The IASB held a meeting on 20 July 2015 to address the consequences of different effective dates of IFRS 9 Financial Instruments (IFRS 9) and the new insurance contracts Standard. At this meeting the IASB took a decision to amend IFRS 4 Insurance Contracts (IFRS 4) to permit an entity to exclude from profit or loss and recognise in other comprehensive income the difference between the amounts that would be recognised in profit or loss in accordance with IFRS 9 and the amounts recognised in profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement (IAS 39), subject to meeting certain criteria.

Addressing the consequences of different effective dates of IFRS 9 and the new insurance contracts Standard: Background (Agenda Paper 2A)

This paper describes the accounting consequences that could arise when an entity that issues contracts within the scope of IFRS 4 applies IFRS 9 together with IFRS 4. No decisions were sought in that paper.

Addressing the consequences of different effective dates of IFRS 9 and the new insurance contracts Standard: IFRS 4 approaches (Agenda Paper 2B)

This paper considers how the accounting consequences could be addressed within the context of IFRS 4, either through existing options in IFRS 4, or by modifying IFRS 4. In particular, the IASB noted that applying IFRS 9 before the new insurance contracts Standard may lead to additional accounting mismatches and temporary volatility in profit or loss. This paper considers the extent to which IFRS 4 already allows an entity to reduce any additional accounting mismatches and temporary volatility in profit or loss that could arise, and whether the IASB should make amendments to IFRS 4 that would enable entities to reduce these effects further.

The methods that are available in IFRS 4 for reducing any additional accounting mismatches and temporary volatility in profit or loss are:

1. shadow accounting, which is a way of adjusting insurance liabilities to reduce accounting mismatches that can arise when unrealised gains and losses on assets held by the entity are recognised in the financial statements but corresponding changes in the measurement of the insurance contract liabilities are not (IFRS 4 paragraph 30);
2. use of current market interest rates in the measurement of insurance liabilities (IFRS 4 paragraph 24); and
3. the ability to change accounting policies for insurance contracts when financial statements are made more relevant and no less reliable or more reliable and no less relevant than before the change (IFRS 4 paragraph 22).

Potential amendments to IFRS 4 are:

1. shadow adjustments for shareholders’ interests in underlying assets;
2. shadow accounting for assets backing non-participating insurance contracts; and
3. apply IFRS 9 with an adjustment which offsets the effect of IFRS 9 on profit or loss.

Staff recommendation

The Staff recommends that IFRS 4 be amended to permit an entity to exclude from profit or loss and recognise in other comprehensive income the difference between the amounts that would be recognised in profit or loss in accordance with IFRS 9 and the amounts recognised in profit or loss in accordance with IAS 39 provided that the entity:

1. issues contracts accounted for under IFRS 4;
2. applies IFRS 9 in conjunction with IFRS 4; and
3. classifies financial assets as fair value through profit or loss in accordance with IFRS 9 when those assets were previously classified at amortised cost or as available-for-sale in accordance with IAS 39.

IASB discussion

One Board member asked whether the recommendation would apply to a conglomerate as a whole, the legal entity or to the insurance business. The Staff noted that there is already a limited scope in the recommendation (only applying to financial assets as fair value through profit or loss in accordance with IFRS 9 when those assets were previously classified at amortised cost or as available-for-sale in accordance with IAS 39), and stated the Staff will consider whether any further restriction is required, and bring this back to the September meeting. Several Board members commented that the scope of the amendment is very important, and that this should not apply to Banks that are subsidiaries of an insurance company.

Several Board members expressed support for option (c) of the potential amendments to IFRS 4. Reasons for this support included it is a transparent solution, it deals with most of the issues raised by constituents, it would be relatively easy to implement, and was both a pragmatic and principles-based solution. One Board member expressed concern that if options (a) and (b) continued to be considered this may extend the re-deliberation process and may lead to unexpected consequences. One Board member noted that one disadvantage of option (c) was that it would require insurers to run systems for IFRS 9 and IAS 39 in parallel. Two Board members expressed a preference for not amending IFRS 4 and to rely on disclosures to explain any additional accounting mismatches and volatility, but both stated that they would nonetheless support option (c).

Tentative decision

IASB Board members voted unanimously in favour of the Staff recommendation.

Next steps

The IASB intend to discuss the scope of amendment to IFRS 4 and whether the effective date of IFRS 9 should be deferred for the insurance industry during its September meeting.

The IASB is expected to consider the remaining technical decisions during the remainder of 2015. In particular, the Staff plans to consider the presentation of interest expense for contracts with participation features, and the differences between the general model and the variable fee approach, and whether those differences can be/need to be eliminated.

The new Standard is expected to be published in 2016, and its mandatory effective date will not be considered until after the IASB has concluded its deliberations.

Agenda Paper 13A: IFRS Taxonomy Due Process

The Senior Technical Manager informed the Board that the purpose of the session was to present the results of the IFRS taxonomy due process trial that had been undertaken as part of the exposure draft (ED) for proposed amendments to IAS 7 Statement of Cash Flows, and obtain the Board’s view on what to recommend to the Due Process Oversight Committee (DPOC) for their October meeting.

The staff recommended aligning the standard-setting with the IFRS taxonomy, i.e. concurrent public consultation and approval for EDs and final standards/amendments. Otherwise, issues identified during the public consultation for the final IFRS taxonomy update could not be considered for the final standard/amendments. Also, the cooperation between technical staff and taxonomy staff would be beneficial for the development of a standard or amendments. Exposing technical documents and taxonomy documents at the same time as EDs and final standard/amendments would mean that the public consultation on the final taxonomy would be removed. To address this a fatal flaw review of the final IFRS Taxonomy Update would be performed at pre-ballot stage of the final standard/amendments by members of the IFRS Taxonomy Consultative Group and other interested parties. This review would also be beneficial for the technical documents as the taxonomy gave a different perspective. The staff emphasised that the taxonomy document would still be separate from the technical document but suggested that on an ED basis, the invitation to comment should also include taxonomy-related questions.

One Board member asked whether this would delay expedited EDs. The Senior Technical Manager replied that a fatal flaw review at pre-ballot stage would give the taxonomy team enough time to review.

The Vice-Chairman expressed concern that a concurrent review with an ED might mean additional work as the final standard/amendments could be significantly different to the ED. He therefore suggested publishing the taxonomy at the same time as the final standard/amendment. The Chairman supported this view.

One Board member said that different groups would review the technical and the taxonomy document. He said that therefore he did not see a huge benefit in simultaneous exposure. The Executive Technical Director replied that a simultaneous exposure could inspire collaboration between those teams which would be beneficial in the staff’s view. The Chairman said that a simultaneous disclosure might be beneficial to reduce the number of exposures but he also said that preparers were not interested in taxonomy. One Board member disagreed and said that if different teams looked at the exposures there would be no complaints about too many exposures. He warned that a simultaneous exposure could be interpreted as the taxonomy being part of the standard. This was supported by another Board member. He also said that in the IAS 7 trial where the ED and the taxonomy update were issued simultaneously, only around 10% answered taxonomy-related questions. For him this sent a clear message from constituents that they did not want to answer taxonomy-related questions at an ED stage. The taxonomy update was like a translation that should be done when the standard/amendment was final. This view was supported by several Board members. One Board member however disagreed and said that feedback on taxonomy should be stimulated by simultaneous exposure. He said it could not be estimated what damage the absence of feedback caused. A fellow Board member added another benefit of the taxonomy. During the deliberation of a standard, Board members might say the same things but mean different things. Translating the draft standard into taxonomy could reveal those differences, but only before the final publication.

A Board member suggested increasing the interaction within the IASB between technical staff and taxonomy staff. He proposed to continue the trial to expose both documents at the same time and defer the decision regarding the due process.

The Senior Technical Manager concluded that the majority agreed with a concurrent fatal flaw review of a final standard/amendment and a publication of the proposed taxonomy update at the time the final standard/amendment is published. The due process would be discussed with the DPOC in October.

Narrow Scope Amendment: IAS 12 Income Taxes – Recognition of Deferred Tax Assets for Unrealised Losses

Due process steps followed

This session was devoted to covering due process matters in relation to the proposed narrow-scope amendments to IAS 12 Income Taxes to clarify the guidance on the recognition of deferred tax assets for unrealised losses on debt instruments measured at fair value.  The IASB Technical Manager explained that there had been some revisions to the exposure draft but that the revisions were not fundamental and responded to the feedback received, and the staff believed that the amendments should be finalised without re-exposure.

In response to a question raised by an IASB member, the Director of Implementation Activities confirmed that the staff had taken the comment letter analysis to the Interpretations Committee and the revised staff recommendations between the exposure draft and final amendments were consistent with the recommendations of the Interpretations Committee.

All fourteen IASB members agreed that the proposed amendments to IAS 12 should be finalised without re-exposure; they agreed with a mandatory effective date for the final amendments of 1 January 2017, and confirmed that they were satisfied that all due process steps required to date that related to the publication of the final amendments had been complied with.  No IASB members indicated that they intended to dissent to the final amendments.

Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture

Deferral of the effective date of the September 2014 Amendment

In September 2014, the IASB published an amendment to IAS 28 Investments in Associates and Joint Ventures and IFRS 10 Consolidated Financial Statements to clarify that a full gain is recognised when a transfer to an associate or joint venture involves a business, and a partial gain or loss is recognised if the asset transferred does not contain a business.  The gain or loss that is not recognised is eliminated against the cost of the investment.  At its February 2015 meeting, the IASB gave the staff permission to ballot a further narrow-scope amendment that would clarify in greater detail some matters linked to the September 2014 Amendment, and also included a proposal to defer the effective date of the September 2014 Amendment until the effective date of the February 2015 pre-ballot.  At its June 2015 meeting, the IASB decided that the issues addressed in the February 2015 pre-ballot draft should instead be addressed as part of the research project on equity accounting, and also decided to propose a deferral of the effective date of the September 2014 Amendment.

The Senior Technical Manager introduced the session and explained that the IASB staff recommended that the IASB defer the effective date of the September 2014 Amendment to IFRS 10 and IAS 28 indefinitely, with early application continuing to be permitted, and allowing entities that had already applied the Amendment to continue to do so.

An IASB member noted that he supported the staff recommendation, but highlighted the fact that this would result in a situation where there were two versions of the Standard in existence, and that it would be important for entities to clearly disclose whether or not they had early adopted the Amendment to enable comparability in the market.

Another IASB member highlighted the fact that the September 2014 Amendment had come about due to diversity in practice, and accordingly, if an entity had not early adopted the Amendment it could be following the accounting prescribed in the Amendment anyway – and suggested that an entity should be disclosing which accounting they were applying rather than whether or not they had early adopted the Amendment.

A further IASB member noted that it was important that the IASB made it clear in its decision how the September 2014 Amendment would be dealt with in the future if the research resulted in no amendments to IAS 28 being proposed or finalised.

Another IASB member expressed concern with having two versions of the Standard in existence for a potentially long period of time, and suggested that a better solution to this issue might be to essentially provide a free option in the Standard for entities to choose which accounting they applied, rather than having indefinite suspension of the Amendment and two versions of the Standard in existence.  The Director of Implementation Activities noted that although this would be cleaner from a process perspective, the September 2014 Amendment affected a number of paragraphs and to convert this into an option would require a lot of rewriting which would be difficult to achieve before the effective date of the Amendment which was 1 January 2016.

Another IASB member also expressed concern with having two versions of the Standard in existence, and suggested that because the Amendment came about to resolve an issue of diversity in practice, the Amendment did not need to remain in existence to support those entities that had already adopted it.  The IASB staff responded noting that with the recommended approach, the staff were just trying to create a ‘holding pattern’.  A further IASB member expressed similar concerns, and suggested that because there was already diversity in practice, the IASB should not allow any further early adoption of the September 2014 Amendment from the date of publication of the amendment to defer the effective date of the September 2014 Amendment, noting that if the IASB effectively authorised two different Standards this could create structuring opportunities.

The IASB observed that because this decision would mean that the IASB was effectively saying that the changes to the Standard were not mandatory, if an entity had already adopted the Amendment they could choose to cease applying it, and noted that this needed to be clearly communicated.

Ten of the fourteen IASB members voted in favour of deferring the effective date of the September 2014 Amendment to IFRS 10 and IAS 28 indefinitely, with early application continuing to be permitted, and allowing entities that had already applied the Amendment to continue to do so.  The IASB agreed to issue the narrow-scope exposure draft with a comment period of 60 days.

IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations

Next steps for a series of IFRS 5-related issues

This session was devoted to discussing the next steps regarding a series of issues relating to IFRS 5 that had been discussed by the IFRS Interpretations Committee but not resolved.  In the agenda paper, the IASB staff had recommended to the IASB that the issues should be divided into those to be considered in the short term, and those to be considered in the medium to longer term; and for the latter, a reference should be made to these issues in the Request for Views in the forthcoming agenda consultation for a potential broad-scope project on IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.  For the items identified to be considered in the short term, the staff recommended that Issues 5 and 9 should be considered for possible tentative agenda decision items, and Issue 11 should be addressed through an annual improvement process.

Overall approach

An IASB member noted that she agreed with the staff recommendation to divide the unresolved IFRS 5-related issues between those to be considered in the short term and those to be considered in the medium to longer term as long as the issues were discreet; and cautioned that the IASB needed to ensure that in doing so it considered whether issues were interrelated with anything else.

Another IASB member also supported the short term / medium to longer term approach but expressed concerns about the IASB placing too much reliance on the results of the agenda consultation, noting that not everything could be a high priority project and the IASB ran the risk that it came out as a low priority project but the issues would still exist.  He questioned what would happen if it was considered to be a low priority project.  The Director of Implementation Activities responded noting that the issues would have to remain there as they were not issues the Interpretations Committee could pick up unless the IASB asked the Interpretations Committee to undertake a broader project, outside of the nature of the narrow-scope projects the Interpretations Committee usually undertook.

Several IASB members noted that they did not believe the IFRS 5 issues warranted a specific question in the agenda consultation, but suggested that the IASB should just highlight that it was there so people could offer a comment if they wanted to.  They also noted that a number of the issues were fundamental questions and highlighted the fact that this was a converged project with the FASB, and even though the IFRS and US GAAP standards are not completely converged, stressed the importance of talking to the FASB in trying to resolve the issues.  One of the IASB members also noted that it was important to convey in the agenda consultation that this project would be a big use of the IASB’s time, so people could factor that into account when providing a response.

All IASB members agreed that the unresolved IFRS 5-related issues should be divided up between those to be considered in the short term and those to be considered in the medium to longer term, and that for the medium to longer term issues, a specific question should not be asked about these issues in the agenda consultation, but it would be useful to refer to these issues so that people would be mindful of these issues when they were responding to the general questions.

Issues to be considered in the short term

An IASB member questioned whether the three short term issues could be bundled into a single annual improvement, expressing his preference for bundling issues relating to the same Standard into a single document, and noting that from a process perspective it would be more efficient than asking people to look at the same Standard three times.  He also added that annual improvements gave better clarity and force to a Standard than agenda decisions.  Another IASB member pointed out that in paragraph 21 of the agenda paper it was noted that with respect to Issues 5 and 9, the Interpretations Committee almost tentatively concluded that sufficient guidance existed, and questioned how these issues would be bundled into an annual improvement, noting that for an annual improvement the IASB had to admit that there was not sufficient guidance in the Standard and a clarification was necessary to change the Standard.  Another IASB member suggested this could be done through the Basis for Conclusions – by only proposing an amendment with respect to Issue 11, and explaining in the Basis for Conclusions why the IASB did not believe it needed to propose an amendment in respect of Issues 5 and 9 – because the Standard was sufficiently clear.  This approach would avoid making unnecessary changes to the Standard.  A further IASB member questioned how visible the issues would be in a Basis for Conclusions to annual improvements, and whether they would get the visibility the IASB would like them to have.

Eleven of the fourteen IASB members agreed that Issues 5 and 9 should be considered by the Interpretations Committee for possible tentative agenda decision items.

Issue 11 was discussed in conjunction with agenda paper 12D on IFRS 12.

IFRS 12 Disclosure Of Interests In Other Entities

Proposal for an annual improvement: clarification of the scope of the disclosure requirements in IFRS 12

This session was devoted to discussing the applicability of the disclosure requirements in IFRS 12 Disclosure of Interests in Other Entities to a subsidiary classified as held for sale.  The IASB staff recommended that the IASB should clarify the scope of IFRS 12 by specifying that the disclosure requirements in IFRS 12, except for those in B10-B16, applied to interests that are classified as held for sale or discontinued operations; that the amendment be made through the 2014-2016 cycle of Annual Improvements; and require the retrospective application of the proposed amendment, with an option to apply it early.

An IASB member noted that she believed that this was all but an editorial correction and that it was unfortunate that the IASB had ended up in this position, questioning why the IASB would have drafted B10- B16 so carefully if it did not think the rest of the Standard was applicable otherwise.  She acknowledged there was tension between IFRS 5 and IFRS 12, and that if the IASB felt an amendment was needed to get to the right outcome, then this should be made.  However, she noted that her underlying concern was whether other situations existed where it needed to be specifically stated that the requirement also applied if something was held for sale and that by making this amendment it could result in issues across the other standards that unless the IASB had specifically stated that the requirements applied to interests classified as held for sale or discontinued operations, there was an open question.

Another IASB member acknowledged that the concern expressed by the previous IASB member was a valid concern, but believed the IASB should do an annual improvement at this time to remove any uncertainty.  She noted that she did not believe the IASB needed to permit early adoption because this was a requirement entities could have always applied, and there was nothing to stop them making the disclosure once it had been pointed out that it was required.  She noted that the concerns expressed by the previous IASB member came from the fact that IFRS 5 explicitly stated that ‘no other disclosure requirements apply unless specifically stated’, and asked the staff to look at the standards that had been published since to see if there were any other clarifications that were needed, and whether the blanket exemption should exist in IFRS 5 – noting that it forced the IASB to consider whether there were any disclosures for discontinued operations every time they were working on a new Standard.

A further IASB member noted that he agreed with the comments of the other IASB members, and noted that the problem with IFRS 12 was that it had been partially excluded, and noted that it would have been better to partially include it as this would have interacted better with IFRS 5.  He questioned whether there were any other standards where the disclosures were either partially included or excluded, and suggested that this should be checked.  Another IASB member noted that the only reason this was done in IFRS 12 was because it was in response to a comment letter.

All IASB members agreed that the scope of IFRS 12 should be clarified by specifying that the disclosure requirements in IFRS 12, except for those in paragraphs B10-B16, do apply to interests that are classified as held for sale or discontinued operations – and that it should be very clear that the IASB considers this to be a clarification.  All IASB members also agreed that such a clarification should be made through the Annual Improvement ED, and that the proposed amendment should be applied retrospectively.

No IASB members indicated that they intended to dissent to the proposed amendments to be included in the Annual Improvements ED.

All IASB members agreed that the IASB should retain its decision to publish the Annual Improvement ED with a comment period of 90 days; agreed with the proposed timetable for publication and gave the staff permission to start the balloting process, including the additional proposed amendment; and all IASB members confirmed that they were satisfied that all due process steps had been complied with.

The Board discussed an illustrative example presented by the staff to address the timing of revenue and cost recognition for rate regulated entities. There were no decisions made. The staff will continue to develop the proposal based on the comments raised by the Board.

[Note: To facilitate the understanding of this summary, please see the illustrative example discussed by the Board, available on the IASB's website.]

The Project manager introduced Agenda Paper 9: Rate-regulated Activities — Revenue requirement— Illustrative example. She explained the tripartite relationship in a rate regulated environment and referred to paragraph 11 of the agenda paper. She said that that in defined rate regulation, the regulatory agreement between the entity and the rate regulator obliged the entity to carry out specified activities in exchange for the right to receive a determinable amount of consideration. The revenue requirement reflected the determinable amount of consideration to which the entity was entitled. The amount of consideration included both a right to recover specified costs plus a right to make a return on the entity’s investments in the assets used to provide the regulated goods or services. The regulatory agreement would include a formula for the calculation of the revenue requirement.  She said that the role of the regulator was not just to protect the customer, but also to provide stability and quality, there were also wider political issues, including identifying what the customers could afford, then the regulator would  establish activities that an entity would need to do to achieve those objectives. In some cases there could be a mismatch between the timing of billing to the customer and the activities performed by the entity.

She said that in May the Board decided to work on an accounting model to reflect the relationship between the regulator and the entity.

She referred to the numerical example included in appendix 1 to be discussed by the Board. The staff did not propose any specific accounting treatment; rather, the staff suggested options for different accounting treatment (adjusting revenue or costs, adjusting both or no adjustments at all) to reflect the mismatch. She also said that the staff discussed the example with the Accounting Standards Advisory Forum “ASAF”; she noted mixed views regarding the alternative solutions although there was more support for deferring revenue recognition rather than advancing revenue recognition. She then opened the discussion to the Board.

There were mixed views expressed by the Board. Some Board members indicated that the main decision should be whether it was necessary or not to make adjustments. Some Board members expressed preferences for adjusting revenue because it would be more reasonable to explain deferral of revenue. There was no agreement for deferring recognition of cost.

In terms of presentation there was more support for presenting the adjustment separately from revenue or cost because it would be necessary to show that this adjustment reflects a situation derived from a regulatory relationship. There was also general support for the additional line item being presented on the face of the income statement with supplemental disclosure in the notes.

There were a few Board members who disagreed with the concept of adjusting revenue. One Board member said that a regulated entity should not have any special treatment compared to other entities. He said that banks, for example, were regulated and their equity would be different if there were no regulations; however, there were no accounting requirements for banks to adjust for the effects of their regulation. Another Board member responded that regulated entities were different because they made decisions about investments, billing etc. based on regulations and also indicated that the regulatory framework forced entities to transfer revenue from one period to another.

Some Board members pointed out that it would be necessary to have an appropriate framework to evaluate which accounting treatment would be appropriate. For example applying the Conceptual Framework to determine whether there were additional assets or liabilities created. One Board member indicated that it would also be important to determine who the primary users of the regulated entities financial statements were. He said that since those companies are capital intensive, it would be reasonably to believe that loan providers and equity holders were the main primary users.

In relation to the specific issue of revenue, one Board member indicated that it would be important to determine first whether this relationship had any bearing on the financial performance of the entity. He asked whether the regulatory framework forced an entity to transfer goods or services which went beyond the requirements of IFRS 15 Revenue from Contracts with Customers. Another Board member pointed out that it would be necessary to explore for each obligation that the entity was being required to perform whether the obligation was met over time or at a point in time. There were also concerns with using the concept of performance obligation which was very specific to IFRS 15 while the regulatory environment required entities to assume obligations which were not defined in IFRS 15.

The Chairman concluded that there was support for adjusting revenue and the staff would work on that assumption. The Project manager indicated that that they would also work with the recommendation to present the adjustment as a separate line item, and in the articulation of the concepts to avoid using concepts that were specific to IFRS 15.

Agenda Paper 4A: Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging — Due process

The Visiting Fellow informed the Board that the first part of the session concerned the due process for the project on dynamic risk management (DRM). The staff had noted significantly conflicting messages in the responses to the discussion paper (DP) issued in 2014, particularly related to the objectives of the project. The staff believed that the insights the IASB had gathered from the public consultation on the DP were not necessarily sufficient to move to an exposure draft (ED). The staff therefore suggested leaving the project on the research agenda and issuing a second DP. The staff also recommended that the Board did not close the possibility to move directly to an ED.

The Chairman expressed disagreement with leaving the possibility for an immediate ED open. A Board member recommended clarifying the purpose of the project. He said that the DP clarified the problem but the Board was still struggling to find a solution. Another Board member said that the interaction with the financial statements presentation project, now renamed the primary financial statements project, should be considered.

The Board agreed with the staff recommendation to leave the project on the research agenda.

Agenda Paper 4B: Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging – The process to identify information needs

The staff had been asked at the May meeting to examine how the information needs of constituents concerning DRM activities could be addressed through disclosures. The objective of the agenda paper was to set up a process to identify those information needs. They had examined in the paper what useful information concerned, whose information needs were the focus, why the information was needed and what sources for the information could be. The Senior Technical Manager asked the IASB for their input on the process and whether they would like comparability between entities that undertook DRM activities and those that did not.

One Board member opened the discussion by saying that the IASB would have to decide whether the focus should be narrow and on hedge accounting or whether it should be broader and on disclosures. She believed that the constituents had asked for the former. Although she preferred the latter focus, she expressed concern that it was unclear whether the Board had a mandate for that. Another Board member agreed that the focus should be on disclosures as this was the only way, in his view, to make the interest rate risk of an entity more transparent. He said that the scope and the objective of the project should be defined, however this would be a very big project and he thought it was not be the right time to undertake this project as IFRS 9 had just been finalised.  The Technical Director understood those concerns and said that the project needed to find the appropriate entry point. Possible entry points could be DRM activities or interest rate risk exposure in general. But even if the latter were the entry point, this would not mean that the entire risk management should be disclosed. A Board member replied that this task would be difficult as DRM activities required different disclosures than micro hedging or proxy hedging. The Chairman said that using general interest rate risk exposure as an entry point would be too broad as every company was exposed to interest rate risks. One Board member warned that the IASB should not align the disclosures to the very extensive information required by regulators. A fellow Board member said that the limit between financial statement risk disclosures and business risk disclosures should be considered. The Technical Director acknowledged an overlap between those two kinds of risks but said that the focus was on interest rate risk disclosures as IFRS 9 addressed other risks appropriately.

One Board member said that the problem with the portfolio risk approach (PRA) was that the Board had tried to solve too many problems in one go. He suggested extracting the problems and dealing with each of them separately. He also said that the revaluation approach suggested by the DP might not be the right solution. He also said that behaviouralisation with regard to core deposits was actually a form of proxy hedge accounting and therefore not a good solution either. Several Board members agreed with that. The Technical Director also agreed but said that all of the problems were linked and they needed to be under a common umbrella. One Board member said that it would, for example, be useful information to know why companies entered into fixed-for-variable interest rate swaps although variable loans were on the decline with falling interest rates.

A Board member said that he had been under the impression that the Board decided to discuss disclosures first and then think about recognition and measurement. A fellow Board member suggested waiting to see what the Basel Committee would propose as they considered the same issues as the IASB.

When taking a vote, all Board members agreed that the comparability between those entities who undertook DRM and those who did not should be considered. None of the Board members objected to the proposed process to identify information needs.

Comment letter summary, due process and permission to ballot

In this session the IASB Technical Manager provided a summary of the feedback received on the Exposure Draft Effective Date of IFRS 15 published by the IASB in May 2015; and the IASB members voted on whether to finalise the deferral of the effective date of IFRS 15 by one year to 1 January 2018.

One IASB member observed that feedback had been received on the Exposure Draft encouraging the IASB to set a formula for determining the implementation lead-time when deciding on the effective date of standards.  He highlighted the difficulties associated with setting a formula that would apply to all standards.  He noted that IFRS 15 was a Standard that involved (up to millions of) day to day transactions, and therefore, preparers would need more lead-time than if they were implementing a Standard that only affected transactions that occurred once a year; and noted that he disagreed with setting a formula, but suggested that the IASB should work on this area a bit more.

The IASB agreed to finalise the amendment to IFRS 15 so that entities would be required to apply IFRS 15 for annual reporting periods beginning on or after 1 January 2018, with early application continuing to be permitted.  All IASB members voted in favour. 

The IASB members confirmed that they were satisfied that all due process requirements had been met, and gave the IASB staff permission to begin the balloting process to amend the effective date of IFRS 15.

No IASB members indicated that they planned to dissent from the publication of the amendment to IFRS 15.

The Technical Manager introduced the session, and noted that this was an Education Session on the research project on Provisions, Contingent Liabilities and Contingent Assets, and that the purpose of the research project was to gather evidence to enable the IASB to make a decision on whether to take on an active project to amend IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and what the scope of such a project should be.  She noted that any project to amend IAS 37 would rely heavily on the Conceptual Framework and because of that, noted that the IASB would need to wait until the revised Conceptual Framework had been finalised before reaching preliminary views on IAS 37.  She noted that the staff wanted to discuss the issue with the IASB at this time for the following reasons:

1. To give the IASB a chance to offer any suggestions where the staff needed to perform further work before the IASB could reach preliminary views;
2. To give people thinking of commenting on the Conceptual Framework exposure draft an opportunity to see some of the implications of some of the proposals and how they might be applied by the IASB; and
3. To help those planning to contribute to the Agenda Consultation in assessing what priority this project should have compared to others.

She asked if the IASB members had any general comments on the project before taking the IASB through the six topics set out in agenda paper 14B.

One IASB member stressed the importance of being clear about the scope of the project, noting the failure of the previous project on this topic was that the IASB members at the time tried to expand the project from a traditional IAS 37 project into a large project on non-financial liabilities, and emphasised the need to confirm the scope to make discussions easier.

Another IASB member noted that in addition to finalising the Conceptual Framework prior to starting on an IAS 37 project, she also believed that the IASB should wait until insurance was finalised because of the crossover, and noted that having insurance finalised would provide an important reference point for thinking about some of the issues about uncertain liabilities.  She also noted that waiting for insurance to be finalised would not have much of an impact from a timing perspective.

She also highlighted that if the IASB was to go ahead with a more limited project on IAS 37 looking at problematic areas, people needed to understand that this did not mean that the IASB could only look at such areas and leave the rest of the Standard unconsidered.  She noted that the IASB still needed to look at the whole Standard to ensure it hung together.  She noted this as a caution for people responding to the Agenda Consultation.

The Technical Manager introduced each topic and asked the IASB members whether they had any questions or comments in relation to each topic.

Topic 1 – Identifying Liabilities

There were no comments by IASB members.

Topic 2 – Recognition Criteria

The Technical Manager highlighted that IAS 37 was unique in that it had three recognition criteria for liabilities, and in particular, it was unusual because it required that it was probable, which is defined as more likely than not that there will be an outflow of resources required to settle the present obligation.  She noted that last time the IASB had looked at IAS 37; the IASB members had raised a concern about the lack of completeness this criterion resulted in, especially when other Standards that were being written at the time did not have the probable outflows criterion.  She further noted that the IASB had proposed to remove it but people strongly objected to this because they felt that the probable outflows criterion was serving a useful purpose in filtering out those liabilities for which the cost of recognition exceeded the benefits.  She further noted that the staff had recently spoken to the Capital Markets Advisory Committee (CMAC) on this issue, and the feedback they had received was that they did not think liabilities should be recognised until outflows were probable. 

An IASB member questioned the reasons CMAC (representing users of financial statements) gave for not wanting the additional information.  The Technical Director responded, noting that CMAC’s feeling was that the amount was very uncertain and there was a need for disclosure anyway, there were some doubts as to whether recognition really added much to the disclosure, and further, they would not want to see a full amount recognised if there was relatively low probability of the outflow.  The Vice-Chairman noted that when he was performing outreach in Australia on this issue, the feedback received was, although it was a blunt tool (either the whole amount is recognised or none), there was a fairly broad acceptance because it was clear and not costly to apply.

There was discussion around differences between the recognition criteria in IAS 37 and US GAAP, with the IASB observing that conceptually the approach to recognising a liability was more or less the same, with the exception of entities defending lawsuits, where ‘probable’ is interpreted under US GAAP as a much higher threshold than the ‘more likely than not’ threshold in IFRS.  Several IASB members suggested the IASB should do some research into whether, even though people interpreted the IFRS and US GAAP guidance having different thresholds, in reality practice was similar, which could mean people were not applying IFRS as they should.  Another IASB member noted that the issue came from the American Bar Association (defence part) who had said that the language in IAS 37 created a lower threshold for the recognition of an obligation, which then potentially prejudiced their clients’ defences in litigation matters, and noted that the threshold was higher in US GAAP so entities did not have to book these obligations.  He pointed out that it did not seem that IFRS reporting entities in the US were having any issues, which could indicate that they were applying more of a US GAAP threshold in that marketplace, and perhaps even internationally.  He also suggested that paragraph 92 of IAS 37 could be trumping recognition thresholds; however, another IASB noted that this exemption (for rare cases when disclosing information would be expected to prejudice seriously the position of the entity in a dispute with another party) only applied to disclosure, not recognition. 

There were concerns expressed about how the staff would go about performing the research into the practice applied by IFRS reporters given it was a very judgmental assessment, and would be difficult to make an assessment unless identical liabilities were being looked at, which would be difficult to achieve given the nature of litigation.  One IASB member pointed out that global banks (domiciled in a number of different jurisdictions) have had major misconduct problems which have resulted in litigation and are all negotiating with the justice department, and suggested the IASB could talk to enough people to get a sense of whether the same threshold was being applied by US GAAP and IFRS reporters. 

The Technical Director noted that he was cautious about going out and talking to people unless the IASB had a clear sense that it might lead somewhere – as it could get people excited for no reason.  An IASB member noted that this was a major focus for the investor community, and it was important for the IASB to know whether its recognition requirements were being overridden by prejudices, and therefore, entities were not recognising liabilities when they should.  Another IASB member noted that from her experience in practice, she had not seen anyone fail to provide information because of commercial prejudice.

Topic 3 – Measurement

With respect to risk adjustments, one IASB member pointed out that the guidance in IAS 37 in this area was old and that it had been discussed in more recent Standards, and suggested that it would make sense to update to reflect the best/most recent thinking if the IASB was to do something on measurement.  He also noted that paragraph 43 of IAS 37 contained a reference to the word “prudence”, which was inconsistent with where the IASB was going in the Conceptual Framework ED, and noted that it was dangerous to allow it to stay there.  He noted that prudence and risk adjustments were completely different things and that they were being confused here.

Another IASB member noted that from an agenda consultation perspective, the IASB should make people aware that there could be a big project on IAS 37, and if the IASB did not move forward with this, there was the potential for a second much narrower project.  She also highlighted the need for the IASB to make it clear that a more limited project could address a group of practical problems that existed which had not been addressed in the past because of a preference to hold off and address the issues as part of a larger project.  She noted that the IASB could use the agenda consultation to gain an understanding of the importance people attached to the IASB undertaking a more limited project if the IASB was going to reject or give low priority to a larger project.

The IASB member noted the importance of making it clear whether the measurement of provisions included or excluded profit margin.  She noted that while insurance was a fulfilment concept, it included a profit margin and so if the IASB were to merely state alignment with the fulfilment notion for IAS 37 liabilities, it could send a confusing message to people.

Another IASB member noted that he believed the concept of risk adjustments was overdone and that best estimates would be a better approach, noting the need for the IASB to make application practical and not overly complex for preparers who did not have access to specialists.

With respect to non-performance risk, a further IASB member noted that he believed the IASB could exclude non-performance risk in general circumstances, but not in extreme circumstances where it would be obvious an entity could not compensate everyone.  He noted the IASB would need to define the scope/cases for when non-performance could be applied.

Topic 4 – Onerous Contracts

There were no comments by IASB members.

Topic 5 – Reimbursement Rights and Contingent Assets

There was discussion around the different thresholds for contingent assets and contingent liabilities, and how this would be impacted by the proposed symmetrical Conceptual Framework definitions of assets and liabilities.  The Technical Manager noted that no one had suggested the threshold for contingent assets should be lowered to be symmetrical with contingent liabilities, and the Technical Director added that it was important to consider the concept of relevance – and whether relevant information would be provided, noting that in the Basis for Conclusions it was not explicit that the IASB proposed either to systematically require symmetry or systematically require asymmetry.  He also noted that with a lot of contingent assets, there was a large degree of existence uncertainty at play as well and emphasised the fact that it was important to look at the individual facts and circumstances.  An IASB member argued that, in theory, having a single principle (i.e. relevance) essentially suggested that one should arrive at a symmetrical outcome, except in situations where unique facts and circumstances existed.  There was discussion around why users found information on contingent assets less relevant than information on contingent liabilities, with one IASB member suggesting that it reflected the fact that investors were going to be more cautious about incorporating upside types of scenarios in their analyses than downside ones.  There was discussion about the reimbursement rights guidance, and the fact that the virtually certain criteria was something that was a problem in practice today.  The Technical Director noted that the guidance on reimbursement rights was written as it was today as it had been inherited from the predecessor to IAS 37.  An IASB member noted that he believed the IASB should strongly consider relaxing the virtually certain criteria for specified events.

Topic 6 – Other Matters: Scope, Terminology And Liability Definition

With respect to scope, one IASB member noted that there was a significant gap in IFRS regarding the disclosure of contractual commitments, noting that it was a very material area of interest for any investor in any company, and that he believed it should be part of the scope.  He observed that in the Conceptual Framework, where the IASB talked about relevance and measurement uncertainty as one of the considerations in determining whether something was capable of making a difference, the IASB had said that there would be situations where disclosure was an important substitute, and noted that there was a nexus between that concept and what the IASB was trying to achieve here.

The IASB member agreed that the terminology section needed some work, and noted specifically that the term “contingent liability” was difficult to understand as an entity either had a liability or it did not.  He noted that an entity could have loss contingencies, but not contingent liabilities – and noted that this should be made clearer.  He also noted that the proposed section in the Conceptual Framework on executory contracts needed a lot more clarity, and noted that the lack of required disclosure of these arrangements was a gaping hole in IFRS.

Another IASB member noted that in the analysis in agenda paper 14C with respect to the Conceptual Framework ED versus IAS 37, the agenda paper appeared to equate “economic compulsion” with “no realistic alternative” and cautioned against viewing the concepts as equivalent.  She noted that if the IASB was to do a project on IAS 37, it might be a good idea to look at how the Conceptual Framework discussion of “no realistic alternative” related to the concept of economic compulsion.

The IASB did not make any decisions at this meeting.

Agenda paper 6: Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value (Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13) — Project next steps

The Project manager introduced the agenda paper. She said that the objective of the session was to discuss possible directions for the project following the feedback received in the comment letters. In particular, the agenda paper outlined the matters covered in questions 2 and 3 of the ED — fair value measurement of investments in subsidiaries, joint ventures and associates that were quoted in an active market (quoted investments) and the measurement of the recoverable amount of cash-generating units (CGUs) on the basis of fair value less costs of disposal when they corresponded to entities that were quoted in an active market (quoted CGUs).

The ED proposed that the fair value measurement of investments in subsidiaries, joint ventures and associates quoted in an active market should be the product of the quoted price (P) multiplied by the quantity of financial instruments held (Q), or P × Q, without adjustments. She said that the majority of respondents did not agree with the proposals in the ED. Many respondents were of the view that the measurement should be aligned with the unit of account, because this was a fundamental principle embedded in IFRS 13. Measuring quoted investments at fair value using P × Q would be a departure from this principle, because P represented the quoted price for an individual financial instrument and not for the investment as a whole. Accordingly, the staff had explored three possible approaches detailed below:

• Option A: Build a deeper understanding of the proposed measurement, taking into consideration the input from different sources (i.e. perform research) and derive from this exercise recommendations to the IASB.
• Option B: Postpone research on the proposed measurement to the Post-implementation Review (PIR) of IFRS 13.
• Option C: Undertake research on the proposed measurement and feed the results of the research into the PIR of IFRS 13.

She said that the staff proposed option c) for the following reasons:

1. it would ensure that work on the measurement of quoted investments and quoted CGUs at fair value would continue;
2. any results from the work undertaken would be fed into the PIR of IFRS 13, which would translate in time savings while undertaking that review; and
3. the PIR would still provide a good platform for obtaining valuable information about the use of P × Q for the purposes of building sound conclusions for the IASB.

She then opened the discussion to the Board.

The majority of Board members expressed strong support for option A, instead of option C. The reasons provided were:

1. the IASB had already conducted an outreach process and it did not seem reasonable to wait until the PIR was completed to finalise this issue;
2. the IASB should conduct research activities to understand the broad issues and the reasons behind the disagreement revealed by the comment letters,
3. the main issue to be explored would be whether P x Q provided a good answer for measuring investments in quoted subsidiaries for investment entities; and
4. there was disagreement that there could be other IFRS 13 issues related to the main issue under discussion.

On the other hand, a few Board members supported the staff recommendation. The reasons expressed for the support were related to the fact that there could be more issues related to IFRS 13 which at this stage were not known. The PIR process could help to identify more issues and avoid duplications. Another concern expressed related to the fact that users of financial statements had a preference for the use of P x Q while the feedback from preparers and auditors showed a different result.

The Project manager indicated that the reason for their support of option C was that at this stage they did not understand how pervasive the issue was; she said that even though respondents disagreed with their proposal the staff did not think that there were too many entities with investments in quoted subsidiaries; accordingly, they believed the PIR process would help to better understand the broad implications of the issue.

The Chairman called a vote and Option A was supported by 10 Board members.

Agenda paper 15: 2015 Agenda Consultation — Permission to Publish the Request for Views

The Project manager introduced the agenda paper. She said that the paper provided the IASB with an update on the 2015 Agenda Consultation process and asked the IASB if it granted permission to publish the Request for Views: 2015 Agenda Consultation.

The request for views would include:

1. an introduction, including discussion of the time period covered by the agenda consultation process and the link with the Trustees’ Review of Structure and Effectiveness;
2. a description of the Board’s evidence-informed approach to standard-setting;
3. an explanation of how the Board’s current agenda had developed since 2011;
4. a summary of the Board’s current agenda, including a discussion of the Board capacity for change and how the current research programme had developed;
5. an update on the Board’s  other main areas of activity – Standard-level projects, the Conceptual Framework, the Disclosure Initiative and Implementation and maintenance projects; and
6. a discussion of the time needed to complete projects compared with a triennial agenda consultation cycle.

Descriptions of the projects under the research programme would form an appendix to the RFV.

No comments or questions were raised by the Board members. The Board tentatively decided to approve the proposals by the staff and granted permission to publish RFV 2015 Agenda Consultation in August 2015 with a comment period of at least 120 days.

Agenda Paper 5A: Relevance of identified features to particular assessments of financial position and financial performance

The Technical Manager opened the session by informing the Board that the agenda paper focused on the assessments users might make. The staff had identified two different types of assessments of financial position (assessments A and B) and two types of assessments of financial performance (assessments X and Y).

The Board was not asked to select or prioritise any assessments at this point. The Technical Manager only asked for a discussion of the assessments.

Assessment A was an assessment of the extent to which the entity was expected to have the economic resources required to meet its obligations as and when they fell due. The main feature relevant to assessment A was the timing of the required settlement. The type and amount of economic resources required were secondary features.

Assessment B was an assessment of the extent to which an entity had sufficient economic resources to satisfy the total claims against the entity at a point in time. The primary feature of this assessment was the amount of resources required. The timing of required settlement was irrelevant. The assessment distinguished between claims that were independent of the availability of the entity’s actual resources and those that were not.

The classification was different depending on which assessment should be satisfied.

One Board member found the approach interesting and suggested to continue on this basis, however he warned that it should not be forgotten what the reason behind this analysis was. Another Board member said that the probability of events occurring needed to be taken into account. This could in turn put emphasis on different relevant features. The Technical Manager agreed and said that, for example, the probability of whether an instrument is settled in cash or in shares was relevant.

Several Board members touched on shares redeemable at fair value. One Board member asked what would happen if the share price went up solely on the basis of internally-generated goodwill. In this case, there would not be enough liquidity for redemption. He agreed with the staff’s conclusion that this would be equity under assessment B as it should not be remeasured. If it were classified as a liability, the remeasurement would increase the liability without a corresponding increase in assets. This could however be addressed by recognition of the remeasurement in OCI.

One Board member referred to the analysis of cumulative preference shares under assessment B, which resulted in a classification as liabilities. She agreed that it was technically an obligation. However this assessment would change if economic compulsion was taken into account. As long as the entity did not go into liquidation, there was no obligation to pay for those instruments. The Technical Manager replied that not just one assessment should be selected. He said that regardless of the classification, information needed to be presented.

A Board member agreed with the staff conclusion that under assessment B claims that specified an amount independent of the availability of the entity’s resources should be liabilities. She said that the question was whether instruments needed to be remeasured or not. The ensuing question was where the remeasurement should go (e.g, P&L, OCI, etc.).

One Board member asked which assessment was more important. The Technical Manager replied that it depended on the circumstances.

The Technical Manager went on to the assessments made on the financial performance.

Assessment X was an assessment of the components of changes in economic resources, other than changes that resulted from issuing claims, or distribution from settling claims.

Assessment Y was a comparison of the returns on the entity’s economic resources to the promised returns of the entity’s claims.

One Board member agreed that shares redeemable at fair value specified a return that was dependent on the actual return on the entity’s economic resources and higher priority claims. She wondered however where the changes in fair value should be recognised as OCI was also a part of performance.

Another Board member urged the staff to focus early in the project on whether adding features to instruments changed their classification in a binary model. He said that this was vital for the project to have more traction.

No further comments were made.

Agenda Paper 15: 2015 Agenda Consultation: Permission to publish the Request for Views

The Senior Technical Manager introduced the agenda paper that provided an update on the 2015 agenda consultation process and asked the IASB if it granted permission to publish the request for views (RFV). She recommended a significant overlap between the comment period for the agenda consultation RFV and the Trustees’ public consultation on the IFRS Foundation’s structure and effectiveness to enable stakeholders to comment on both processes. The agenda paper also contained a summary of the outreach conducted as well as the contents of the RFV. She asked the IASB whether they agreed with the process and if they granted permission to publish the RFV. The IASB agreed with both.