1998: Excerpt From International Accounting Standard-Setting: A Vision for the Future (FASB Report, 1998)
During many months of discussions on international strategic policy, the FASB and the FAF reached general agreement on a number of key points that underlie much of what is expressed in this report, including the following:
- The FASB has a leadership role to play in the evolution of the international accounting system and is guided by the belief that, ideally, the ultimate outcome would be the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting.
- Until that ideal outcome is achieved, the FASB's objective for participating in the international accounting standard-setting process is to increase international comparability while maintaining high-quality accounting standards in the United States. To achieve that objective, the FASB is willing to commit the required resources to the related goals of (1) ensuring that international accounting standards are of high quality and (2) increasing the convergence and quality of the accounting standards used in different nations.
- The FASB believes that the establishment of a quality international accounting standard-setting structure and process is key to the long-term success and development of international accounting standards. The FASB will participate in establishing that structure and process. The FASB accepts that an increasing and substantial level of resources might be required to support and influence the establishment of that organization.
- The FASB acknowledges that, if a quality international accounting standard-setting structure and process emerges, the FASB's commitment and desire to participate in a meaningful way in the operations of that standard setter may ultimately lead to structural and procedural changes to the FASB as well as potential changes in its national role.
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2000: From the 2000 Annual Report of the Financial Accounting Foundation
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International
The global capital markets are growing increasingly interdependent at an accelerated pace. This is a positive development for all economies and one that will support capital-raising activities and global growth. The Foundation, the FASB and the International Accounting Standards Committee (IASC) have long recognized that in order for international capital markets to function properly, a single set of high-quality, international accounting standards must exist.
The agreement reached in May of 2000 to restructure the IASC was a historic event. I am pleased to report that the Foundation was an important participant in this process through the hard
work of Foundation Trustee David Ruder and FASB member Tony Cope. David and Tony were members of the Strategy Working Party, which was charged with the responsibility of developing a restructuring plan. Over a period of about two-and-one-half years, this team of 12 completed its task in early 2000, finalizing a blueprint for a newly formed IASC.
The restructuring of the IASC – renamed the International Accounting Standards Board (IASB) – was accomplished through an independent group of Trustees chaired by former U.S. Federal Reserve Chairman Paul Volcker. In January of 2001, the Trustees announced the appointment of a
14-member IASB to be chaired by Sir David Tweedie, former Chairman of the U.K. Accounting Standards Board. That body, comprised of leading accounting professionals from several countries,
will work toward development of a single set of high-quality global accounting standards. Among those appointed to the IASB were Tony Cope and Jim Leisenring of the FASB.
As part of that recent announcement, two of the Foundation's Trustees were appointed Trustees of the IASB, David Ruder and John Biggs. I am confident that David and John will provide the same level of commitment to the IASB that they have continued to demonstrate at the Foundation. We support their participation and look forward to a close relationship with the IASB.
For our part, the Foundation and the FASB welcomed the restructuring result as a key element in the establishment of a fully independent international accounting standard setter that will
work toward providing the essential convergence among national IASB standard setters as we rapidly approach a global capital market system. We were pleased that the restructuring was consistent with the long-held views of the FAF and the FASB as expressed in the latter's 1999 report International Accounting Standard Setting: A Vision for the Future.
Manuel H. Johnson,
Chairman and President
Financial Accounting Foundation
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October 2002: IASB and FASB Agreement on Convergence
In October 2002, the International Accounting Standards Board and the US Financial Accounting Standards Board jointly issued a memorandum of understanding, marking a significant step toward formalising their commitment to the convergence of US and international accounting standards. The IASB and the FASB presented the agreement to the chairs of leading national standard setters at a two-day meeting in London on 28-29 October 2002.
The two Boards had reached agreement on the terms in the memorandum of understanding at their joint meeting in Norwalk, Connecticut, USA in September 2002. For that reason, the memorandum of understanding is sometimes referred to as the "Norwalk Agreement".
Link to FASB website Policy and Background on Convergence with IASB.
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December 2002: Except from Address by FASB Chairman Robert H. Herz, 12 December 2002, at the AICPA 2002 National Conference on Current SEC Developments
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As I noted, a more principles-based approach could help in the drive for international convergence between the U.S. and other parts of the world. Clearly, the growth of cross-border investing and capital flows and a growing endorsement of international standards in many parts of the world mean that, on the one hand, the U.S. cannot go it alone in terms of development of accounting standards and, on the other hand, the development of international standards across the major capital markets of the world requires that the U.S. be a very active participant in the process, for there can be no truly international accounting standards if the largest capital market in the world, the U.S., is not part of their development. Accordingly, we have been dedicating significant resources at various levels to this effort, including developing procedures and protocols used not only by the FASB but also by the IASB and other major national standards setters in working together, working with the IASB on several major joint projects including business combinations, revenue recognition, and reporting on financial performance, and closely monitoring the progress of the IASB on other key projects. Moreover, recently we have also agreed to try on the best-efforts basis to align our agendas and finally, and very importantly, we have agreed to undertake a specific project with the IASB and with the help and support of the SEC staff aimed at accelerating the convergence process by trying to eliminate or narrow some of the areas of difference between current U.S. and international standards. Since there are literally hundreds of differences between U.S. GAAP and international standards, realistically, this effort will still be ongoing, well, beyond 2005 when Europe adopts international standards en masse. But we need to set this process in motion now if we are to get to the Promised Land.
For the FASB, this is a major area of activity that is logistically challenging and that necessitates increases in both our people and monetary resources, but we need to do it. I think the trick is to do it in a way that does not significantly delay or dilute our efforts to improve U.S. standards and that, by working with our international colleagues, results in better standards that can be applied both here and across the major capital markets of the world. And while most people seem to support international convergence, we all recognize that it won't be easy to achieve because by definition it will involve choices between existing standards, and thus changes to both U.S. GAAP and international standards are inevitable.
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February 2006: Updated IASB-FASB Convergence Agreement
On 27 February 2006, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) published a Memorandum of Understanding (MOU) that reaffirms the boards' shared objective of developing high quality, common accounting standards for use in the world's capital markets. The MOU is a further elaboration of the objectives and principles first described in an MOU published in October 2002.
While the new document does not represent a change in the boards' convergence work programme, it does reflect the context of the US SEC's 'roadmap' for the removal of the reconciliation requirement for non-US companies that use IFRSs and are registered in the United States. It also reflects the work undertaken by the Committee of European Securities Regulators (CESR) to identify areas for improvement of accounting standards.
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Both the FASB and the IASB note that removing the current reconciliation requirements will
require continued progress on the boards' convergence programme. Accordingly, the MOU
sets out milestones that the FASB and the IASB believe are achievable...
The boards agreed that trying to eliminate differences between standards that are both in need
of significant improvement is not the best use of resources. Instead, new common standards
should be developed. Consistent with that principle, convergence work will continue to
proceed on the following two tracks:
- First, the boards will reach a conclusion about whether major differences in focused
areas should be eliminated through one or more short-term standard-setting projects,
and, if so, the goal is to complete or substantially complete work in those areas by
2008.
- Second, the FASB and the IASB will seek to make continued progress in other areas
identified by both boards where accounting practices under US GAAP and IFRSs are
regarded as candidates for improvement.
The goal by 2008 is to reach a conclusion about whether major differences in the following
few focused areas should be eliminated through one or more short-term standard-setting
projects and, if so, to complete or substantially complete work in those areas.
Topics for short-term convergence include:
| To be examined by the FASB | To be examined by the IASB |
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| Fair value option* | Borrowing costs |
| Impairment (jointly with the IASB) | Impairment (jointly with the FASB) |
| Income tax (jointly with the IASB) | Income tax (jointly with the FASB) |
| Investment properties** | Government grants |
| Research and development | Joint ventures |
| Subsequent events | Segment reporting |
FASB Notes:
*Already on FASB's active agenda
** To be considered by the FASB as part of the fair value option project |
IASB Note:
Topics are part of the IASB's existing short-term convergence project except for impairment, which will be added to that project |
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December 2007: FAF proposes changes to FASB structure
On 18 December 2007, the Trustees of the US Financial Accounting Foundation (FAF), under which the Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB) operate, published for comment proposals for significant changes to the FAF-FASB-GASB structure. The proposals are designed to make FASB's decision-making more efficient and to strengthen the oversight role of the FAF. Click to download the FAF Proposed Changes to Oversight, Structure, and Operations of the FAF, FASB, and GASB (PDF 83k). Comment deadline is 10 February 2008. Among the proposed changes are the following:
| Summary of Main Proposals by the FAF Trustees:
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Financial Accounting Standards Board (FASB):
- Reduce the size of the FASB to five members, from seven currently.
- Retain the current simple majority FASB voting requirement.
- Require that FASB have at least one member from each of four backgrounds: investing, auditing, preparing financial statements, and accounting education. The fifth member could be from any background. Currently there is no required mix.
- Give the FASB chair the authority to add issues to FASB's agenda. Currently the full Board must decide. The FAF would have an oversight role in agenda setting.
Financial Accounting Foundation (FAF):
- Strengthen the governance and oversight activities of the FAF trustees as to the efficiency and effectiveness of the standard-setting process. Trustees propose taking a more active oversight role in such areas as due process, agenda setting, solicitation of public comment, consideration of comments, and the post-isuance evaluation of the
effectiveness and efficiency of standards adopted by FASB.
- Give the power to choose FAF trustees to the trustees themselves, replacing the current system by which eight non-government trustees are selected by six specified organisations subject only to rejection by the trustees on grounds a nominee is 'not suitable'.
- Change FAF trustees' maximum terms of service from two three-year terms to one five-year term.
- Change the number of FAF trustees from 16 currently to a range between 14 and 18.
- Require that the next chairman of the FAF devote between one-third and one-half time to the job.
Governmental Accounting Standards Board (GASB):
- Retain the current size, term length, and composition of the GASB.
- Secure a stable mandatory funding source for the GASB.
- Give the GASB chair the authority to set GASB's technical agenda. Currently the full Board must decide. The FAF would have an oversight role in agenda setting.
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With regard to the future role of FASB and IFRSs, the FAF proposal notes:
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Recent commitments by many countries to use International Financial Reporting Standards (IFRSs) have opened a broad-ranging debate on issues related to accounting standards convergence and globalization. At its core, this debate must include a realistic assessment of how IFRS will work in actual application across the world and what contributions can be made by the FAF and FASB to the quality and consistency of those standards. The outcome of this debate will affect the future role, structure, and influence of the FAF and FASB on the global standard-setting process. However, regardless of the outcome, the FASB likely will continue to have a meaningful role in how international standards are set, and it may have continuing responsibility for setting standards for private enterprises and not-for-profit organizations in the United States.
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December 2007: FASB chairman's views on a global reporting system
On 10 December 2007, Robert H Herz, Chairman of the US Financial Accounting Standards Board, made a presentation titled Towards a Global Reporting System: Where Are We and Where Are We Going? (PDF 70k). In his remarks, Mr Herz posed a series of questions:
- Why the movement towards global financial reporting?
- But what exactly is the end goal?
- What are the key elements of such a system?
- Where are we now?
- So what's needed to achieve a global reporting system?
- What's needed internationally?
- What's needed in the US?
- OK, so where should we head?
In response to the last question (where should we head), Mr Herz identified 'three possible endgames':
- 'Mutual recognition' only
- 'Mutual recognition' plus 'two-GAAP' system for US registrants
- A single set of high-quality international standards for registrants (and perhaps others)
Mr Herz stated that:
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"FASB and FAF support option 3 (single set of high-quality international standards).... We advocate a well planned 'improve and adopt' approach to transitioning the US to IFRSs – improvement through continued joint projects between IASB and FASB in major areas, and directly adopt other parts of IFRS." |
February 2008: FASB trustees approve major structural changes
On 26 February 2008, the Board of Trustees of the Financial Accounting Foundation (FAF) approved major changes to the oversight, structure, and operations of the FAF and its two standard-setting Boards, the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). The changes include reducing the size of FASB from seven to five members effective 1 July 2008 and vesting in the chairs of the two standards boards the authority to establish board agendas. Click for:
| Key Structural Changes Approved by the FAF Board of Trustees
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Financial Accounting Foundation (FAF)
- Expand the number and breadth of investors, accounting, business, financial, and government organisations and entities invited to nominate FAF Trustees with the understanding that final authority for all appointments rests solely with the discretion of the Board of Trustees. The manner of implementation of this open nomination process will be determined pending further discussions among the Trustees and interested constituencies.
- Change the current term of Trustees from one three-year term with a possible second three-year term to one five-year term.
- Change the size of the Board of Trustees from a fixed 16 Trustees to a flexible range of 14 to 18 Trustees, the size to be fixed by Board resolution from time to time.
- Increase the Trustee governance activities, including its level of formal review, analysis, and oversight of the data and materials regularly provided by FASB, FASAC, GASB and GASAC.
Financial Accounting Standards Board (FASB)
- Reduce the size of the FASB from seven members to five, effective 1 July 2008.
- Retain the FASB simple majority voting requirement.
- Reaffirm the need for investor participation on the FASB by broadening the current by-law requirement that FASB members possess investment experience.
- Change the FASB's agenda-setting process to a 'leadership agenda process' whereby the FASB chair is vested with the authority, following appropriate consultation, to set the FASB project plans, agenda, and priority of projects.
Governmental Accounting Standards Board (GASB)
- Secure a stable and permanent funding source for the GASB.
- Retain the current size (seven members), term length (five years renewable once), and composition of the GASB.
- Change the GASB's agenda-setting process to a 'leadership agenda process' whereby the GASB chair is vested with the authority, following appropriate consultation, to set the GASB project plans, agenda, and priority of projects.
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April 2008: FASB invites comments on IASB's financial instruments paper
On 1 April 2008, the US Financial Accounting Standards Board issued an Invitation to Comment (ITC) on Reducing Complexity in Reporting Financial Instruments. The ITC incorproates the IASB's Discussion Paper on Reducing Complexity in Reporting Financial Instruments, which the IASB issued for comment on 20 March 2008. FASB's ITC asks whether there is a need for the FASB to add a project aimed at simplifying and improving standards for measurement of financial instruments and, if so, what kind of projects or approaches should be considered. It also requests feedback on the issues in the IASB's Discussion Paper. FASB requests comments by 19 September 2008 (same comment deadline as the IASB). Click for:
April 2008: IASB and FASB plan completion of MOU projects
An agenda paper for the joint meeting of the IASB and the FASB on 21 and 22 April 2008 proposes a plan for completion of a number of projects that are part of the convergence agenda set out in the February 2006 Memorandum of Understanding between the two boards. 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:
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 prioritized 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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April 2008: Update on the status of the Memorandum of Understanding Between the IASB and FASB, including current priorities
At their joint meeting on 21-22 April 2008 in London, the IASB and the FASB considered the Recommendations of a Working Group (PDF 81k) of IASB and FASB Board members and staff tasked by the chairmen of the respective Boards with reviewing the 2006 Memorandum of Understanding (PDF 68k) and suggesting changes to it.
Wayne Upton (IASB staff) introduced the session noting that the group's objective was to 'outline the improvements to existing IFRS that are needed to facilitate mandatory adoption of IFRS in all major capital markets.' In developing their recommendations, the group assumed that (a) for capital markets not yet adopting IFRSs, the target date of mandatory adoption is no later than 2013; and (b) a 'quiet period' of at least a year before that date is provided. Therefore, the timescale that the MOU could realistically contemplate is the progress that could be made between April 2008 and around mid-2011.
The 30 June 2011 date was also a constraint: it represents a date on which there is a considerable IASB member turnover (including the Chairman and Messrs McGregor and Yamada). Another constraint was that a project to amend a standard should be undertaken only when it would result in a 'substantive improvement' in financial reporting.
Sue Bielstein (FASB staff) noted that, to succeed, the Boards needed to establish almost immediately both their objective in amending a standard and the scope that that objective implied. The meeting then turned to discuss projects identified by the working group.
Revenue recognition
The working group assigned a 'high priority' to this project and recommended that the Boards proceed on the basis of the 'customer consideration' model to be included in the forthcoming Discussion Paper (DP), because that that model has sufficient support (or the least opposition). In particular, the Boards would need to address the following areas:
- (a) The definition of a performance obligation.
- (b) When/how performance obligations are satisfied/extinguished.
- (c) When, if ever, the initial amount assigned to a performance obligation should change for reasons other than performance.
- (d) The accounting for conditional obligations such as rights of return.
- (e) Disclosure.
- (f) Testing the conclusions reached against existing practice problems.
An IASB member noted that he was fundamentally opposed to the approach being taken to the MOU. He noted that the working group's memorandum was prepared without involving any of the project teams and, as such, without their views on whether the working group's suggestions were capable of being achieved. He thought that the concept of trying to issue as many final documents as was implied by the memorandum was totally unrealistic – both in terms of what the Boards could realistically accomplish and what constituents would accept. In addition, the Board member was highly critical of the implied consequence of the working group's approach: that there would be inconsistent treatment of similar items. This was especially critical for performance obligations.
Addressing the revenue recognition project proposals directly, several IASB members were prepared to accept the working group's recommendations, but did not want the significant work and study that had gone into the forthcoming DP to be lost: constituents needed to be given a clear idea of where the Boards were likely to go. In particular, the measurement (and re-measurement) of performance obligations was critical. These IASB members were expecting that they would develop an approach to measurement that was a hybrid of the 'customer consideration' and the 'asset and liability' models, but that performance obligations would be re-measured.
A FASB member noted that the recommendation that the conclusions reached must be field tested was critical to the successful implementation and completion of the project.
The IASB Chairman noted that the IASB would issue the Revenue Discussion Paper and that the project would continue to be in the MOU.
Fair value measurement guidance
The working group recommends that this project should be completed by mid-2011 by limiting its objective to the following:
- (a) Amending existing IFRS to replace the various measurement terms used with either entry price or exit price based on the intent of the existing standard.
- (b) Defining exit price identically to FAS 157.
- (c) Defining a comparable entry price, and providing disclosures about entry and exit price measurements.
The staff noted that the IASB would not have the time to re-debate or re-tune things in FAS 157; nor would they be able to discuss 'when' fair value should be the measurement requirement: that is, the existing IFRS requirements as to when fair value is used would remain. In any event, the disclosures about 'Level 3' measurements contained in FAS 157 would be useful and would represent an improvement to IFRS reporting.
IASB members agreed, but noted that they should be able to debate areas of confusion or areas in which FAS 157 had proved difficult to apply.
Consolidation policy
There was a fair degree of confusion about this topic. Both the FASB and IASB are under high-level pressure to 'do something' on consolidation and other standards as a result of the current economic situation. IASB members were worried that the progress made by the IASB staff on control and consolidation policy should not be lost in the rush to respond to the Financial Stability Forum (IASB) and the President's Working Group on Financial Markets (FASB).
The staff noted that the 'effective control' model would need additional guidance when it was applied to special purpose entities and that some of the principles underlying FIN 46R might be adapted to good effect.
Derecognition
The staff noted that significant progress toward a replacement standard has been made in the form of a staff research paper developed in consultation with a team of Board advisors. More work is needed, however, primarily to address securitisation issues. As such, the staff was not in a position to make specific recommendations and discussion was deferred to October 2008.
Financial statement presentation
The staff noted that this project remains a priority, but that the scope should be limited to presentation on the face of the primary financial statements and related note disclosure. The staff clarified that the consequences of this limitation would be that tax allocation would not be addressed in detail, and that the current 'net of tax' display of items in Other Comprehensive Income, discontinued operations, and equity items would remain as the only items presented net of tax for the moment.
An IASB member was concerned that the Board had gone on record, in papers and in Board debates, as saying that financial statement presentation would 'solve' many of the contentious problems in other projects – for example, post-employment benefits and insurance.
Two IASB members suggested that the re-scoped project would not result in a 'substantive improvement' in financial reporting and should not be included in the revised MOU. Two FASB members supported this view.
Post-employment benefits
The staff noted that the IASB had issued a discussion paper on phase 1 of its project focused on measuring cash balance plans, elimination of 'smoothing' devices (the Corridor), and income statement presentation of changes in plan assets and benefit obligations. The DP offers alternatives for the display of the change in the pension benefit obligation but no preferred view. The staff noted that they did not think there was sufficient Board member support for a single charge to profit and loss, but they also thought that there was not sufficient support for any one of the OCI approaches either.
Board members questioned the 'challenging and problematic' aspects of the project: were the challenges technical or push-back from constituents? The staff noted that some challenges are technical, but some are resistance to change. An IASB member asked what the push-back would be like if the IASB was unable to fix the presentation issue. The IASB chairman noted that the IASB would then 'be in trouble.'
The staff acknowledged that some matters included in the DP might need to be removed from any subsequent ED (for instance, cash balance plans).
Lease accounting
The staff noted that significant lessee obligations are excluded from corporate balance sheets, distorting financial ratios and complicating financial analysis for investors and lessor accounting raises many derecognition and revenue recognition issues. However, because lessor accounting appears to be a relative lower priority for investors and some Board members, the staff was suggesting that any project be targeted to lessee accounting only.
The staff recommendation would leave the classification of finance leases in IAS 17 unchanged. What were previously operating leases would then be reflected as the acquisition of an intangible asset: the right-of-use inherent in the lease, matched by the obligation to pay for that right. The current accounting treatment for contingent rentals would remain.
IASB members in particular were unhappy with leaving contingent rentals unchanged, especially given IFRS 3 (2008)'s requirements for contingent consideration. More generally, the Boards were uncomfortable to proceed without a proper idea of the scope of the project they were being asked to accept. However, on a poll, only one IASB and one FASB member were opposed to the project.
Financial Instruments
This was one of the two projects for which the working group was unable to make a recommendation at this time. In their opinion, there is no single solution that would have broad-based Board support. The use of fair value for all financial instruments was the most obvious answer, but it did not command sufficient support in either the FASB or IASB to be viable.
In the meantime, the IASB has a Discussion Paper and the FASB has an Invitation to Comment on Reducing Complexity in Reporting Financial Instruments. The FASB also has a forthcoming ED on hedging. The working group thought it premature to make a recommendation until the comments on both have been received, as those comments might inform the Boards' decisions.
The working group will revert to the Boards in October 2008.
Liabilities and Equity
The staff noted that FASB members had some deeply-held views on the liabilities/equity split, and the FASB Preliminary Views paper issued in 2007 reflected those views. It was the recommendation of the working group that the IASB concentrate its deliberations on two of the models included in the FASB document: the pure ownership and the ownership-settlement models. The working group did not think that there was sufficient support for the reassessed expected outcomes approach to make it a viable alternative.
An IASB member noted that one of the problems for the IASB was its own Framework's discussion of liabilities. An easy fix would be to state that a liability could be settled (extinguished) by the delivery of assets or the entity's own equity. There were other problems – for example perpetual preferred shares – but these were not insurmountable.
Another IASB member thought that the current bifurcation of compound instruments required by IAS 32 reflected economic reality and provided useful information. Other IASB members were also content to leave puttable shares in equity, provided the put feature is at fair value.
Short-term convergence
Earnings per Share: The working group sought guidance from the Boards as to whether this topic should be subsumed into the Liabilities/Equity project or whether the work done by the IASB, which is nearly ready for release as an ED, should be allowed to continue. Some were strongly of the view that it should be wrapped into the Liabilities/Equity project, but a majority of the IASB were of the view that there was the opportunity to make significant improvements and simplifications to financial reporting by issuing the ED.
Joint Arrangements and Income Taxes: The Board noted that the IASB should complete its project to replace IAS 31 Joint Ventures by the end of 2008. With respect to Income Taxes, the forthcoming IASB ED would be exposed as a 'replacement' for FAS 109; however, the issue of the status of FIN 48 on uncertain tax positions was still open. An IASB member expressed concern that the IASB's conclusions on uncertain tax positions were operational.
Investment Property: The FASB chairman noted that the US real estate investment trust organisation has asked FASB to adopt IAS 40, but to make fair value mandatory. That would work in the US, but the IASB had the problem that deep and liquid markets for real estate, and the necessary professional infrastructure, are not present in many emerging economies.
Cross-cutting issues
The staff suggested that the most critical 'cross-cutting issue' facing the IASB is how to define, recognise, and measure liabilities – issues the Board is currently facing in its project to revise IAS 37. Staff noted that the IASB has suffered because it has no common understanding of the definition of a liability and consequently no agreement on recognition and measurement. A Board member commented that this assessment was cynical but realistic. However, it tended to obscure the fact that, even when the IASB had a common understanding on some issues within the Liabilities project, Board members still came to different conclusions. Another IASB member expressed frustration that each time they discussed liabilities, they were prone to reach different answers, depending on the context of the discussion: insurance, pensions, financial liabilities, or non-financial liabilities. Part of the tension is that the IASB needs to identify clearly the recognition and derecognition issues and to separate those from measurement.
Wayne Upton (IASB staff) volunteered to prepare a memorandum that would attempt to tie together the various issues that continually trouble the IASB. However, he noted that subsequent measurement would be challenging – even given general agreement on the initial measurement attribute. He noted that it was highly unlikely that the Board would agree that all liabilities should be (re)measured at fair value. Board members were concerned that there was no common understanding of what they mean when they say 'a liability is remeasured' – what the measurement attribute should be. Any substantive progress on that issue would be a significant step forward.
Next Steps
The Boards agreed the general strategy summarised in the Working Group's Memorandum (PDF 81k), with limited dissents. The next steps would be to revise and reissue the 2006 Memorandum of Understanding, and for the staff to prepare and present at the June 2008 IASB meeting (and a June FASB meeting) a revised project timetable.
IASB members queried the effect on non-MOU projects of the IASB's decision. The IASB Chairman assured IASB members that non-MOU projects, including SMEs and Insurance, would be unaffected. The staff resources being devoted to those projects would not be diverted to MOU projects.
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