During the February and March 2013 meetings the IASB was informed that questions had been raised about the unit of account for investments in subsidiaries, joint ventures and associates that are within the scope of IFRS 10, IAS 27 and IAS 28. That is because the measurement requirements for such investments in those standards refer to IFRS 9 which refers to fair value measurement of individual financial statements.  In particular, the question was whether those references to IFRS 9 should be understood to:

1. refer only to the measurement basis of the investments (for example, fair value through profit or loss); or
2. also prescribe the unit of account of those investments (i.e. the individual financial instruments that make up the investment).

At the March 2013 meeting, the IASB tentatively decided that the unit of account for investments in subsidiaries, joint ventures and associates was the investment as a whole rather than the individual instruments that make up the investment.  However, the IASB also tentatively decided that the fair value measurement of an investment composed of financial instruments quoted in an active market should be the product of the quoted price of the financial instrument (P) multiplied by the quantity (Q) of the instrument (i.e. PxQ).

At this meeting the Board set out to discuss:

• whether IFRS 10, IAS 27 and IAS 28 need to be amended to clarify the unit of account for investments;
• whether additional disclosure where required as a result of the decisions taken; and
• what transitional disclosures are needed and what the effective date will be.

The Staff view was that the reference to IFRS 9 was intended to ensure that entities use the requirements in IFRS 9 when:

• measuring investments at fair value through profit or loss, including the accounting for items such as any differences between the fair value at initial recognition and the transaction price; and
• accounting for such investments in the entity’s separate financial statements (for example, either by measuring those investments at fair value through profit or loss or by making an irrevocable election at initial recognition to present subsequent changes in the fair value of those investments in other comprehensive income).

The Staff recommended not to amend IFRS 10, IAS 27 and IAS 28.  Instead, the staff proposed to amend IFRS 13 to clarify that investments composed of instruments quotes in an active market should be measured at PxQ.

The Board did not agree with the Staff recommendation.  The Board tentatively decided that it should amend IFRS 10, IAS 27 and IAS 28 making it clear in each of those standards that when an investment is measured at fair value and that investment is composed of financial instruments quoted in an active market, the investment should be measured at PxQ.  The Board also indicated that it would include cross references to IFRS 13 to indicate how the guidance in IFRS 13 relates to their decision. The Board decided that it would rather amend IFRS 10, IAS 27 and IAS 28 to keep the guidance that relate to investment entities and its measurement together in the relevant standards with cross references to IFRS 13.

During the IASB’s discussions in February and March 2013, no additional disclosures were proposed.  The Staff did not recommend providing additional disclosures given that IFRS 13 already has extensive fair value measurement disclosure requirements already. The Board agreed with the Staff recommendation.

The Staff also recommended that the proposed amendment should be applied prospectively (i.e. the effect of the change is recognised in the current and future periods affected by the change).  This would be akin to the treatment of a change in estimates under IAS 8.  Some Board members raised specific concerns with this approach citing that it would result in entities recording a gain or loss in profit or loss on application of the proposed amendment.  They did not believe it is appropriate for entities to effectively be penalised in their profit or loss account because the IASB clarified its intentions with regard to measurement of investment entities.  Some Board members believe that entities should be allowed to apply this amendment retrospectively similar to accounting for changes to accounting policies or errors. One Board member also raised the point that if IFRS 10, IAS 27 and IAS 28 were to be amended, the transition requirements in those standards that relate to investment entities should be considered, rather than creating a different precedent specific for this amendment.

The Board did not discuss the proposed effective date of the proposed amendment, it also made a decision during this meeting to further investigate the impact of the proposed amendment (if any) on the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk.  The Board asked the Staff to prepare an agenda paper on this for a future meeting. Once the Board has finalised its discussions it will make a decision with regard to proposed effective dates.

Introduction

The objectives of this discussion (which followed discussions during the March and April 2013 IASB meetings) were to discuss:

1. the remaining new and revised IFRSs issued since the IFRS for SMEs was published;
2. additional issues raised in response to the IASB’s Request for Information (RFI) issued in 2012:
1. where the Staff is proposing changes and
2. where the Staff is not proposing changes.

The following timetable is anticipated for the comprehensive review of the IFRS for SMEs:

• third quarter of 2013 – the IASB issues an exposure draft
• first half of 2013 – the IASB issued final revisions to the IFRS for SMEs
• target date in 2015 – effective date of revisions.

New and revised IFRSs

At its April 2013 meeting the IASB considered how to apply the five new or revised standards with the potential most significant impact: IFRS 3, IFRS 10, IFRS 11, IFRS 13 and IAS 19 (amended).  The IASB tentatively agreed not to amend the IFRS for SMEs for these standards.

At its April 2013 meeting the IASB tentatively agreed to incorporate the rebuttable presumption for the recovery of investment properties from IAS 12 into the IFRS for SMEs.

During its May 2013 meeting the IASB discussed the following new and revised standards that were issued since the IFRS for SMEs was published; the table also includes the Staff proposals on whether to change the IFRS for SMEs for the new guidance (for various reasons provided in the Staff paper):

There was some discussion on whether the amendment of IAS 1 (regarding the presentation of items in OCI) should be incorporated in the IFRS for SMEs given that there might be more OCI items in the future. However, there was not much support for this amendment as it was not considered as that important.

The Board agreed with the Staff proposals for changes to the IFRS for SMEs.

Issues from RFI – changes proposed by Staff

Reasons for adding these issues to the IFRS for SMEs are stated in Staff Paper 8B; the Paper also includes proposed amendments:

1. Undue cost and effort (in several sections of the IFRS for SMEs) – include more exemptions
2. Uniform reporting dates for consolidation purposes (Section 9) – what to do if the difference is more than 3 months
3. Definition of a basic financial instrument(Section 11) – how to treat bank loans with loans covenants and loans in foreign currency
4. Intangible assets acquired in a business combination (Sections 18/19) – ‘undue cost or effort’ exemption to recognise intangible assets separately
5. Exceptions from fair value measurement on allocation of the cost of a business combination (Section 19) – e.g. for deferred tax, pensions should also be included in the IFRS for SMEs
6. Common control exemption (Section 22) – include
7. Related party definition (Section 33) – should be consistent with IAS 24
8. Extractive activities (Section 34) – more guidance is required so that the guidance is easier understood (i.e. no change in accounting)
9. Unlisted equity instruments (Section 11-12) – add ‘undue cost or effort’ exemption

There has not been much discussion on the Staff proposals because they were generally supported. Two drafting issues were raised both of which related to disclosures:

• Issue 1 – at the moment if the entity uses the ‘undue cost and effort exemption’ it is not required to disclose reasons for the used exemption, but should it disclose the fact that the disclosure was issued in the first place? There was an agreement, that the entity should disclose that fact.
• Issue 6 – at the moment there is only one measurement basis (i.e. fair value); with the amendment as proposed there will be two measurement options. Therefore, should we add a disclosure requirement so that it is clear which basis is used? There was an agreement, that the entity should disclose the measurement basis.

The Board agreed with the Staff proposals for changes to the IFRS for SMEs (as modified with the drafting comments).

Issues from RFI – changes NOT proposed by Staff

Reasons for not adding these issues to the IFRS for SMEs are stated in Staff Paper 8C:

1. The revised IFRS Conceptual Framework (Section 2) – whether it should be incorporated (currently incomplete)
2. Other comprehensive income (Section 5) – whether OCI should be removed from the IFRS for SMEs
3. Hedging instruments (Section 12) – the types of hedging instruments permitted are too limited
4. Accounting for investment property (Section 16) – provide an accounting policy choice (FV or cost) that is currently available in IAS 40
5. Accounting for biological assets (Section 34) – a cost model should be permitted
6. Further reduction in disclosure requirements (several sections)
7. Reduced disclosure framework for subsidiaries
8. Size-related reliefs – e.g. for disclosures
9. Name of the Standard
10. Barter transactions (Section 23) – whether additional guidance is required

There has not been much discussion on the Staff proposals because they were generally supported.  A limited discussion was held about Issue 10; namely whether the new standard on Revenue Recognition would affect accounting for the barter transactions. It was considered unnecessary to address this concern as the new standard was not effective yet.

The Board agreed with the Staff proposals not to proceed with the changes in respect of the above issues.

The IFRS Interpretation Committee had originally received the request to address the accounting for mandatory purchases of non-controlling interests (NCI) in business combinations. There are two questions:

1. Should the initial acquisition of the controlling stake and the subsequent mandatory tender offer (MTO) be treated as separate transactions or as a single acquisition (i.e. linked transactions)?
2. Should a liability be recognised for the MTO at the date that the acquirer obtains control of the acquiree?

On the first issue, back in November 2012, the Committee tentatively agreed that the initial acquisition of the controlling stake and the subsequent MTO be treated as a single transaction. The Committee tentatively decided to propose to the IASB to amend IFRS 3.

The second issue was also discussed at the November 2012 and it was concluded that no liability should be recognised for the MTO. However, the Committee has subsequently received some feedback disagreeing with that conclusion.

In the light of the feedback, the Staff have performed a further analysis and brought the issue to the Board at the May 2013 meeting. On the basis of that analysis, the Staff made the following proposals in respect of both questions:

1. Single acquisition – unchanged as above. In terms of the process, the Committee recommended to amend IFRS 3 through Annual Improvements.
2. Whether the liability should be recognised for the MTO – the Staff has reached a different conclusion; namely that the liability should be recognised in a manner consistent with IAS 32 at the date the acquirer obtains control. In terms of the process, the issue could be addressed as part of the Board’s post-implementation review (PIR) of IFRS 3 (i.e. separately from Issue 1). 

Measurement of the liability has not been addressed pending the conclusion on its recognition.

Most Board members agreed with the conclusions reached by the Staff (although one Board member believed that it was an IAS 37 liability that should be measured on a net basis). It was mentioned that there might be a variety of situations in practice; sometimes there would be a time lag between the acquisition and the MTO.

One Board member wanted to clarify the accounting implications of the above conclusions. The response was that if the transactions were considered linked, then the debit side of the entry for the liability would go to goodwill (vs. as a reduction in equity).

Following the above discussion, one Board member pointed that this issue should be discussed together with NCI puts as the issues were related.

Another Board member believed that it would be unhelpful to separate discussions on the two issues (i.e. linkage and liability) and that they should be dealt with at the same time.  

The Board decided to address both issues (linkage and liability) within the NCI puts project and not to wait for the PIR of IFRS 3.  

The IASB has discussed the proposed narrow scope amendment to IAS 39 and IFRS 9 on novation of derivatives and continuation of hedge accounting. The amendment ED was initially drafted in response to the proposed laws and regulations that would mandate clearing of the over the counter (OTC) derivatives through a central counterparty (CCP).  These laws and regulations were expected to take place in different jurisdictions as part of the G20 commitment. The ED was prompted by the fact that if on novation previous OTC hedging derivatives were de-recognised prompting de-recognition and re-designation of existing hedging relationships, this would unduly penalise preparers. Given the urgency of the regulatory reforms and the potential impact on existing hedge accounting the ED was published as a narrow scope amendment with a tight 30 days comment period. The feedback received by the IASB, as presented by Staff was a majority support for the proposed amendment. However, most respondents questioned the scope of the proposal because they considered the scope ‘too narrow’ as well as some of the specific wording. This feedback was discussed in today’s session after which the IASB have agreed to make some changes.

On the first question of whether a specific amendment to existing IAS 39 and IFRS 9 is necessary all but one Board member voted ‘yes’. The Board re-confirmed their previous conclusion that without such amendment the novation of derivatives would meet the de-recognition requirements of IAS 39/IFRS 9 with original derivatives expiring and being replaced by new contracts. Under existing wording of the standards this would have an effect on whether the hedge could be continued.

The majority of the debate centred on the second question about the scope of the proposed amendment. Initially the Board was fairly evenly split on the Staff proposals. The Staff’s recommendation was three-fold:

1. to remove the scope requirement that novation to should be required by laws or regulation and in this way allow for voluntary novation to effect CCP clearing
2. to include in the scope of the amendments a novation to a party as part of indirect clearing to a CCP and
3. to maintain with the following rewording the requirement to limit any other changes to the hedging instrument on novation to those that are necessary to effect the replacement of the respective original counterparty with a central counterparty. Such changes are limited to those that are consistent with the terms that would be expected if the hedging instrument were originally entered into with the central counterparty. These changes include changes in the contractual collateral requirements, rights to offset receivables and payables balances with the central counterparty and charges levied by the central counterparty.  (The Staff paper clarified that this list is not meant to be exhaustive.)

On the first item a few members questioned whether in extending the scope to voluntary notations designed to affect CCP clearing the Board was moving away from its original intention that justified the short comment period. Some felt that voluntary novation in anticipation of legislative change was too wide. However these members would have accepted novation in response to enacted legislation that while only related to newly entered derivatives nonetheless made business sense to have all the derivatives on the same basis. Others felt that as long as the purpose of the legislation was achieved it did not matter whether it was voluntary or mandatory.

On the allowance of indirect clearing the Staff explained that in some jurisdiction it is not possible to transact directly with a CCP but for a few banks and that smaller corporates have to transact with the clearing members, or maybe even with the clients of the clearing members. However the process is done in the same as with a CCP with the same segregation of assets, back-to-back arrangements with the CCP and the same collateral requirements passed on from the original counterparties to the CCP. The Staff further clarified that on novation to affect indirect clearing to a CCP the original counterparties would be exposed (to the minimum extent possible and however briefly) to some of the risk of the intermediate counterparty (e.g. overnight fair value changes not offset by posting of collateral). However the Staff argued that under current wording of IAS 39 without the novation, the existing hedging relationships can be deemed effective even if they are not collateralised. In their view, such brief exposure to the credit risk of the intermediary due to the mismatch of collateral should not impact the analysis of whether the hedge is effective. Some Board members then raised a concern whether the amendment would be permitted to any novation that has somewhere down the indirect chain resulted in a CCP clearing. To that one member proposed to amend the Staff wording to restrict the scope only to those novations for which the purpose was to include the CCP (directly or not) and which would satisfy the regulatory requirements in the preparer’s jurisdiction on how to move to a CCP clearing. In other words, the novation could not be just any novation to include a CCP clearing. However, the Board then questioned whether this amendment would restrict voluntary novations (a decision they have already voted on). The Staff confirmed that their intention in this project was to address only the novations prompted by regulatory changes and they did not consider other scenarios. The majority of the Board were in agreement that novation to be in the scope of this amendment had to have an objective to affect CCP clearing (directly or indirectly) and did not extend the scope to novations with other counterparties for other reasons. The Board requested the Staff to bring the amended words for re-deliberation, which is likely to be taken off-line.

On the third question the Board tentatively unanimously agreed that the amendments should apply retrospectively and early application should be allowed as was proposed in the ED. The Staff clarified that these decisions do not impact on the validity of past accounting under the previous versions of the applicable standards but are intended to provide greatest relief possible going forward in the situations meeting the scope requirements where hedge accounting was not discontinued. Further, the Staff clarified that if in the past periods the entity discontinued its hedge accounting as a result of novation that would have met the scope of the amendment, such hedge cannot be re-instated.

Some of the words of the draft ED were discussed in more detail as part of the forth question. The Board members agreed unanimously with the Staff recommendations. In particular, the Board members tentatively agreed to reword the term ‘novation’ in a way that does not rely on the legal definitions that may vary across jurisdictions. The term could be reworded as a discharge or formal termination of the rights and obligations under the original contract and a substitution with a new contract.  The Board member tentatively agreed to replace the words ‘if and only if’ in the list of the scope criteria with the word ‘if’ so as not to imply that only novations under this ED would be allowed to continue hedge accounting since other novations were not considered in this project. Finally the Board tentatively agreed to include in the basis of conclusion an analysis of why the novation of the derivatives to a CCP would result in the derecognition of a hedging instrument.

On the fifth question the Board tentatively unanimously agreed that equivalent amendments to those for IAS 39 should be made to the forthcoming chapter of IFRS 9 on hedge accounting.

On the final sixth question all but one Board member tentatively agreed that additional disclosures should not be required. One Staff member argued that exposure to intermediate CP credit risk, however brief, in the case of indirect clearing is significant enough to require disclosure, and further that a change from having OTC derivatives to having derivatives cleared through a CCP should be disclosed. However, many considered that all the effects of changes in credit risk as a result of novation would be reflected in the financial statements as part of changes in fair value of the derivatives under IFRS 13. The Staff proposal of no disclosures was approved 13:1.

The IFRS Interpretation Committee received a request to clarify the meaning of “interim financial report” in IAS 34. The submitter believed that the definition of the term in paragraph 4 of IAS 34 is not sufficiently clear with respect of whether the “interim financial report” covers only the information reported under IFRS (i.e. IFRS interim financial statements) or other elements as well.

The submitter provided two current practices:

1. View 1 – all required disclosures should be included in the interim financial statements; and
2. View 2 – some of the disclosures required by IAS 34 may be given in the interim financial report, but outside of the interim financial statements.

The Staff believed that the guidance in paragraph 16A of IAS 34 referring to the inclusion of certain required disclosures “elsewhere in the interim financial report” is consistent with View 2. The Staff also proposed to amend the paragraph to clarify the meaning and to require the inclusion of a cross-reference from the interim financial statements to the location of this information.

One Board member was concerned that with the information being outside of the financial statements how the auditors would audit it. The response was that the Interpretation Committee had considered this issue: the information that has been included by cross-reference is considered as part of the financial statements and therefore, it should be audited as well.

The Board member proposed to include the above understanding in the Basis for Conclusions (BfC) for the Board’s decision to amend and clarify IAS 34 about the inclusion of information by cross-reference. Other Board members agreed.

The Board agreed with the Staff proposals for changes to IAS 34 (as modified with the drafting comment for the BfC).

The Exposure Draft (ED) Annual Improvements to IFRSs 2010-2012 Cycle, published in May 2012, proposed amendments to IFRS 3 which aimed to clarify the following aspects of accounting for contingent consideration in a business combination:

1. classification of contingent consideration as debt or equity – only on the basis of IAS 32;
2. subsequent measurement of contingent consideration classified as debt – at FVTPL, unless the recognition of the resulting gain or loss is required in OCI in accordance with IFRS 9;
3. disclosures – IFRS 7 disclosures might be required;
4. other issues; and
5. transitional provisions and effective date.

Based on the comments on the ED, however, the Staff had to re-visit some of the original proposed amendments; this resulted in the further proposed amendments mainly related to the subsequent measurement of contingent consideration:

• Issue 2 – the wording of the requirement on non-equity contingent consideration subsequent measurement in paragraph 58(b) of IFRS 3 should be amended to ensure that it does not imply that contingent consideration can only be a financial instrument.
• Issue 2 – that the amendment proposed in the ED to IFRS 9 paragraph 4.1.2 should not be made.
• Issue 2 – all liability contingent consideration should be required to be subsequently measured at FVTPL.
• Issue 5 – the wording of the transition and effective date paragraph should be amended to ensure that the proposed amendments to IFRS 3 could not be applied without also applying IFRS 9.

The Board agreed with the first three proposals without any discussion.

There was a discussion about the final proposal; more specifically about whether the transition paragraph should require the application of IFRS 9. It was considered necessary to have the reference. (NB The effective date of the annual improvement will be 2015.) A Board member commented that IFRS 9 applied to classification but not to measurement of contingent consideration. It was important to amend both standards (IFRS 3 and IFRS 9) were amended in parallel to ensure consistent messages.

The Board agreed with the above Staff proposals (as modified with the drafting comments about IFRS 9).

In April 2012 the IFRS Interpretation Committee received a request for clarification of paragraph 25 of IAS 41 which refers to the use of a residual method as an example of a possible valuation technique to measure the fair value of biological assets that are physically attached to land, if the biological assets have no separate market but an active market does exist for the combined assets as a group. The submitter’s concern was about how the valuation of the biological assets was linked to the valuation of land, when it was concluded that the value of the assets based on the highest and best use of the land differed when determined on the basis of its current use.  

The Committee discussed this issue at several meeting and in March 2013 it decided to refer this issue to the IASB for clarification. (The IASB was provided with all the analysis performed by the Committee as of today.)

At the May 2013 meeting, the IASB discussed the best way to proceed with this issue; the Staff presented two options:

1. Option 1 – direct Staff to perform further analysis and to bring it to a future IASB meeting;
2. Option 2 - consider the issue during the post-implementation review (PIR) of IFRS 13, possibly in late 2015. The issue does not appear to be widespread; however IFRS 13 has recently become mandatory and the issue could potentially affect other standards (e.g. IAS 16, IAS 40 and IFRS 3, e.g. when land and a building are acquired together).

The Staff supported Option 2.

There was an extensive discussion with one Board member believing that the issue could be resolved within IAS 41 and some other Board members believing that it was a bigger issue and should be addressed within IFRS 13.

There was a proposal by a Board member to delete the last sentence of paragraph 25 of IAS 41 so that there was no mention of the residual method. Others responded that the removal of the sentence would not take the valuation problem away.

The Board agreed with the Staff proposal (i.e. wait for the PIR of IFRS 13) and not to amend IAS 41 at the moment.

In May 2012, the IAS decided to develop proposals to amend IAS 27 to restore the option to use the equity method of accounting in separate financial statements (SFS) [in addition to the existing cost and FV options].

At the May 2013 meeting, The Staff presented a paper proposing to amend IAS 27 to allow entities to account for investments in subsidiaries, associates and joint ventures using the equity method in their SFS. The paper acknowledged that this amendment would impair comparability; nevertheless this information would provide users with useful information (comparing to the cost method).

During the May 2013 meeting, it was mentioned that this option was important for some countries. Also, jurisdictions can limit options available for SFS.  

Most Board members were supporting the proposals; however, there were a number of practical concerns. One Board member believed that bringing in the equity method to SFS would raise other questions, e.g. on how to account for deferred tax or how to determine goodwill on acquisition.

The comment from the Staff was that the equity method basically equated to consolidation procedures. Another Board member said that the equity method had been allowed in IFRS until recently and she was not aware of any practical issues.

Another Board member was concerned that the equity method option could apply to one category only (e.g. only to subsidiaries). Therefore, entities will be ‘picking and choosing’. The rest of the Board members did not seem to share the same concern.

One Board member believed that the scope of this issue went beyond regular amendments and that it should go to the Advisory Council first given the issue’s potential significance.

When put to a vote the majority of the Board members agreed with the Staff proposal. The amendment will not be done as part of the Annual Improvements process, but instead it will be an ‘independent’ amendment.

The same Board member who raised the issue about applying the equity method option to various categories of investments raised an additional issue: he believed that if one investment within the category (e.g. an associate) was accounted for using the equity method option in SFS then the entire category (i.e. all associates) should be measured using that option. Other Board members seemed to be in agreement with this.

The Board agreed with the Staff recommendation to amend IAS 27 to allow the equity method of accounting for investments in subsidiaries, associates and joint ventures in SFS.

The Conceptual Framework discussion paper (DP) and its various sections were discussed extensively during the past two IASB meetings. At the May 2013 meeting, the Board discussed:

• the comment period for the DP (Staff proposal was 120 days) and
• the IASB’s permission to ballot the DP.

In respect of the comment period, sometimes constituents ask for a longer period (e.g. 180 days). Besides, there will be a holiday period. The IASB could use this period for the outreach.

The Board agreed with the comment period of 180 days for the DP.

One Board member asked about the process. He might have further comments for the Measurement chapter that has been re-written.

The Board permitted to ballot the DP.

The IASB continued to discuss different aspects of the revaluation approach for accounting for macro hedging activities to be published in a forthcoming discussion paper on the topic.  No questions were asked of the Board. The purpose of the session was to discuss the following two issues:

1. Income and balance sheet presentation: Where should the necessary accounting adjustments from application of the portfolio revaluation approach be presented in the financial statements?
2. Portfolios included in the revaluation model: How should portfolios be selected for inclusion in the revaluation model?

Income and balance sheet presentation

The discussions so far have predominantly focussed on the net impact on profit or loss and the balance sheet from the revaluation adjustment for managed exposures.  In this session the Board considered the “geography” of the necessary adjustments considering what would present the most useful information and at the same time be practical.  This discussion was in the context where the objective of risk managers within a bank is to manage net interest margin.

The Board considered two approaches for income statement presentation as follows:

Stable net interest income approach

Under this approach net interest income is recognised on the assumption that this objective has been achieved. Revaluation profit or loss would then provide information on how good the bank has been at achieving that objective, for both realised and future net interest margin.

To apply this approach all changes to the revaluation adjustment would be taken to a new single profit or loss line item outside of net interest income. From this line, the managed accrued interest would be reclassified to net interest revenue or expense to reflect the stable rate.

Actual net interest income approach

Under this approach there would be no change to existing interest revenue and interest expense presentation. However, a new line would be introduced within net interest income, presented on the face of the income statement, called “net interest income from risk management activities”. Net accruals from all risk management instruments would be reported within this new interest line.  A profit or loss line item for the effect of dynamic interest rate risk management would also be presented reflecting any mismatches in anticipated future net interest income.

During the discussion the Board questioned whether the stable net interest approach would be relevant and useful for users.  The Staff noted that from the limited outreach undertaken so far there was a preference for the actual net interest margin approach. A number of a Board members agreed that both alternatives should be presented in the discussion paper, although those that commented said they would also prefer the stable net interest approach. In response to a question raised it was noted that although the two income approaches were being considered in the context of macro hedging of interest rate risk, the question could equally apply to hedges of non-financial risks by non-financial entities.

The Board considered three balance sheet presentation alternatives as follows:

Line-by-line balance sheet gross up

Under this approach individual exposures included in the managed portfolio would be adjusted on balance sheet to include the associated revaluation adjustment. Where eligible exposures do not meet the criteria to be recognised as assets or liabilities (e.g. equity model book or pipeline trades) the presentation of the revaluation adjustment would require further consideration with OCI being a possible alternative.

Separate lines for aggregate gross adjustments to assets and liabilities

Under this approach revaluation adjustments for all assets would be reported in a single asset revaluation line in the balance sheet and likewise a single liability revaluation line for liabilities. Again, adjustments to eligible exposures not meeting the criteria for recognition as assets or liabilities would have to be considered with a single net adjustment to OCI being a possible alternative.

Single net balance sheet line item

Under this approach the net revaluation adjustment for the whole managed portfolio would be presented in a single line in the balance sheet.

During the discussion many of the Board members preferred the gross aggregate approach with two expressing a preference for a net approach as they believed it provided a better reflection of the actual risk management approach and the potential difficulty in separating out a net amount. A number of Board members asked about disclosures and explained that the gross information would be useful and hence could see a rational for it to be at least disclosed. 

Portfolios included in the revaluation model

In Board discussions so far, the question of what the model should be applied to has not been explicitly covered. The Staff noted that in the limited outreach conducted so far there has been significant interest in what portfolios should be included in the revaluation model.

In this session the Board considered whether the approach should apply to all portfolios managed for interest rate risk, or to a selection of discrete portfolios and in either case whether the whole managed amount should be revalued or only the managed amount that is hedged (i.e. excluding open positions).

The Board considered the pros and cons of the different approaches. It was noted that to apply the model to the managed amount of all portfolios would be the most transparent and would provide information on risk management activities including information on the positions that have intentionally been left open. This approach would be less about reducing profit or loss volatility necessarily which is a key objective of hedge accounting, but more about presenting useful and transparent information about macro hedging activities. This approach would also avoid a patchwork of hedge accounting which can make it difficult for readers to understand the results.

It was noted by the staff that a revaluation model that tried to accommodate risk limits by allowing varying proportions of the managed amount being revalued would not be operational as it would result in tracking and amortisation issues.  These are the very issues and complexities that exist in the current model that the Staff is seeking to avoid by considering a revaluation model. The Staff explained that they would look to explain this point in the discussion paper.

The Board also considered whether the revaluation approach for macro hedging should be optional or mandatory. It was highlighted that the revaluation approach could give rise to more profit or loss volatility than current application of hedge accounting.  Hence if entities are given a choice between applying hedge accounting an applying the revaluation approach they may opt for hedge accounting. Also, if entities may apply the model only to selected portfolios, this could lead to the revaluation approach only applying to those cases where hedge accounting is difficult to apply or not permitted (e.g. apply the revaluation model only to a portfolio of demand deposits and apply the hedge accounting model to other items).

One Board member asked about how this model would interact with macro-cash flow hedge accounting under the general model. The Staff explained that this would depend on the choices made available to preparers. For example, if the revaluation approach was optional and could be applied to selected portfolios, then preparers could choose between the two models and apply macro cash flow hedge accounting to some exposures and the revaluation approach to other portfolios.

Another Board member requested the Staff to include some content about how to define a portfolio for the purposes of applying the revaluation model to it.

One Board member asked that the Staff make clear in the discussion paper that the objective of the revaluation model would be to make the accounting for macro hedging activities more transparent and not to reduce profit or loss volatility.

In a final question, the Staff were asked if there were any remaining issues to discuss before the discussion paper could be drafted.  It was explained that there may be one further issue to be brought to the Board before discussions are complete for the purpose of issuing a discussion paper.

First-time adopters and IAS 8 disclosures

There were two issues and Staff recommendations:

1. Transition methods available for first-time adopters

1. To permit first-adopters of IFRS to use the alternative transition method (as outlined to the Boards in February 2013) to transition to the revenue recognition standard. Recommendation: not to permit the use of the transition method.
2. To provide an exemption to ignore, in their application of IFRS 1, contracts that are completed under legacy revenue requirements before the earliest comparative period presented, i.e. first-time adopters are required to apply the new standard retrospectively. Recommendation: not to provide the exemption.

2.   The applicability of disclosures required by paragraph 28(f) of IAS 8 that requires an entity to disclose the amount of adjustments for each financial statement line item affected, in the current and prior periods, as a result of applying a new IFRS. Recommendation: do not require this disclosure.

The Board had a discussion about the transitional exemptions (i.e. issues 1(a) and 1(b)). A number of Board members believed that first-time adopters were not provided with sufficient transitional exemptions.

In response to this, another Board member agreed with the Staff proposal 1(a) not to permit the alternative transition method, because, she believed, the level of disconnect between previous GAAP and the new IFRS standard could be potentially too big and this would defy the objective of the first-time adoption. However, she had more sympathy for proposal 1(b) for contracts that were completed. Other Board members supported the member’s view.

The Board agreed not to permit the alternative transition method in 1(a); it agreed to provide exemption for completed contracts in 1(b). The Board also agreed not to require disclosures in paragraph 28(f) of IAS 8.

Due process summary 

The revenue recognition project is a joint project with the FASB. The FASB will complete its own due process analysis in the next few weeks and will start their ballot process, subject to permission. Although the analysis of each Board’s respective due process is done separately, the final standard will be a joint standard and the Boards will be asked to approve for the publication substantially the same Standard at the same time.

At the May 2013, the IASB discussed three questions about the revenue recognition standard:

1)      Re-exposure: does the Board agree with the Staff recommendation not to re-expose?

2)      Permission to ballot: can the process begin?

3)      Dissents: do any Board member intend to dissent?

The Board members were satisfied with the mandatory and non-mandatory due process steps.

No Board members wanted to re-expose the standard. The Board gave its permission to ballot. No Board member expressed an intention to dissent.

The Staff considered feedback on the Exposure Draft (issued in November 2011) regarding how the revenue recognition model would apply to credit card reward programs, in particular, when there are more than two parties to the arrangement. The difficulty seems to arise in situations when certain merchants paid a fee to a bank when a payment was done with a credit card. At the same time the bank grants award credits to the cardholder who has used the card. Some respondents (primarily US GAAP reporters) were uncertain whether the revenue model applied credit card reward programs based on Example 24 (that deals with a retailer) in the 2011 ED as it was not clear who the bank’s customer in the reward programs was (i.e. a cardholder or a merchant).

The Staff believed that there were two alternatives for the Board to address the issue:

1. Alternative A: Provide specific guidance to address the issue.
2. Alternative B: Rely on the application of the revenue model.

The Staff recommended Alternative B. However, the Staff believed that Example 24 needed an amendment. For some respondents, the Example in the 2011 ED implied that award credits always gave rise to a performance obligation and, therefore, that award credits in a credit card award program always gave rise to performance obligations. As a result, the Staff proposed to clarify that not all customer loyalty arrangements give rise to a performance obligation. In particular, when there are more than two parties to the arrangement, the entity should consider all the facts and circumstances in order to determine a customer in the arrangement that gives rise to the award credits. In other words, whether the award credits were granted to the cardholder for using the card or whether the award credits were, in substance, granted to the merchant for being part of the credit card’s network.

A Board member asked the Staff for confirmation on whether the new revenue recognition standard provided sufficient general guidance for the card issuer to use in respect of performance obligations and agent versus principal relationship. The Staff believed that there was sufficient guidance in the standard.

Another Board member said that people should work through the model and adding more specific guidance on a particular issue would not be helpful. There were many issues that could potentially be discussed in depth. Other Board members supported this opinion.

The Board decided to proceed with Alternative B and to amend Example 24 as recommended by the Staff.

The IASB and FASB jointly discussed the same issue that was discussed by the IASB during the previous day (23 May) meeting.

The IASB members reiterated their position from yesterday. An IASB member questioned whether it was necessary to add extra wording to Example 24 saying that the entity should consider all facts and circumstances. This wording applied to all examples.

FASB agreed with the proposal not to provide further guidance and to amend Example 24 as recommended by the Staff (as modified by drafting comments).  

At this session the staff summarised some of the feedback received by the IASB on its exposure draft ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9.

The comment period on the ED ended on 28 March and the IASB had received 167 letters and had over 40 formal outreach meetings. Further outreach is taking place, such as the online survey of users as well as other joint outreach with the FASB.

The session was kept brief and at a high-level as the staff intends to come back to the Board with more detailed feedback.

 The staff summarised feedback in respect of the following key topics:

• Contractual cash flow characteristics assessment
• Business model assessment
• Fair value option
• Early application of the ‘own credit’ requirements
• Effective date

Contractual cash flows characteristics assessment

Nearly all respondents agreed that a financial asset can have cash flows that, for the purposes of IFRS 9, represent solely payments of principal and interest, even if the economic relationship between the principal and the consideration for the time value of money and credit risk is modified. They supported the IASB’s efforts to clarify this point and noted that the proposals would result in more appropriate classification outcomes. However many respondents stated that the proposed clarifications do not go far enough in addressing common application questions and raised a number of detailed questions and concerns. For example it was proposed by some that the scope should be wider, the threshold for passing the test lower and the application guidance clearer.  Many raised a broader question of how the principle should be applied and asked for more clarity in this regard. It was noted that most preferred the principal and interest principle but some still preferred embedded derivative accounting for assets.

On discussing the feedback one board member commented that reaffirming the principle would be wise and would help to avoid too detailed application guidance attempting to cover specific examples which he was not in favour of.

One board member asked whether there would be less support for embedded derivative accounting if there was more guidance on application of the principle. The staff felt that this could be the case where further clarification of the principle resulted in some assets that were failing the test now passing and be measured at amortised cost (i.e. the demand for embedded derivative accounting arises primarily where the application of the test results in FVTPL accounting for the instrument).

Business model assessment

A majority of respondents agreed with measuring some debt instruments at fair value through other comprehensive income (FVOCI), however, responses were split relatively evenly between three broad views:

1. support for the introduction of the mandatory FVOCI measurement category as proposed by the Limited Amendments ED
2. agreement in principle with measuring some debt instruments at FVOCI, but subject to conditions or different classification requirements compared to those in the ED (for example it was noted that a common comment suggested making FVOCI the residual category due to difficulty in distinguishing between the two business models that result in FVOCI and FVTPL respectively)
3. disagreement with the proposed introduction of the third measurement category into IFRS 9.

In addition, some respondents were concerned with what they considered inappropriate limitations on the ‘hold to collect’ business model—either due to the proposed clarifications to the ‘hold to collect’ business model, or due to the introduction of the FVOCI category.

The staff explained that some had commented that there was too much focus on the level and frequency of sales making it too restrictive and also that sales by regulators should be consistent with the hold to collect business model.

One board member asked whether there were any regional trends in comments.  The staff explained that in North America there was general support, in Europe there were mixed views across the three broad views discussed above and in Asia some supported and some did not. 

During discussions it was noted that the timings of completing the classification and measurement model and the insurance standard will mean that the Board will need to consider how to address the issues of insurers within the classification and measurement model.  Some commentators had suggested addressing the issues affecting insurers at a later date.

Upon being questioned about user’s views on the ED, the staff explained that a paper presenting user’s views is planned for next month (the survey for users closes 31 May 2013)

Fair value option

Nearly all respondents who commented on the fair value option agreed that the existing fair value option for accounting mismatches in IFRS 9 should be extended to financial assets that would otherwise be mandatorily measured at FVOCI. However, some respondents favoured an unrestricted fair value option for those assets, as has been proposed by the FASB’s proposed ASU, and others advocated an unrestricted fair value option for all financial assets.

Early application of the ‘own credit’ requirements

Nearly all respondents who commented on the ‘own credit’ requirements for financial liabilities welcomed the proposal that entities should be permitted to early apply just those requirements without also applying the rest of IFRS 9. However, nearly all respondents also recommended that the IASB should make just the ‘own credit’ requirements available for early application before the completed version of IFRS 9 is issued by amending IAS 39 and/or IFRS 9 (2010).

Effective date

The staff’s final point of the session noted that many respondents had urged the IASB to confirm as soon as possible that the mandatory effective date of IFRS 9 would be deferred given the lead time required to implement the impairment phase of the IFRS 9. At this point the meeting was adjourned.