Research programme

Date recorded:

Foreign Currency Translation

The Project manager introduced the agenda paper and explained that it related to foreign currency issues on IAS 21The Effects of Changes in Foreign Exchange Rates. She indicated that Board members would be presented with three papers: a paper on long-term monetary items; a proposal for a comprehensive review on foreign currency translation, and a third paper on other narrow-scope issues. The issues had been primarily raised by the Korea Accounting Standards Board (KASB), and the Board would have to decide whether they would like to take any of these matters for further consideration. The Project manager highlighted that the KASB had performed a detailed research on those matters and their findings were included in the agenda papers.

The Project manager introduced the first agenda paper on long-term monetary items which was a narrow scope amendment proposed by KASB. She indicated that the driver of the proposal had been concerns in emerging economics due to the volatility in the exchange rates experienced during the financial crisis on long-term items in the financial statements. The proposed amendments would permit or require using alternative foreign currency exchange rates instead of the closing rate for translating long-term foreign currency items in cases where the closing rate did not reflect the best circumstances of future events that could affect those items. The situations where this amendment would apply would be when there was a thin market and a significant market rate fluctuation due to exceptional and temporary shocks. The KASB research had concluded that this principle was also applicable in IAS 36 Impairment of Assets for value in use calculations, IAS 19 Employee Benefits, and IFRS13 Fair Value Measurements, which permitted using alternative rates when the market was not active. The Project manager indicated that the key issue was whether the alternative exchange rate would better represent the best estimate of future events. The staff summarised that they had no basis to conclude whether or not this was the case. The staff believed that the arguments for maintaining the closing exchange rate were convincing because closing rates would represent the economic conditions at the reporting date. In addition, for cost-benefit considerations staff would not support the suggested amendments.  

Several Board members expressed agreement with the staff recommendation while at the same time they expressed concerns about different aspects of IAS 21 and how they should be addressed.

One Board member indicated that the possible solution for companies that faced those circumstances would be to provide additional disclosures, including quantitative information to explain what they believed the impact on the financial statements from the possible evolution of the exchange rate would be. He indicated that despite its limitations, for comparability and objectivity reasons the closing exchange rate should be used. He also believed that the situation was not unique to exchange rates, it could equally apply to interest rates, commodities prices etc.

Another Board member believed that the discussion should be considered in the Conceptual Framework project. In addition, he was concerned about paragraphs 14 and 15 of agenda paper 8A, which he found tricky and contradictory. He said that the paragraphs were suggesting removing the project from the IASB’s research agenda, but at the same time were allowing the Interpretations Committee to issue an interpretation on a timely basis. He believed that there were problems and inconsistencies in IAS 21 that needed to be addressed, particularly the conceptual issue as to whether the translation was a measurement or not.

A fellow Board member stated that it should not be left to companies to define what rare circumstances were. Further, she said that a thin market could also exist because the country was small. Defining a significant rate fluctuation during a financial crisis would be easy, but situations in a small country with a thin market would be more difficult to define. Further, she said that temporary shocks could be regional, or local.

A further Board member indicated that he agreed with his fellows members’ concerns. Also, he said that many countries had expressed concerns with IAS 21. He believed that, generally, IAS 21 worked well because it provided good information to markets; however, it would still be necessary to explore whether there were two types of translations (a measurement or a mechanical conversion), and it would be necessary to collect more information to complete the due process. However, he acknowledged that it was not an urgent issue to merit a narrow-scope amendment. He would support a more comprehensive research project on these issues. 

Another Board member said that it would not be appropriate to simply conclude that the Board would not take this issue on as a research project. He said that concerns had been raised many times, not only by Korea, but, for example, from India. He believed that it would be necessary to include these issues into a research project. He also indicated that in the project on fair value measurement, the IASB had concluded that fair value was defined for normal circumstances, and in exceptional cases special consideration needed to be given to certain aspects of the model (for example, when there was a forced sale).

Yet another Board member said that IAS 21 worked well in the majority of circumstances, whereas the standard did not provide a proper representation in certain circumstances. In those cases, further disclosures should be added to help users understand the events. However, he believed that the Board could not define those circumstances. He also believed that there were other projects that had higher priority.

Again another Board member said that this issue did not merit further research because the same concern would arise with interest rates (it could be argued that the current interest rates were artificially low and derived from the financial crisis), and it would be a dangerous direction to allow not using the current exchange rate or interest rate. He disagreed with the comment that there should be consistency with fair value measurement guidance when no quoted prices were available because the issues were different. Further, he asked whether the real issue in this case could be volatility in performance reporting.

The Chairman indicated that he believed that, since the issue was raised by Korea, it was related to foreign exchange rates against the background of the Asian crisis and the global financial crisis, to which the Korean fellow Board member agreed.

One Board member said that companies might provide additional disclosure so that investors could adjust the financial statements. However, there could be other problems in contracts or with debt covenants that could not be adjusted easily. The Vice-Chairman member said that this issue was not only pertaining to emerging economies or the financial crisis, for example the Australian dollar had fluctuated significantly. He believed that this issue should be asked as part of the agenda consultation next year. Also, they could also ask the Korean Board to do more research to understand the problem, as was suggested in paragraph 11 of the agenda paper.

The Chairman asked whether the Korean Board would be able to define a thin market. The Senior Technical Manager responded that the issue raised was broader, because it was related to a measurement issue (not just translation) and to performance. The thin market issue was just a mechanism to address volatility.

Several Board members supported the idea of using the agenda consultation process to identify issues regarding IAS 21 instead of putting efforts in a narrow-scope amendment. One Board member indicated that it would be important to explore whether there could be other issues regarding debits and credits in P&L vs OCI and issues about recycling and a broader perspective on performance reporting, but that he would not prefer focusing on issues affecting particular countries. Another Board member said that it would be difficult to define extreme events and that the Board could benefit from the KASB’s continuous research. Another Board member pointed out that it would be necessary to align this issue with fair value measurement guidance, yet he would still like further research in the context of performance reporting. In relation to the concern expressed by a fellow Board member about possible issues with contracts and debt covenants, he indicated that usually companies that operate in those economies were aware of those risks and took them into account in their negotiations for contracts and debt covenants.  

Another Board member asked why the paper focused only on long-term items. He believed that the foreign currency problem applied to all monetary items. He also believed that further analysis would need to be done on the OCI accounting and the impact on long-term items.

The Chairman concluded that the Board would not support a narrow-scope amendment. The Senior Director for Technical Activities added that it would be important to keep this item on the agenda, but to give it a lower priority. At the same time the IASB should provide assistance to the KASB to continue their research. The Chairman further said that the Board was not ready to remove the topic from the research agenda. Rather, they would ask constituents about this topic as part of the agenda consultation next year and would continue with research in the angle of performance reporting.

One Board member raised some concerns regarding agenda paper 8A(c), specifically the issues lodged with the IFRS Interpretations Committee. She said that the Interpretations Committee seemed to be endorsing a mechanical application of the translation requirement, and the issues would be fixed through disclosure only. She believed that IAS 21 still provided useful information and should be considered in their agenda decision. As regards the list of items included in the agenda paper she said that, in the future, it would be important to add the Interpretations Committee comments on each of them because this agenda paper was publicly available. The Director of Implementation Activities confirmed that he would take these comments to the Interpretations Committee. However, he pointed out that the Committee had not taken a mechanic approach but had just felt bound by the limits of the standard and had not been able to find a solution.

Another Board member supported adding this topic to the agenda consultation but was still concerned as to the interaction with the conceptual framework project. He said that IAS 21 was an old standard, so the Board needed to know what the nature of a translation was. The Chairman indicated that this approach would not be possible because the conceptual framework project could not be put on hold.

The Senior Director for Technical Activities summarised that the Board would not take the topics proposed by the KASB or the issues raised by the Interpretations Committee to their agenda. As regards the broader research issue, the Board would retain the subject in their research programme, but would move it from short-term to long-term and would contact the KASB to help them focus on the broader issues discussed during this session. Lastly, the subject would also be added for consideration as part of the agenda consultation.

One Board member asked whether the Interpretations Committee was currently working on any project related to the issues discussed. The Director of Implementation Activities responded that the Interpretations Committee had not been doing anything and they had not yet finalised their agenda decision on the Venezuela issue, though their tentative decision had been to refer the topic to the Board as they were unable to find a solution. The Board member also asked if there had been any discussion about recycling of the foreign currency translation adjustment to which the Director of Implementation Activities responded that the topic had been discussed years ago and that the Committee had not been able to reach a consensus on that issue.


Research project on financial instruments with characteristics of equity

The Technical Manager introduced the agenda paper. He mentioned that the Board had had a discussion in April 2014 and in September 2014 and had decided not to amend the definitions of the elements that distinguished liabilities and equity. Further, the Board had decided to continue discussions on the research project remain open for possible future changes to the definitions. The Technical Manager indicated that the Board would need to consider how this project interacted with the Conceptual Framework project. He said that the staff was proposing some changes to the definitions, and it would be important to clearly communicate the implication of the interaction with the Conceptual Framework project as there could be possible changes in the definitions depending on the outcome of the research. The staff also discussed this topic with the Accounting Standards Advisory Forum (ASAF) last month, and they had also suggested the need to clarify how this project interacted with the Conceptual Framework project. The research should still focus on IAS 32 Financial Instruments: Presentation; however, given the inconsistencies as regards the definitions in IAS 32 and the Conceptual Framework, a narrow-scope amendment would not be possible. The Board would also have to consider implications for IFRS2 Share Based Payments (no amendments to IFRS 2 would be considered as part of this project). Furthermore, the Board might want to go beyond the classification issue and discuss potential presentation and disclosure solutions. He asked the Board whether they agreed with the focus of the research project as well as with the classification and presentation issues listed in the paper.

One Board member said that he agreed with the staff recommendation. He had some concerns about changes to the definitions and the confusion they could create. He would prefer maintaining the definitions in the Conceptual Framework, which was still work in process, and to wait for its completion. Another Board member agreed with this concern but believed that there were unanswered questions in IAS 32 because there was not enough guidance. If the Conceptual Framework did not provide guidance, then the Board would need to do what the staff recommended. She also agreed with the scope of the research project presented by the staff, i.e. doing two strings of analysis, being classification and disclosure. She also pointed out that the Conceptual Framework was a live project, so future consequences would be considered.

The Chairman asked whether the first product of the research would be a Discussion Paper. The Technical Manager responded that it would be a Discussion Paper or Research Paper. One Board member pointed out that given the timeframe, one would also take into account the results of the Conceptual Framework so one would not start from zero. The Technical Manager further confirmed that they would not go back to the definitions already agreed on the Conceptual Framework for assets and liabilities.

Another Board member said that there were further issues to be analysed, such as IAS 37, levies and the share-settled debt in IAS 32. For these reasons he believed that they had to continue this project. A fellow Board member agreed and said that it would be important to pursue this project given the feedback received from investors and users. She did not believe that the Board should be constrained by the Conceptual Framework project. The Technical Manager stressed that the communication point would be very important.

Another Board member said that he also agreed with the staff proposal. He believed it would also be important to look at improving presentation and disclosure requirements. In this project, the Board needed to think ahead so as to anticipate new instruments to be created.

One Board member raised another topic dealt with in the Conceptual Framework project, which was the enhancement of the Statement of Changes in Equity. He was concerned that non-controlling interest would not be classified as equity instruments, but would still be presented in equity. He said that proper classification was critical to understand ratio analysis. The Technical Manager indicated staff would be dealing with liabilities and equity only and would not expand to consolidation matters.

Another Board member said that he agreed with the staff proposal to divide the project into two streams. He asked the staff whether he would consider having sub-categories in the balance sheet. The Technical Manager responded that it would depend on what he meant by that. The staff would definitively work on subcategories, but did not think about having an additional element. The Chairman pointed out that they had decided not to have a third element.

The Chairman concluded that the staff could go ahead with the project and should take into account the comments about careful communication. The progress that they would make in this project would not endanger the timeline to the Conceptual Framework project.


Research programme – project update

The Senior Director for Technical Activities indicated that the agenda paper provided a general overview of the projects.

One Board member raised a concern about performance reporting as she believed there was mixed communication around it. She said that the FSP project had been suspended several years ago and that it had been far-reaching. The Board had decided to make sure to capture the progress that had been made in that project and to reflect the conclusions in other projects. She would like to make sure that the Board were not restarting the FSP project. The Senior Director for Technical Activities responded that FSP would not be restarted because it was discontinued, with some parts being allocated to other projects. The scope would basically be to analyse what areas people were interested in.

Another Board member asked whether the project performance reporting under the research programme was FSP and whether OCI was part of this project. The Senior Director for Technical Activities confirmed this and responded that it was FSP. As regards OCI, the Board would have to analyse the outcome of the Conceptual Framework project. He said that the Board would be provided a paper with a list of topics to analyse and would then decide next steps.

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