Annual Improvements to IFRS 2014-2016 Cycle – Due Process Steps Followed

The purpose of this agenda paper was to ask the IASB to confirm it was satisfied the due process steps required to date had been complied with; and to ask the IASB for permission to begin the balloting process.

The IASB members were asked:

1. whether any members intended to dissent from any of the proposed amendments that are to be included in the ED;
2. whether the IASB agreed that the ED should be published with a comment period of 90 days;
3. whether the IASB members agreed with the proposed timetable for publication, and gave the staff permission to start the balloting process; and
4. if IASB members were satisfied that all due process steps required to date had been complied with

All twelve IASB members present confirmed agreement and were satisfied all due process requirements had been met. No IASB members indicated that they intended to dissent.

Proposed Narrow-Scope Amendment: IAS 40 Investment Property — Transfers Of Investment Property – Due Process Steps Followed

The purpose of this agenda paper was to ask the IASB to confirm it was satisfied the due process steps required had been complied with; and to ask for permission to begin the balloting process.

The IASB members were asked:

1. whether any members intended to dissent from the proposed amendment to IAS 40 that is to be included in the ED;
2. whether the IASB agreed that the ED should be published with a comment period of 120 days;
3. whether the IASB members agreed with the proposed timetable for publication, and gave the staff permission to start the balloting process; and
4. if IASB members were satisfied that all due process steps required to date had been complied with

An IASB member observed that when the issue came to the IASB from the IFRS Interpretations Committee (“the Committee”), in addition to the recommendation to make the amendment that was being proposed in the Exposure Draft, the Committee also recommended adding some explicit disclosure requirements, which the IASB was not including in the Exposure Draft. She questioned what the process was with respect to reporting back to the Committee on the decision not to move forward with the disclosure requirements recommended by the Committee.

The Director of Implementation Activities noted that the staff would write to the Committee members to inform them of the IASB’s decision and ask for and report back any concerns.

All twelve IASB members present confirmed agreement with the staff recommendations and were satisfied that all due process requirements had been met. No IASB members indicated that they intended to dissent.

Post-Implementation Review Of IFRS 8 Operating Segments – Staff Recommendations For Potential Amendment Of The Standard

This session was devoted to discussing the findings and recommendations of the staff in the areas identified for potential improvement and amendment to IFRS 8 in the Post-Implementation Review (“PIR”). The IASB members were asked if the areas identified in the PIR had been adequately investigated, and whether they agreed with the staff’s recommendation to make the limited amendments proposed in paragraph 86.

Areas identified for potential improvement and amendment to IFRS 8

i) Identification of the chief operating decision-maker (‘CODM’)

The staff recommended adding words to clarify that the CODM could be an executive committee or an individual, depending on the circumstances of the entity; that non-executive roles should be excluded; and disclosure of the identity and nature of the CODM should be required. When developing IFRS 8, the IASB thought adopting the management perspective would result in other forms of reporting such as the management commentary and presentations to analysts being consistent with operating segment information, and the staff recommended including a reference to this.

An IASB member commented that the words for the last recommendation is would be better expressed as “if the operating segments an entity is identifying are inconsistent with reporting in the MD&A etc., this questions whether the entity has correctly identified the operating segments” as it was not the job of the IASB to dictate internal reporting.

Another IASB member raised an issue with respect to terminology, noting that in his jurisdiction “non-executive director” simply meant outside director and that this position played an important role in decision-making, and questioned whether the intention was to exclude outside directors. The discussion noted that non-executive directors often take very important decisions but are not involved in the daily operations, and there was agreement that the focus should be on those making the daily operating decisions.

A further IASB member noted that he believed it was irrelevant whether the role was non-executive or not, noting that the focus should be on linking the selection of the CODM to the information needs of investors and the objective of financial reporting. He highlighted the original belief of the IASB that there would be a correlation between the information needs of the CODM to manage the business and the information needs of the investors.

Another IASB member noted that he did not agree with making such a change. Concentrating on the CODM might not always provide the most useful information to investors, but this was due to a lack of alignment between internal management and the way investors looked at a company. If the IASB made a change to focus on the needs of investors, this would be a move away from internal management. He noted that he believed the Standard should be clear that selection of the CODM was based on internal organisation, and hopefully this was aligned with the information investors needed, and if not, that market forces would push for better alignment over time.

The twelve IASB members present agreed to make amendments to clarify that the CODM could be an executive committee or an individual; to emphasise that the focus of the CODM was on making operating decisions; to emphasise that identifying operating segments in accordance with the management perspective facilitated the consistency of information between operating segment information disclosed in the financial statements and other forms of reporting; and that the identity and nature of the CODM should be separately disclosed.

ii) Aggregation of operating segments into reportable segments

IFRS 8 requires operating segments that exceed certain quantitative thresholds to be reported separately, and operating segments that do not exceed these thresholds can be combined if they have similar economic characteristics and share a majority of the aggregation criteria as set out in paragraph 12 of IFRS 8. “Similar long-term average gross margins” is provided as the sole example of similar economic characteristics, and in practice some believe this was the key thing that should be considered in determining whether aggregation was appropriate. The staff recommended paragraph 12 of IFRS 8 be extended to include more representative characteristics such as revenue growth, exposure to currency, inflation or specific markets.

An IASB member fully supported expanding the list of examples of similar economic characteristics, noting that gross margin was a very bad all-purpose indicator as gross margins could vary significantly simply due to the size of accounts (customers).

Another IASB member did not know if expanding the list of examples would be helpful as this would result in less freedom. He believed that the point made in paragraph 41(a) of the agenda paper – that investors would like identified operating segments to align with stand-alone businesses to assist them in their use of valuation models – was the most important consideration, and that in his experience, there needed to be a certain level of aggregation to get to operating segments that were comparable with stand-alone businesses.

A further IASB member suggested that guidance on the alignment of operating segments with management commentary and presentations to analysts (as discussed on the previous issue) should be sufficient to attain the goal of preventing improper aggregation.

Another IASB member highlighted that gross margin is actually written the opposite way in the Standard, noting that the wording in the Standard was “for example, similar long-term average gross margins for two operating segments would be expected if their economic characteristics are similar”, not that their economic characteristics are similar if they have the same gross margin. He believed the aggregation criteria were perfectly clear as written.

Another IASB member suggested just deleting the sentence with the example of similar long-term average gross margins and another member agreed with this suggestion.

A further IASB member shared the view expressed by others that adding further examples was not the best idea. He suggested adding the language used in paragraph 111 of the IFRS 15 disclosure preamble, as this was essentially the principle the IASB wanted to achieve – that management needed to make the call as to what information was useful, and that if that information was not delivering useful information over time, then it would need to be adjusted.

The Chairman, acknowledging the point that people were misreading the current words, suggested that the best way forward was to add some explanatory wording around gross margin and asked the staff to come up with some wording.

iii) Preservation of trend data on reorganisation

The Senior Technical Manager highlighted the point that trend information by segment was important to investors, and that during outreach some investors suggested that on reorganisation the number of comparative periods required for operating segment information should be increased to three or five years. The staff did not recommend this approach as it went against the management perspective principle, would be burdensome on preparers in terms of both preparation time and additional audit costs, and in some cases the information may not be available. However, the staff did recommend that all interim periods of the prior reporting year should be restated and presented as part of the first interim financial reporting following a reorganisation of operating segments.

An IASB member agreed with the staff recommendation, but questioned whether any technical issues would arise in the scenario where only some of the prior year data had been subject to audit, so a company would be issuing audited financial statements and presenting on a restated basis information that was not subject to auditing at the time, and asked the staff to check with the audit firms whether they would see any technical issues arising from this recommendation.

Another IASB member noted that although he agreed with the staff recommendation, he did not believe that requiring restated comparative information for three to five years was too much to ask as this would not require any changes to items such as measurement bases or estimates, and that typically when management made such a decision, they had already analysed the preceding three to five years and had the data.

A further IASB member agreed with the staff that requiring up to five years of restated comparative information was unreasonable and failed the cost vs. benefit test. He also asked the staff to clarify whether the recommendation applied only to the immediate comparative period (in situations where two comparative periods were presented to satisfy regulatory requirements). There was discussion amongst the IASB members on this point. The Senior Technical Manager confirmed that the staff recommendation would apply only to the immediate comparative period.

Ten of the eleven IASB members present agreed with the staff recommendation to require that all interim periods of the prior reporting year should be restated and presented as part of the first interim financial reporting following a reorganisation of operating segments.

iv) Allocation of reconciling items to individual segments

v) Improvements to the understandability of the reconciliation

The Senior Technical Manager noted that some investors had requested that any reconciling items between segment information produced in accordance with the management perspective and the financial statements should be allocated to individual segments. She noted that the staff did not recommend this since including non-systematic allocations would reduce the value of segment information reported, and instead recommended that a fuller description of reconciling and unallocated items.

An IASB member noted that he believed there were two types of reconciling items, head office costs and items relating to an operating segment that had been excluded from the profit reported to the CODM, such as restructuring costs. He noted that head office costs should be kept separate if they were viewed that way by management and there should not be some arbitrary basis for allocation, but restructuring costs should be allocated to a segment.

The Senior Technical Manager noted this approach went against the management perspective. The IASB member noted that this was the area where the management perspective was the weakest, noting that the strength of the management perspective approach was in determining the operating segments in the first place, but the approach weakened as an entity moved into determining the data provided for those segments. The Senior Technical Manager explained that the reason for the staff recommendation that a fuller explanation about the nature of individual unallocated and reconciling items should be required was to enable investors to allocate for themselves the items management did not allocate. The IASB member questioned the extent to which the additional information would enable investors to be able to do this.

Another IASB member noted that he agreed with the comments of the previous IASB member he did not support the staff recommendation to require a fuller explanation of such items.

A further IASB member noted that he agreed with a previous IASB member that there were two types of reconciling items, and suggested this idea should be explored further. Another IASB member noted that he believed it would be difficult for the IASB to try and define the difference between the two types, and a further IASB member expressed similar concerns.

Eight of the eleven IASB members present supported the staff recommendation to require that reconciling and unallocated items should be fully explained in the required reconciliations.

vi) Increasing the number of reported line items

The Senior Technical Manager noted that in outreach discussions, many investors identified specific line items they believed should be disclosed; however, there was no agreement reached on what these line items should be. She noted that for the reasons set out in paragraph 82 of the agenda paper, the staff did not recommend extending the list of required line items, but instead recommended including some discussion to emphasise the importance of the core principle of the Standard, and adding additional guidance about the type of information that is particularly relevant to investors in their decision-making as described in paragraph 79 of the agenda paper.

All eleven IASB members present agreed with the staff recommendation.

The Senior Technical Manager asked the IASB members whether they believed that the areas identified in the PIR had been adequately investigated. All eleven IASB members present agreed that there had been adequate investigation.

On timing the intention was for the staff to start drafting very soon, with a view to balloting in late June/early July, and that publication of the Exposure Draft would not likely be until September.

Another IASB member questioned whether there would be an effect on convergence with US GAAP (FAS 131). The Senior Technical Manager noted that the view of the IASB staff was that the amendments should not have an effect on convergence, and noted that now the IASB staff had more of an idea of where the drafting was going, they would speak to the FASB staff again in more detail.