The goal of the paper is 'to outline the improvements to existing IFRS that are needed to facilitate mandatory adoption of IFRS in all major capital markets'. The plan proposed in the paper is based on the following two assumptions:
- For capital markets not yet adopting IFRSs, which would include the United States, the target date of mandatory adoption is no later than 2013.
- A 'quiet period' of at least a year before that date is provided.
If the plan is agreed, an updated Memorandum of Understanding between the two Boards will be published. The agenda paper notes:
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The IASB agenda priorities should limit the possibility that a company adopting IFRS in 2013 would undergo two changes in a relatively short period (the first change being the adoption of IFRSs and the second change being a major revision of an IFRS standard). Thus, work completed by 2011 should be designed to remain in place for three or more years after completion; any other changes to IFRS during the 3-year period after 2011 should be modest. Under this view:
- Significant, fundamental weaknesses in existing IFRS need to be prioritised for completion by mid-2011.
- Worthwhile improvements to IFRS can be deferred beyond 2011 if the existing IFRS and US standards are similar (leasing would be an example of this).
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The agenda paper concludes that achieving a mid-2011 completion goal will require revisions to scopes and objectives of some projects. The paper states: 'For their part the IASB directors intend to make the projects in this memorandum their primary staffing priority. If necessary, they will remove staff from other projects to serve the projects addressed in this memorandum and will not staff other projects unless and until staff become available.'
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Here are some of the specific proposals in the agenda paper as they relate to IASB projects:
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Projects that address areas where fundamental improvement in IFRS and possibly US GAAP are needed:
- Revenue recognition. The Boards should develop a standard based on the 'customer consideration approach' to measuring the performance obligation, by which the amount paid or payable by the customer is allocated to the components of a transaction. The alternative is a 'fair value model' by which the performance obligation is measured at its current fair value.
- Fair value measurement. The IASB project would be limited to defining exit price identically to Statement 157; defining a comparable entry price; amending existing IFRSa to replace the various measurement terms used with either entry price or exit price based on the intent of the existing standards; and providing disclosures about entry and exit price measurements. Project would not address measurement concepts.
- Consolidation, including special purpose entities. Develop a consolidation standard based on effective control.
- Derecognition. Publish a staff research paper and, in October 2008, decide on an accelerated approach to replacing the derecognition portions of IAS 39.
Projects that address areas for which there is a significant need for improvement in both IFRS and FASB standards:
- Financial statement presentation. Project would not try to resolve (a) whether a sub-total of net income/profit or loss should be reported, (b) which items should be included or excluded in determining that sub-total, or (c) recycling. Instead, limit the focus to presentation on the face of the financial statements and a limited number of disclosures directly related to presentation issues. Thus, current IFRS-US GAAP differences regarding which items are included in profit or loss and recycling would continue.
- Postretirement benefits. The IASB would continue its work on phase 1 of the project – limited amendments to IAS 19 (see our News Story of 27 March 2008 regarding the recent IASB Discussion Paper). Consider dropping cash balance plans from the current project. Suspend work on phase 2 (comprehensive employee benefits standard).
- Leasing. Address only lessee accounting and focus on an approach that results in on-balance-sheet presentation of rights inherent in leases – the right to use an asset. Do not address definition of a lease or contingent rentals.
- Financial instruments. The IASB would not pursue full fair value measurement for all financial instruments. "The obstacles that exist lie in the area of presentation and the Boards' willingness to deal with the political outcry that would no doubt accompany such a move." Possibly, improvements to hedge accounting or measurement classification could be made.
- Liabilities and equity. High priority project. IASB should consider FASB's narrow view of equity proposed in its 30 Nov 2007 discussin paper (see our News Story of 5 Dec 2007. Under FASB's 'basic ownership' approach, only the instrument that represents the lowest residual interest in an entity is classified as equity. All other instruments represent either liabilities or assets. Also to be considered: Would a standard based on the narrow view of equity preserve the solution to puttable shares recently published by the IASB?
Projects that address areas in which IFRSs currently do not provide guidance:
- Insurance. Unlikely to be completed by 2011 ('significant political opposition and demands for field testing').
- Extractive industries. Cannot be completed by 2011.
Conceptual Framework:
- Conceptual Framework. The agenda paper presents divided views on the Framework project but does not make a recommendation. One view is that between now and 2011 IASB and FASB should devote their resources to standards-level projects. The other view is that work on measurement and a disclosure framework could be completed by 2011.
Short-term Convergence Projects:
- Earnings per share. The agenda paper notes divided views on whether this current project should be completed now or await progress on liabilities and equity.
- Joint ventures. Focus only on eliminating proportionate consolidation.
- Income taxes. IASB should complete its current project to reconsider IAS 12. While the IASB's upcoming exposure draft does not take the same approach on uncertain tax positions as did the FASB, it is nonetheless important to US adoption that IFRSs address this issue.
- Other projects. Defer work on impairment, research and development, and fair value option.
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