit account balances and services associated with the explicit account balances, if any, together with the other components of insurance contracts?
Do the Boards agree that explicit account balances should be presented separately from the insurance contracts liability on the face of the statement of financial position (rather than the notes) in an amount equal to the sum of:
the explicit account balance, and
an accrual for all fees and returns though the reporting date?
The staff reiterated that explicit account balances would not be unbundled with a separate measurement from the insurance component of the contract. Instead they would be measured together with the other components of an insurance contract's cash flows. However their disaggregation from the insurance contract carrying amount would result in a separate presentation from it on the face of the statement of financial position. Such an approach would not require the explicit account balances to be discounted. Following inconclusive discussions among Board members, the IASB staff attempted to survey the Boards with some basic questions. When asked if the Board members believe the whole contract should be measured using the building blocks (excluding embedded derivatives, etc. and other items already unbundled), 9 IASB members said they did with 6 members preferring unbundling to disaggregation. However, the IASB members were unanimous that at least disaggregation would be needed in the final IFRS. Finally, the same majority of 9 indicated that they would be comfortable to restrict the disaggregation requirements to explicit account balances only as defined in the staff paper. The other members were prepared to go further in disaggregating deposit components. When asked similar questions, only two FASB members believed that the whole contract should be measured using the building blocks.
The IASB chairman declared that no tentative decisions could be recorded at the end of the session and asked the staff to explore other approaches. He also asked for more concise and thorough papers stating that the length of the paper discussed at this session coupled with the number of questions that remained and needed to be addressed may have been a factor affecting the quality of the debate.
As part of its continuing deliberations surrounding the Exposure Draft Leases, the IASB and FASB discussed: (1) consequential amendments to IFRS 3 'Business Combinations' / Topic 805 'Business Combinations' in the FASB Accounting Standards Codification, (2) transition requirements related to IFRS 3 and Topic 805, (3) consequential amendments to IAS 23 'Borrowing Costs' / Topic 835 'Interest' and (4) transition accounting for secured borrowings.
As part of its continuing deliberations surrounding the Exposure Draft Leases (Leases ED), the Boards discussed: (1) consequential amendments to IFRS 3Business Combinations / Topic 805 Business Combinations in the FASB Accounting Standards Codification, (2) transition requirements related to IFRS 3Business Combinations and Topic 805, (3) consequential amendments to IAS 23Borrowing Costs / Topic 835 Interest and (4) transition accounting for secured borrowings.
In addition to the above discussion topics, the staff noted that it intends to bring staff papers to the December 2011 meeting. However, it currently anticipates completion of redeliberations on the project as part of that meeting.
Consequential amendments for business combinations
The staff discussed the measurement of lease assets and lease liabilities recognised in a business combination. Considering proposals in the Leases ED that lease assets and lease liabilities would be exempt from the fair value measurement requirements in the business combinations guidance (and instead, measured in accordance with the new leases standard), and respondent feedback to the Leases ED that ensued, the staff considered two alternatives of measuring lease assets and liabilities in a business combination (context of lessees); measure the right-of-use asset and liability to make lease payments at the present value of the remaining lease payments, with an adjustment made to the right-of-use asset for any off-market terms (the approach proposed in the Leases ED), or measure both the right-of-use asset and the liability to make lease payments at fair value (consistent with the measurement principle for business combinations).
In presenting its analysis, the staff noted certain advantages to the Leases ED model, including:
the benefits of fair value measurement are achieved without the related costs of fair value measurement by arriving at a net carrying amount for acquired lease contracts that closely approximates the fair value of that contract without undergoing the costs of obtaining a fair value for the individual right-of-use asset and liability to make lease payments.
it is consistent with the lessee model in the leases standard.
However, this approach was also known to have disadvantages in that the business combination literature in IFRSs and US GAAP is based on the premise that fair value provides the most relevant information in the case of business combinations, and thus, the Leases ED proposal contradicts this premise.
Several IASB members questioned the need to establish an exception to IFRS 3; noting that leases are not inherently more complex to value that other items requiring fair valuation in a business combination. Other Board members built on this concern and noted that they did not believe that the Leases ED achieved a relative fair value approach; citing the difference in the measurement basis between initial recognition of leases (in which the significant economic incentive criteria is not considered) as compared to evaluation of renewal options in subsequent periods as example of a valuation difference.
Board members also expressed concern with applying adjustments to the right-of-use asset for 'off-market terms' under the Leases ED approach. Specifically, they noted uncertainty as to the offsetting entry to an adjustment to off-market terms, and questioned the scope of assessing off-market terms. The staff responded that it anticipated the debit / credit to a right-of-use asset adjustment for off-market terms to be applied against goodwill. The staff also clarified that off-market terms would be measured as the difference between the present value of the remaining lease payments at the acquisition date and the present value of the lease payments that the acquirer would expect to pay if, at the acquisition date, it entered into an identical lease for the remaining period.
Based on the above deliberations, both Boards tentatively decided:
If the acquiree is a lessee, the acquirer should recognise a liability to make lease payments and a right-of-use asset. The acquirer should measure: (i) the liability to make lease payments at the present value of future lease payments in accordance with the proposed leases guidance, as if the associated lease contract is a new lease at the acquisition date, and (ii) the right-of-use asset equal to the liability to make lease payments, adjusted for any off-market terms in the lease contract.
If the acquiree is a lessor applying the receivable and residual approach, the acquirer should recognise a lease receivable and a residual asset. The acquirer should measure: (i) the lease receivable at the present value of the future lease payments in accordance with the proposed lease guidance, as if the lease was a new lease at the acquisition date; and (ii) the residual asset as the difference between the fair value of the underlying asset at the acquisition date and the carrying amount of the lease receivable.
If the acquiree is a lessor of investment property or if the acquiree has short-term leases (or acquires a lease which has a remaining lease term at the acquisition date which is considered a short-term lease under the proposed lease standard), the acquirer should apply the guidance in IFRS 3 and Topic 805 relating to acquired operating leases.
The staff noted that respondents to the Leases ED requested that the leases standard contain transition guidance for previously recognised intangible assets or liabilities relating to favourable or unfavourable terms in an operating lease.
The staff recommended that upon transition, a lessee with any previously recognised assets or liabilities related to favourable or unfavourable terms in acquired operating leases derecognise those assets or liabilities and adjust the carrying amount of the right-of-use asset by the amount of any asset or liability derecognised. The recommendation was based on the premise that it is not appropriate to continue to recognise an intangible asset or liability relating to a favourable or unfavourable contract when there is an asset (the right-of-use asset under the Boards' lease proposals) whose value is directly affected by that asset or liability.
One Board member questioned whether the adjustment should go to retained earnings as opposed to the right-of-use asset. However, other Board members preferred the staff's recommendation as providing an answer which is more consistent with full-retrospective application. Without further debate, both Boards tentatively agreed with the recommendation of the staff.
The FASB staff then presented a FASB-only issued related to transition. Under US GAAP, an acquirer of any assets subject to operating leases in which the acquiree is the lessor is required to measure the acquisition date fair value of such acquired assets separately from the lease contract and to record a separate asset or liability for favourable or unfavourable lease terms. The staff did not think it was appropriate that such assets or liabilities related to favourable or unfavourable lease terms continue to be separately recognised as those assets and liabilities would effectively be recognised as a part of the lease receivable under the proposed receivable and residual approach. Therefore, the staff recommended that such assets or liabilities be treated as adjustments to retained earnings on transition. Without debate, the FASB tentatively agreed with the staff recommendation.
The Leases ED proposed removing finance charges in respect of finance leases from the scope of IAS 23. However, constituent outreach questioned if interest expense incurred under a lease could be capitalised, if appropriate, under IAS 23 and Topic 835.
The proposed removal of finance lease charges from the scope of IAS 23 was originally based on the Board's notion that a right-of-use asset itself would never be a qualifying asset. However, constituent outreach revealed examples in which a right-of-use asset would be a qualifying asset (e.g., in the case of leasing a specialised piece of equipment solely to construct a building, the right-of-use asset may be used to construct a qualifying asset). Therefore, the staff recommended that interest expense incurred in a lease be included in the scope of IAS 23 and Topic 835. Without debate, the Boards tentatively agreed with the staff's recommendation.
The staff presented information regarding transition accounting for secured borrowings. This issue is considered particularly relevant given that under existing IFRSs and US GAAP, a lessor would not recognise lease receivables associated with current operating leases, and therefore, could not account for the subsequent transfer of such operating lease receivables as sales. Instead, those transactions would be accounted for as secured borrowings. However, under current proposals, a lessor would recognise lease receivables at transition and present them as lease receivables pledged to lenders, and therefore, could conceivably determine that such pledged receivables meet the sale criteria.
The staff noted that if existing IFRSs and US GAAP for transfers were amended such that a lessor would be required to evaluate, as of the date of transfer, whether the sale criteria were met, the lessor would derecognise the lease receivables at transition. Any resulting gain or loss from derecognition would be recognised in opening retained earnings if the transaction occurred before the earliest comparative period. The staff recommended that a reconsideration of whether the sale criteria were met not be required because it may increase transition complexity and costs. However, the staff supported permitting a lessor to evaluate, as of the date of transfer, whether the sale criteria were met given that it was seen to improve comparability between periods if an entity elected application of transfer accounting retrospectively.
In considering this issue, many Board members expressed concern with allowing entities an 'election' to evaluate whether the sale criteria were met. Specifically, these Board members noted that the election does not promote comparability between reporting entities. Further, they noted the structuring opportunities associated with an election. Specifically, these Board members believed that entity elections would correspond to the favourability of the election on financial results, whereby entities would seek to project gains or bury losses wherever possible.
When put to a vote, 11 IASB members supported the staff's recommendation to permit reconsideration of whether or not the sale recognition criteria were met at the date of transfer, but no FASB members supported the staff's recommendation. Instead, one FASB member suggested that the evaluation of whether or not the sale recognition criteria are met should be considered on a prospective basis. Other FASB members supported this proposal. The IASB was asked to reconsider its previous vote in consideration of the FASB's proposal. In a vote, the IASB tentatively agreed with the proposal set forth by the FASB.
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