Recap

At the March meeting, the IASB resumed its deliberations on their project to revise the Conceptual Framework. The IASB published exposure draft ED/2015/03 Conceptual Framework for Financial Reporting in May 2015. The IASB invited comments on the exposure draft until November 2015.

The staff analysed the comment letters received. The comment letters showed that most of the respondents support the IASB’s decision to revise the Conceptual Framework. The staff prepared a high-level summary of the comments received on each major section of the exposure draft.

The purpose of the session was to provide the Board with an overview of the comments.  The Board was not asked to make any technical decisions in this session.  The staff would bring more detailed papers back on particular topics.

Discussion

The Board did not make particular decisions on the topics presented. The discussion was based on providing feedback to the comment letters received.

The staff clarified that many respondents indicated that the Conceptual Framework should be a “living document” when the Board considered that there were new issues. The staff indicated that this idea would be discussed at a strategy meeting next month. The staff would also bring to the next meeting a discussion paper about the purpose of the Conceptual Framework.

There were comments related as to how the effects on the Conceptual Framework should be tested (i.e how it would change existing Standards; how it would change Standards being developed and how it would affect areas where there were no Standards). The staff responded that the comments were not particularly focused on any specific approach. There were concerns noted that it seemed that there was an expectation that there would be changes in existing Standards derived from the Conceptual Framework. In that regard, it was pointed out that it would be a separate decision whether or not to change existing Standards,

There were more specific concerns about the research project on Financial Instruments with Characteristics of Equity (FICE) because it could have significant implications on the Conceptual Framework. Another concern noted was that the Board should have the goal to align at a certain point the Standards with the Conceptual Framework.

See discussion below for each topic.

Chapter 1 – The objective of general purpose financial reporting

Many constituents agreed with the treatment of stewardship in the exposure draft but some requested more guidance on the term ‘stewardship’ and its relation to the word ‘accountability’; on how the increased focus on stewardship will affect future standard-setting; and on the link between the stewardship discussions and the discussions around the objective of financial reporting. Some respondents suggested adding stewardship to the objectives of financial reporting.

Discussion

There was an extensive debate on the concept of stewardship. Some Board members indicated that it seemed there was different understanding of the meaning of stewardship. There were concerns that some respondents considered that stewardship implied the use of cost-based accounting measurement, because it was believed to be less volatile. One Board member suggested linking the mission statement of the IASB, which focused on serving public interest and promoting rigorous reporting Standards, with the Conceptual Framework so that it would be clear what the Board meant with the concept of stewardship. The Chairman agreed that more work would be necessary in this area, he also pointed out that management accountability was more than the investors assessment of “buy/sell/hold”. 

There was also a discussion about the role of regulators. The Chairman disagreed with some of the comments stating that regulators should be considered as primary users of financial statements. He believed that regulators worked on behalf of investors and creditors and were “agents” of the primary audience.

Another comment on this topic was that accountability should be considered in relative terms rather in absolute terms as to the mission given to management. Even though management could perform well, it would not automatically mean that investors would not sell shares of the company because for example other investments could be more attractive at that particular time. Management should not be responsible for market changes or new technology. In that regard, it was also indicated that best corporate management practices tended to align assessment of management performance with external reporting. The Chairman suggested discussing further the concept of stewardship at future meetings.

Chapter 2 – Qualitative characteristics of useful financial information

Many of the comment letters welcomed the reintroduction of prudence to the Conceptual Framework. Some argued that the Conceptual Framework should state in its main body that selecting asymmetric accounting policies for gains and losses is possible if such selection is intended to result in relevant information that faithfully represents what it purports to present.

With regard to measurement uncertainty, respondents suggested it should be explained as an aspect of either relevance and faithful representation, or reliability. Some suggested reintroducing reliability as a qualitative characteristic.

Discussion

Among the main comments made during this discussion were:   

1. there was support from some Board members on the suggestion to use the word “unbiased” instead of neutral to avoid misunderstanding, it was pointed out that the word neutral implied a mathematical centre. It was also suggested that it would also be useful to introduce the concept of “credibility” and it should be explained that “unbiased” meant to achieve credibility and that was that prudence was all about.  The staff responded that “unbiased” could also imply a mathematical centre;
2. it should be important to explain that the Board intended not to change this chapter other than in very limited circumstances;
3. the definition of the word “prudence” in a dictionary had a different meaning from the one intended by the Board, which was more consistent with neutrality and it was suggested not to use the word “prudence”;
4. it was pointed out that the suggestion in paragraph 14 of the agenda paper which indicated that neutrality should be a starting point was a good alternative and asymmetry should only be incorporated if there was a valid reason; and
5. it seemed that the concept of neutrality was not commonly understood and it was necessary to clarify what the Board meant in using this concept.

Chapter 3 – Financial statements and the reporting entity

Many respondents supported the proposals on the description and boundary of a reporting entity. However, some of them think more guidance is needed. While there was general support for the use of control to determine the boundaries of a reporting entity, some respondents found the terms ‘direct control’ and ‘indirect control’ confusing as they were not used in IFRS 10.

As regards combined financial statements, some respondents supported the idea but asked for guidance on when preparing combined financial statements might be appropriate. Many respondents disagreed with the statement that consolidated financial statements were more likely to provide useful information than unconsolidated financial statements. The proposed description of going concern was supported by many while views were mixed about the statement that financial statements are prepared by the entity as a whole rather than from the perspective of any particular group of investors, lenders and other creditors.

Discussion

Few comments were made on this topic. It was suggested to provide more guidance on combined financial statements and explore more the concept of usefulness of consolidated vs unconsolidated information.

Elements of financial statements – Assets

While regulators, standard-setters, accountancy bodies, accounting firms and individuals broadly supported the proposed changes to the definitions for an asset and a liability, the views of preparers of financial statements were more divided. Those who disagreed with the definitions were concerned about the proposed replacement of the notion ‘expected’ economic benefits with ‘potential to produce’ economic benefits. Their main concern was the increased population of assets and liabilities and the fact that, together with the proposed recognition criteria, more low-probability items would be recognised in financial statements.

Furthermore, some respondents expressed a desire for more guidance on selecting a unit of account and some respondents disagreed with the proposal that executory contracts give rise to a combined right and obligation that constitutes a single asset or liability. In their view, executory contracts give rise to a separate right and a separate obligation.

See discussion below

Elements of financial statements – Liabilities and Equity

Many respondents agreed with the definitions of a liability and equity. Some respondents suggested prioritising problems that arise in classifying financial instruments with characteristics of both equity and liabilities. However, most of the respondents agreed with the IASB’s decision to explore those problems in a separate project.

Many respondents agreed with the proposed description of ‘present obligation’. However, most banks disagreed with the proposed description. They expressed concern about the implications for the classification of claims as liabilities or equity. Some respondents believed that the description or accompanying guidance could be difficult to interpret and implement.

See discussion below

Elements of financial statements – Income, expenses and undefined elements

There was no objection amongst most respondents to retain the existing definitions of income and expenses largely unchanged, to remove some discussions of various types of income and expenses from the Conceptual Framework and not to define elements for either the statement of changes in equity or the statement of cash flows.

Discussion

The Board discussed the elements of financial statements together. The majority of comments were related to the definition of liabilities. Some Board members pointed out the need to consider in more detail the concerns presented by bank institutions because they considered that complex financial instruments could bear different application questions, such as the role the concept of economic compulsion might play in identifying liabilities of banks.

There were also concerns about the potential implications of moving forward with the Conceptual Framework project while at the same there were separate projects about financial instruments which require a definition of liabilities. There was no agreement as to how to approach this issue. On the other hand, it was pointed out that bank regulators agreed with the definition of liabilities proposed in the Conceptual Framework. The staff indicated that it was not yet clear why there were different views between banks and their regulators.

There was support for providing more guidance on the meaning of “no practical ability to avoid” in the definition of liabilities.

Few comments were made in relation to the definition of assets. One Board member asked the staff to explore the comments presented in paragraph 27(e) of agenda paper 10D which indicated that the measurement of a collective bundle of rights accounted for as a single asset was not necessarily the sum of the measurements of the individual rights that collectively form the asset. Another comment was that the concept of “rights” was mostly understood as being derived from a legislation or law which made a right enforceable; however, the intention was to include other rights (i.e. access rights) and it was pointed out that there should be a better articulation of the definition.

Recognition

There was broad support amongst constituents for the proposed approach to recognition, however preparers and users of financial statements were less supportive. Those who disagreed would like to retain the existing criteria, particularly the ‘probability criterion’. They expressed concern about the concept being too abstract and subjective and that low-probability items could be recognised.

Discussion

Few comments were made on this topic. There was a concern noted that users needed clarification as to in which circumstances they would need to refer to the Conceptual Framework for guidance and the consequential interaction with the existing guidance in IAS 8.

Derecognition

Many respondents generally agreed with the proposed discussion on derecognition. As regards modification of contracts, some respondents supported including the proposed guidance.

Discussion

Only one Board member indicated that using a control approach in a mixed measurement environment provided opportunities for recognition of gains or losses which might be inappropriate.

Measurement and capital maintenance

Some respondents suggested that further research was necessary before the measurement chapter was issued or to issue the Conceptual Framework with only limited guidance on measurement and perform some research after publication. Most respondents expressed support for the proposed measurement bases with some respondents suggesting that additional measurement bases should be addressed. Most respondents agreed that the selection of the measurement basis should be based on the qualitative characteristics. Many supported that a different measurement basis may be used in the statement of profit or loss if current measurement is used in the balance sheet, however, some suggested that further guidance is necessary.

Most respondents considered the concepts of capital and capital maintenance unsatisfactory.

Discussion

The discussion was mostly focused on the concept of capital maintenance. It was clarified that the Board did not analyse the issue and the ED Conceptual Framework maintained the existing concept.  . It was agreed that the current wording was erroneous and leaving it with no changes could send the message that it was considered appropriate. There were some comments about deleting the definition of capital maintenance but it was pointed out that it would be necessary to review all the Standards that had a reference to this concept. On the other hand, it was pointed out that the concept of capital maintenance was fundamental to financial reporting and should not be abandoned.

Presentation and disclosure

There was general agreement amongst constituents with the proposals on presentation and disclosure with some concerns and reservations about particular parts of the proposals. Those who disagreed argued that the proposed guidance is insufficient to guide the Board in future standard-setting activities.

Many respondents welcomed the work the IASB performs under the disclosure initiative, although some wished for more clarity as regards the interaction between the Conceptual Framework and the disclosure initiative project.

Discussion

No significant comment was made on this topic.

Information about financial performance

Interested parties expressed diverse and often opposite views about presenting information about financial performance. Many respondents disagreed with some or all of the aspects of the proposals. In their view, the proposed guidance is not conceptual and insufficient to guide the Board in future standard-setting activities. Some respondents suggested revisiting the Conceptual Framework after the project on primary financial statements is finalised.

Many constituents disagreed with the proposals on the use of OCI, with some disagreeing with the items that should be in OCI and others believing that the proposed guidance is insufficient and lacks a conceptual basis. A slight majority of respondents suggested that all OCI items should be recycled with some supporting a rebuttable presumption and others supporting a requirement for recycling.

Discussion

There was a substantive discussion on this topic. The area that raised more comments was OCI. Board members observedthat:

1. if the Board decided to maintain the concept of OCI, then it should be refined;
2. there was no clear concept of OCI and there was a need to prevent accounting abuse; the best approach would be to provide a robust principle or if not possible use the idea of a rebuttable presumption;
3. OCI should be discussed at a Standards level (suggestion agreed by the Chairman);
4. there should be a high hurdle for recognising an item in OCI; and
5. the Chairman indicated that there should be more analysis about recycling because it distorted financial reporting;

There were different suggestions on segregating items on the P&L, for example segregating components that could be converted to cash readily vs those that could not. Another approach suggested was to segregate P&L in three elements (i) whether the element was persistent or not; (ii) cash or non-cash related and (iii) controllable or non-controllable.   However, some members pointed out that it would be difficult to implement.

Another issue pointed out that the discussion should not focus on areas that mostly relate to questions at a Standard level.

Some Board members considered that the IASB should not finalise this chapter until work on performance reporting has been completed.

Business activities and long-term investment

As regards business activities, almost all of the respondents agreed that the way in which an entity conducts its business had a role to play in financial reporting. However, supporters had different views as regards the extent of the proposed guidance. About one half agreed with the proposed guidance while the other half suggested giving more prominence to the notions of business activities or business model.

As regards long-term investment, many agreed with the proposed approach, i.e., the proposed Conceptual Framework contains sufficient guidance for the Board to make appropriate standard-setting decisions on measurement and presentation of long-term investments and to address appropriately the needs of long-term investors.

Discussion

No comments were made on this topic.

Effects of the proposed changes to the Conceptual Framework and the exposure draft Updating References to the Conceptual Framework (‘the Updating References ED’)

As regards inconsistencies between existing IFRSs and the proposed Conceptual Framework, some respondents agreed with the Board’s analysis of inconsistencies, many suggested other possible inconsistencies and some encouraged the Board to undertake a more comprehensive effects analysis.

Many agreed that there should not be an automated revision of IFRSs upon publishing a revised Conceptual Framework. Some, however, suggested addressing all identified inconsistencies.

Most respondents agreed with the Updating References ED. Some were concerned about unintended consequences and suggested a comprehensive effects analysis of the proposals.

Discussion

The only comment made on this topic was that it would be necessary to analyse the implications in IAS 1 and IAS 8 of referring to the revised Conceptual Framework.

The papers summarised the feedback received by IASB on its Exposure Draft (the ED) addressing the effects of the misalignment of the effective dates for IFRS 9 (effective from periods beginning on 1 January 2018) and the new IFRS on insurance contracts (effective date not yet decided by the IASB but expected to be at least two years later than IFRS 9).

The Board received 95 comment letters from preparers, accounting and actuarial bodies, regulators and national standard setters. The comments received are summarised in paper 14A. The Board has also conducted extensive outreach activities with users over August-September 2015 and November 2015-March 2016 periods. The feedback from users is summarised in paper 14B. Paper 14C sets out the proposed direction for the Board’s redeliberations, gives Staff recommendations on the key issues and suggests a project plan.

The majority of preparers agreed with the concerns raised in the ED and thought that a solution is required, but agreed that such solution should be optional. Most of the preparers argued that the deferral approach is the only approach that would address all their concerns. Some groups combining banking and insurance businesses favoured the overlay approach. Regarding the scope of the deferral approach, the majority of respondents thought it was too narrow. However, while most of the regulators would prefer to apply the deferral approach only at the reporting entity level as proposed in the ED, the majority of the preparers, accounting bodies and national standard setters would favour permitting it at below the reporting entity level. This would mean that in the same consolidated financial statements there may be qualifying insurance subsidiaries which could opt for continuing to apply IAS 39 while the rest of the group would be required to apply IFRS 9. Regarding the ‘sunset clause’, respondents had mixed views, with most of the preparers wishing to defer the application of IFRS 9 until the effective date of the new IFRS on insurance contracts becomes known, while most of the regulators, some auditors and national standard setters preferring a fixed expiry date. The Board is due to select the mandatory effective date for the new IFRS on insurance contracts in the next few months.

The population of users involved in the outreach was mostly from Europe (50%), Australia (20%) and Asia (20%) with the rest split between North and South America. In the second outreach period the Board enquired a greater proportion of users following conglomerates and financial institutions, rather than the insurance industry only. There have been mixed views on the concerns raised in the ED. Many users replied that increased volatility in profit or loss from applying IFRS 9 would not affect their analysis because they focus on other metrics and commented that there is no need for the solutions proposed by the ED. Others (mainly from Europe and Asia) viewed the increased volatility as unhelpful and expressed a preference for the overlay approach over the deferral approach. They also agreed that any approach should be applied only at the reporting entity level. The majority of users considered having two optional approaches a reduction in comparability and preferred, if any approach was introduced, a single mandatory approach for qualified entities. Most users supported the ‘sunset clause’.

Considering the feedback received the Staff was asking the Board to confirm that:

• Entities should be able to qualify for both a deferral or an overlay approach;
• Both approaches should be optional;
• The assessment of the eligibility for the deferral approach should be performed at the reporting entity level only; and
• There should be a fixed expiry date for the deferral approach (‘the sunset clause’).

The paper also provided a proposed project plan. The April 2016 meeting would aim to deliberate on the deferral approach with the following month dedicated to the deliberations on the overlay approach. Finally, the Board was be called to vote on the fixed expiry date for the deferral approach and the application of either approaches for first time adopters of IFRS. The Staff is planning to discuss permitting a narrow exemption from applying uniform accounting policies for entities using the equity method for investments in associates and joint ventures where the accounting for financial assets may follow a different approach to the one adopted by the investor.

Board discussion

Agenda Paper 14A - Summary of comment letters and outreach

A Board member stated that he was not convinced that if IFRS 9 is implemented in 2018 there would be incremental costs as extensive as suggested by some respondents. He considered that IFRS 9 will provide useful information, including expected credit losses, which would not be a wasted cost. He noted that more volatility may arise, but this would be economic volatility, not volatility arising from accounting mismatches. He also noted the concerns raised by a few respondents about the tax and regulatory impact that may arise, but commented that there had been a consistent lack of empathy about these issues by the Board.

Another Board member stated that she found the arguments about the cost of implementing the overlay approach difficult to understand as insurers currently need to have fair values for disclosure purposes, and she noted that those respondents who stated that they intended to adopt the overlay approach considered that the costs would not be burdensome.

One Board member felt that insurance activities could be reported under IAS 39 in the segmental reporting, but noted that volatility would still arise in equity as the overlay approach would only result in the difference in measurement between IAS 39 and IFRS 9 moving from profit or loss to OCI. He noted that different classifications of financial assets would be possible if both IAS 39 and IFRS 9 were applied by the reporting entity at the same time and comparability would be more difficult to achieve than if the entity used only IAS 39 or IFRS 9.

A Board member stated that investors compared bankassurers to banks rather than to insurers, therefore the impact of applying IFRS 9 at the reporting level was important.

Another Board member stated that it was important to have a fixed expiry date for the temporary exemption from applying IFRS 9, whether this was 2021 or some other date. Without this the Board would be inviting more disagreement on the proposed solution. However another Board member observed that the Board would probably allow a further deferral in the implementation date of IFRS 9 if it considered this to be necessary due to unexpected delays in the publication of the new IFRS on insurance contracts.

The Staff noted that feedback had been received on two proposals about which the Board did not ask for comment. These were (1) IFRS first-time adopters would be prohibited from applying the overlay approach and the temporary exemption, and (2), an entity may be required to apply different accounting requirements to its investment in associates and joint ventures. After limited discussion it was agreed that these were valid points which needed to be considered further.

Agenda Paper 14B - Summary of feedback from the users of financial statements

The Staff noted that many users had stated that they used OCI metrics in addition to information in the profit or loss and that confusion would arise if there were too many options. Many users supported the overlay approach with a single presentation approach being permitted. Few favoured the deferral approach, but if this was an option, this should be at the reporting entity level. The majority of users preferred that any approach the Board will eventually select it should be made mandatory rather than optional. All users considered that having an expiry date was important.

One Board member considered that the expected loss model will provide useful information, and that investors agreed that the benefits of this would exceed its cost. He stated that most insurers have a credit risk management unit and the information required by IFRS 9 should be available. Differing views were expressed about the extent to which it would be necessary to maintain two systems to produce both IAS 39 and IFRS 9 information.

In response to a question by a Board member, the Staff stated that there had been responses by 18 standard-setters, who supported the option to introduce both the overlay and the deferral approach and recommended that the deferral approach is applied at both the reporting entity level and below.

Agenda paper 14C - Project direction and plan

A Board member asked why, despite users not supporting the deferral approach, it remained a Staff recommendation. The Staff responded by stating that their recommendation took into account the views of all respondents and the views of several Board members.

Another Board member stated that the potential for accounting mismatches is more important than the cost considerations. The overlay approach will introduce some costs, and although deferring IFRS 9 would solve the accounting mismatch and cost issues, the deferral approach should only be available in limited circumstances particularly because credit loss information would not be reported in those entities. Given this inherent weakness the Board would need to consider further the disclosure requirements under the deferral approach.

A further Board member stated that she felt that the overlay approach would not result in prohibitive costs, but the deferral approach was a cleaner solution for an insurer. She felt uncomfortable about straying outside of user preference, but the proposed definition of the scope restriction for deferral by ‘pure insurers’ would cause fewer problems for users, therefore she felt that the Staff recommendations achieved a reasonable balance between the differing views.

A Board member stated that having consistent accounting policies was a compelling reason not to move to having a mixed IAS 39 and IFRS 9 model, and another Board member felt that a mixed model would result in a lack of transparency. A further Board member stated that there were two extenuating circumstances to this view, being (1) staying with IAS 39 was a simple approach, and (2) there would be no change to existing accounting for a limited period. However, he felt that the benefits of both of these would be reduced if the deferral approach was applied below the reporting entity level, as there would be a mixture of IAS 39 and IFRS 9 accounting which would add costs and complexity for users. Another Board member noted that added complexity would also arise to explain the accounting treatment of financial assets transferred within a reporting entity where a different accounting policy applied. 

A Board member stated that the temporary expiry date needed to be for a short period, and he felt that preparers should be encouraged to adopt IFRS 9 before the expiry date. He was against the overlay approach because of the loose designation basis proposed in the ED.

Tentative decisions - Project direction

The Board was asked to agree to confirm the following matters:

1. The ED proposal to provide a temporary exemption from applying IFRS 9 for qualifying entities.
   
   The Board approved the Staff recommendation with 11 members voting for and 3 against.
   
   
2. The ED proposal that the eligibility for the temporary exemption should be determined at the reporting entity level only.
   
   The Board approved the Staff recommendation with 13 members voting for and 1 against.
   
   
3. That there should be a fixed expiry date for the temporary exemption.
   
   The Board approved the Staff recommendation with 13 members voting for and 1 against.
   
   
4. The ED proposal to provide an overlay approach.
   
   The Board approved the Staff recommendation with 13 members voting for and 1 against.
   
   
5. The ED proposal that the temporary exemption from applying IFRS 9 and the overlay approach should be optional.
   
   The Board unanimously approved the Staff recommendation.

The project plan sets out the issues that the Board will consider in April and May 2016. The main topics are (1) the deferral approach ( referred to as the “temporary exemption”) (2) the overlay approach (3) other issues, including the fixed expiry date for the deferral approach and whether it should also apply to the overlay approach, whether IFRS first-time adopters would be permitted to apply the overlay and/or the deferral approach, whether an exemption should be provided from requiring the entity’s financial statements to be prepared using uniform accounting policies when accounting for investments in associates and joint ventures and (4) due process and permission to ballot.

There were no comments on the project plan.

Recap

At the end of last year, the IASB started its discussions on how to clarify the definition of a business and related application guidance.

In the December 2015 meeting, the Board tentatively decided to:

1. clarify, in the illustrative examples of the proposed amendments, that a building acquired and an in-place operating lease shall be considered a single asset for the evaluation of the ‘substantially all’ threshold;
2. clarify, in the proposed amendments to the application guidance of IFRS 3, that an acquired outsourcing agreement may be considered to provide an organised workforce and that the acquirer should consider whether the organised workforce accessed through the acquired outsourcing agreements perform a substantive process;
3. explain, in the Basis for Conclusions of the proposed amendments, that when an entity acquires a supplier that then ceases generating revenues, because all output is consumed by the acquirer, the supplier would still be 'capable of' generating revenues, and so it might qualify as a business, if the other criteria are met; and
4. add two illustrative examples on how to apply the proposed guidance in the financial sector and in the extractive industries sector.

In this meeting the staff asked the Board whether they agreed with the proposals to expose amendments to the Application Guidance of IFRS 3 that are different from the wording exposed by the FASB.

The following changes were proposed compared with the FASB exposure:

• change the order of some paragraphs;
• wording changes in the explanation of gross assets acquired;
• wording changes in the explanation about acquired contracts; and
• streamlining of wording of some illustrative examples.

Discussion

There was a very short discussion. No significant issues were raised other than the importance to maintaining convergence. One Board member suggested the staff to reach out to the FASB staff and provide them with the IASB’s current analysis and obtain their feedback. Some Board members suggested that there should be a discussion on (i) whether convergence should be maintained at all costs; and (ii) whether it is feasible to have Standards issued with different wording (by the IASB and FASB) which are intended to achieve the same outcome. The Chairman disagreed with discussing the first suggestion.

As regards the wording of the agenda paper, there was only one question raised by a Board member. That related to the lack of clarity of paragraph 13, which states that an acquired contract is not in of itself a substantive process. The paragraph explored a situation in which an acquirer obtained a contract to get access to an organised workforce. The Board member pointed out the need to clarify that an acquirer should focus on the substance of a contract. The staff indicated that a contract was an input and accordingly, an acquirer should analyse whether it also obtained the substantive processes performed by the workforce. The staff will review the wording of that part of the proposed amendment.

Goodwill and impairment project — Agenda paper 18

Recap

As a result of the post-implementation review (“PIR”) of IFRS 3 Business Combinations the IASB decided to examine issues related to the subsequent accounting for goodwill; improving the impairment test in IAS 36; and the identification and measurement of intangible assets in a business combination.  The IASB discussed the first two topics in October and the third in November 2015.  In February 2016 the Board continued deliberations on those topics and instructed the staff to provide quantitative information about the amount and trends of reported goodwill, impairment and intangible assets over recent years. The staff would present this information at the April 2016 IASB meeting.

No technical decisions were made at those earlier meetings. 

During this meeting the Board considered (i) ways to improve the information provided about goodwill and impairment and (ii) whether there was a need to clarify the existing requirements for customers relationships acquired in a business combination.

Staff proposal for continuing the project:

The staff proposed to continue the project in two phases:

Phase one: To discuss the following topics jointly with the FASB: (i) whether to include any intangible assets in goodwill rather than recognising them separately and (ii) subsequent accounting for goodwill (in particular whether reintroducing amortisation of goodwill would improve financial reporting).

Phase two: To have IASB-only discussions to consider improvements to the impairment testing and disclosures.

The timetable proposed by the staff is as follows:

• April 2016: Presentation of quantitative information
• April/May 2016: Education session with the FASB by videoconference.
• June 2016: Joint decision making meeting with the FASB.

Goodwill and impairment project– Customer relationships acquired in a business combination- Agenda paper 18A (topic included in Agenda paper 18A discussed in February 2016)

Recap

In February 2016 the staff presented analysis about clarifying guidance on customer relationships, a type of customer related intangible asset.

The purpose of this agenda paper was to describe an issue discussed by the IFRIC on customer relationships acquired in a business combination and provide staff analysis and recommendations for how the Board could address the issue. The staff did not ask the Board members to make any decisions on this agenda paper.  Instead, the IASB was asked whether they have enough information to discuss it with the FASB.

Staff recommendation

The IFRIC submission identified different views in practice about the classification of customer relationships as contractual or non-contractual. The classification had a significant impact in applying IFRS 3 because the legal environment in many countries made it impossible to sell a group of customers if they were not separable. The staff conclusion was that it was not necessary to clarify the meaning of “contractual” customer relationships, because other Standards already provided guidance of what was considered a contract. Instead, the staff recommended adding a definition of customer relationships in the Standard, as follows:

A customer relationship:

1. represented the future economic benefits in the form of future business with a customer beyond the amount secured by any current contractual arrangement.
2. existed  between an entity and its customer if the entity had information about the customer and had regular contact with the customer”.

Further, the staff recommended that if the definition was not met, the customer relationship should not be recognised separately from goodwill.

Discussion

No decisions were made. The Board raised the following concerns and questions to the staff:

1. The staff was asked to analyse what was going on in this area and to compare their analysis with FASB’s analysis
2. There was general concern about distinguishing contracts on whether they were written or not because that was not useful information;
3. There was general concern that customer data was not the same as customer relationships; customer data was consider as just having information about customers while customer relationships were beyond that;
4. There were concerns about the definition proposed by the staff because it related to future transactions which were not under control of a company and accordingly, whether that could be considered an asset;

Goodwill and impairment project- Improving the disclosure requirements for goodwill and impairment- Agenda paper 18B

Recap

The Board discussed in February 2016 the staff analysis requirements in Agenda papers 18A and 18B.on improving disclosure.  Those agenda papers also include a discussion of concerns raised on the PIR of IFRS 3. The staff proposed that the Board (i) consider ways to make disclosures about goodwill and impairment more effective and (ii) decide which approach the staff should develop further.  The agenda paper included an analysis of the feedback received about impairment requirements.

Staff recommendation

The staff proposed for the Board to consider the following approaches for additional disclosure requirements:

1. Disclosure of why management paid a premium and the key performance targets.
2. Disclosure of why management paid a premium and the key performance targets and a basic comparison with actual performance.
3. Breakdown of goodwill by acquisition.
4. Disclosure of recoverability of goodwill.
5. Information about the payback period. This option is not recommended by the staff.
6. Consider ways to improve application of existing disclosures in IAS 36.

The staff also recommended that field testing should be performed to understand the impact on preparers, auditors and others of the options discussed.

Discussion

No decisions were made. There was general support from the Board to the staff recommendations and the staff was encouraged to conduct field testing. The staff was specifically asked to focus on material acquisitions and inquire about the feasibility of the proposals noted in items (i) and (ii) above. There was no support for item (v) above because it was considered that the term was not defined and it would be difficult to implement. 

On the other hand, some Board members believed that the information required in items (i) and (ii) should be presented as part of management commentary instead of a company’s financial statements.

During the discussion while some concerns were presented by some Board members:

The concerns were related to:

1. the information in items (i) and (ii) was usually presented to investors privately; however, there were concerns whether there could be market sensitivity information that could not be made publicly available;
2. how this proposal would be consolidated into current disclosure requirements which were considered already complex;
3. whether this proposal would work in companies with more than one acquisition per year;
4. whether it would only encourage more boiler plate disclosures;
5. whether it would be necessary to review the disclosure requirement objectives  in IFRS 3 and state the expectations more clearly;
   

Goodwill and impairment project- Improving the impairment test- Agenda paper 18C

Recap

In February 2016 the staff presented in agenda paper 18C an analysis of potential improvements to impairment testing to address concerns raised in the PIR of IFRS 3.

The purpose of this agenda paper was to ask the Board to consider a possible modification to the impairment test to address users’ concerns about late recognition of impairment losses and overstatement of goodwill (for example because of an overpayment).

Staff Analysis

The staff considered that an overpayment or underpayment might occur in a business combination and that acquired goodwill was comprised of some or all of the following components: (a) the fair value of the expected synergies and other benefits from combining the acquirer’s and acquiree’s net assets and businesses; (b) the fair value of the going concern element of the acquiree’s existing usiness; (c) assets that were not recognised separately because they were not identifiable; (d) differences that arisen because some assets and liabilities acquired in a business combination were not measure at fair value, for example income taxes and employee benefit; (e) overvaluation of the consideration paid by the acquirer; (f) overpayment by the acquirer.

Staff Recommendation

The staff believed that conceptually overpayments and underpayments should not be part of goodwill because they represent either a gain (in the case of underpayment) or a loss (in the case of overpayment) to the acquirer. However, the staff considered that the quantification of overpayments would not be feasible. Instead, the staff recommended three possible approaches:

1. incorporate into the impairment test calculation any excess of the recoverable amount over the carrying amount of the existing CGUs (or groups of CGUs) to which goodwill is allocated;
2. after the purchase price allocation has been completed, at the end of the measurement period, require any identified overpayment to be quantified and written off ;
3. measuring acquired goodwill on a stand-alone basis against the assumptions that gave rise to it at acquisition;

The staff recommended following approach a). The agenda paper included a detailed analysis as to how the staff envisaged applying this approach.

Discussion

No decisions were made. There was general support expressed by the Board for continuing to develop the thinking around the proposal (a) above and no significant interest was expressed for proposals (b) and (c) because it was considered that approach (a) would give an opportunity to address the concerns on existing requirements on impairment testing.  The staff was instructed to explore option (a) further and to provide the Board with a detailed analysis of how this approach would work.

During the discussion the following concerns were noted on approach (a):

1. potential incremental costs and complexities would be added to the impairment testing;
2. whether this approach would work in companies with more than one acquisition allocated to a CGU;
3. whether this approach would encourage entities to not allocate goodwill acquired to existing CGUs in order to avoid the impairment testing on acquisition;
4. whether there could be an impact depending on the accounting policies adopted by a company  in terms of identifying assets in an acquisition, (i.e. either more conservative or more liberal approach);
5. it appeared difficult to understand how pre-existing internally generated goodwill would be measured for impairment testing; the paper seemed to assume that this could be calculated; in that regard the staff indicated that it would be clearer if that term were called “headroom”.

Comment letter and outreach summary — Agenda Paper 24

The purpose of this paper was to provide an analysis of the feedback received in relation to the request for views 2015 Agenda Consultation (RFV). The staff would present in future sessions an analysis of the comments letters received on individual projects and a work plan for discussion by the Board.

The key messages received were:

• The completion of major projects such as leases (now completed), Insurance, Disclosure Initiative and Conceptual Framework should be a high priority;
• The Board should focus on its implementation activities rather than on new Standards level projects;
• The Board should analyse the delays experienced in completing major projects
• There was support for the research programme; however, there was uncertainty about the strategy, objective and processes of the programme;
• There were too many narrow-scope amendments and the Board should instead focus its maintenance activities on PIRs of recently issue Standards, and broader reviews of other Standards where a number of issues have arisen;
• There were mixed views on the timing and areas on which PIRs should focus;
• There was support for maintaining convergence of Standards
• The Board should consider improving the quality of drafting in order to reduce re-exposure and implementation issues;
• Although not considered as part of the key messages received, the activities of the IFRS Interpretations Committee (IC) received the following comments: (i) the IC should subject submissions to a greater initial analysis to filter important issues; (ii) there was a large number of topics rejected; and (iii) agenda decisions were not clear and more detailed of facts and circumstances should be provided.
• There were also concerns raised in relation to narrow scope amendments because it was considered that: (i) did not address fundamental underlying issues; (ii) could have unintended consequences; and (iii) might not be unjustified if the Board had not gathered enough evidence of diversity in practice.

Further detailed was presented in the agenda paper following the questions raised in the RFV:

• Q1 Balance between the Boards type of activities
• Q2 and Q3 The Board’s research programme
• Q4 Standard level projects
• Q5 Implementation support and maintenance of IFRS Standards
• Q6 Level and pace of change
• Q7 Other comments
• Q8 Interval between agenda consultations

Discussion

No decisions were made. The staff indicated that the next step would be a paper for the Board about balancing activities; how the message received would affect the work plan; and prioritisation criteria and potential impact on individual research projects. The staff will also be consulting with the Advisory Council in June.

The Chairman indicated that in his view the feedback asked the Board for less Standard setting and the more work on implementation activities, although he was sure about the precise meaning of this request. He also sensed that the Board should focus on the Disclosure Initiative, digital reporting, non-GAAP measures and performance reporting.  None of these projects would require huge system changes, and all would improve the overall effectiveness of fianncial reporting. He also indicated that there appeared to be mixed messages in that there were comments that the Interpretations Committee was dismissing too many agenda items; while the Board was dedicating too much time to narrow scope amendments. He also noted that the questions asked were very generic and the Board should take the leadership in moving forward.

There were also comments from some Board members in that there was a perceived need to improve communication particularly, how around the research projects. It was also noted that the Board should not wait for agenda consultations to initiative new projects; it seemed necessary to act in accordance with the needs derived from the economic environment.  Some comments in the agenda consultation suggested that the Board had not made this point clear.  On that basis, the agenda consultation was more about assessing the balance periodically.

In relation to maintenance activities, there was a concern raised about which party would be responsible for those activities (i.e.  the Board, the Interpretations Committee, or the staff). Some Board members believed that constituents could not be expected to provide an answer to that question. 

Trustees’ Review of Structure and Effectiveness — Agenda paper 24B

The IFRS Foundation (‘the Foundation’) published the consultation document Request for Views—Trustees’ Review of Structure and Effectiveness (‘the RfV’). The RfV contained three main areas on which the Trustees were seeking comments, as follows:  (a) the relevance of IFRS Standards (‘the Standards’); (b) the consistent application of the Standards; and (c) the governance and financing of the Foundation.

The agenda paper provided:

1. an update on the decisions taken by the Trustees in redeliberations on the RfV (excerpted from Agenda paper 4 from the February 2016 Advisory Council meeting and; 
2. a summary of the feedback received on the RfV in areas that are relevant to the Agenda Consultation (excerpted from Agenda Paper 4A from the February 2016 Advisory Council meeting).

In relation to the first topic, the agenda paper indicated that the Trustees made decisions in January 2016 on few areas and directed the staff to conduct further analysis on the more complex topics for their May 2016 meeting.

In relation to the second topic, the agenda paper presented a detailed analysis of the feedback received. The main comments presented are:

• The majority of respondents did not support an expansion in scope to not for profit entities and there was agreement with the Trustees proposal for not expanding its scope to include public sector entities; 
• There was agreement that the IFRS taxonomy should not dictate the standard-setting process;
• There was general support for establishing a network of experts to provide advice on technological developments and how the Foundation and or the Board should respond;
• There was general support for the Foundation’s efforts to encourage consistent applications while it was expressed that the Board should remain focused on setting principle-based standards;
• There was support for the establishment of TRGs and it was indicated that TRGs should be used for major complex Standards;
•  In relation to the IFRS Interpretations Committee (IC) activities the comments indicated that it was perceived as slow and unresponsive with a long lag between submissions and decisions and that the IC sometimes did not focus on the underlying causes of the issues considered;
• There were mixed views on the usefulness of the Education Initiative; and
• There was general support for the PIRs with suggestions presented to improve its efficiency.

Discussion

No decisions were made. The staff indicated that the Board would meet with the Interpretations Committee in May to discuss the feedback received about the Interpretations Committee.

There was extensive discussion about a concerned raised by one Board member. He pointed out that there were negative comments about the transparency of the drafting process. He indicated that the process should be more open to the public, that would reduce the risk of unintended consequences and it would help to test whether the Standard would work as intended. Several Board members indicated that it would be very difficult to implement; and that there was also a risk that if the process were open, many issues that were discussed and approved by the Board could be re-opened which could also indicate that it was in practice a re-exposure. The Chairman indicated that he believed that the process was already the most transparent process anywhere in the world, and not just among accounting standard setters. The staff noted the option was already open to the Board to have a public fatal flaw review, but that the Due Process Oversight Committee had warned that it should be used with caution.