At its meeting with its Standards Advisory Council 23 July, IASB presented a paper that proposed major changes to the structure of the Standing Interpretations Committee (SIC). SAC comments are noted in italics:

Name of committee. SIC will be renamed the International Financial Reporting Issues Committee ('IFRIC'). This would be consistent with the proposed new name of IASB pronouncements, International Financial Reporting Standards and with the new mandate (below).

Name of pronouncements. IFRIC's output would be known as 'Abstracts' rather than 'Interpretations'. This change is consistent with the new mandate and is in line with other standard setters 'interpretative' committees and would aid in convergence. The US EITF and UK UITF both release 'Abstracts'.

Mandate.The scope of the IFRIC's activities would be broadened to allow the IFRIC to address issues beyond interpretations of existing standards. This would allow IFRIC to answer questions that would otherwise be answered ad hoc by external parties, which could lead to divergent practices.

SAC members raised concerns that there would be conflicts between the IASB and the IFRIC agenda's. SAC members also expressed concerns that the new IFRIC would be setting new 'mini-standards' with the same status as IFRS.

IFRIC members and chairman.The new IFRIC would have 12 members and a non-voting chairman. This would allow the voting members of IFRIC to concentrate on the technical issues while the chairman can deal with the running of the meeting. The chairman would be either an IASB liaison member, senior IASB staff member, or outside party -- most likely to be a senior member of IASB staff.

SAC members expressed concerns over a non-voting chairman. It was also proposed that the Big 5 firms should all have a permanent seat on IFRIC as they see the practical issues daily.

Procedures.The following procedural issues are set out in the draft paper:

• An IFRIC agenda committee will make recommendations on proposed agenda items. This will increase IFRIC efficiency and work as a screening process for issues submitted by the public. Sources of questions posed to the committee will remain confidential. The agenda committee will make recommendations on an agenda, but the final decision will be with the IFRIC.
• IASB will review Draft Abstracts by a process of negative clearance. This would help prevent, at an early stage, the possibility of IFRIC issuing a Draft Abstract to which IASB is opposed.
• Final approval of an Abstract will be given in a public meeting of the IASB by voting.

Other matters set out in the draft paper

• There should be a principle-based approach to the guidance to be issued.
• The proposed IFRIC structure will also have the ability to reconsider a member's membership should they not attend meetings regularly.
• The proposal makes provision for meeting electronically. These must still be public meetings.
• Issues where consensus is not reached within 3 meetings will be automatically referred to the Board.
• Regular IFRIC review of the mandate and operating procedures.
• The IFRIC will meet every 2 months.

IASB Meeting

IASB has approved an Exposure Draft of a revised Preface to IASB Standards for a public comment period of 90 days. Among other things, the proposal will suggest that:

• New IASB Standards will be called International Financial Reporting Standards
• IFRS will apply to general purpose financial statements of profit-oriented entities
• All paragraphs in the Standards are of equal authority (no more black-letter and grey-letter)
• An objective of IASB is to reconsider allowed alternatives
• Due process for interpretations will include negative clearance of Drafts by the IASB as well as approval of final interpretations (at least 8 votes)
• Due process for standards will normally include an advisory group, a discussion document, an exposure draft (at least 8 votes required), and approval of a final standard (again at least 8 votes)
• Both EDs and final Standards will include dissenting views of IASB members and a basis for conclusions.

The Board formally added this project to its technical agenda as a first priority project, after having consulted with the Standards Advisory Council. The project will include a review of SIC 8. IASB staff made a presentation highlighting the key issues and a proposed approach for the project. Click here for a Summary of the Key Issues. In approving the project, the Board indicated that the issues raised are significant and need to be addressed urgently. The staff expects to present a paper at the September Board meeting as well as the October SAC meeting.

The Board debated the relationship between fair value and the three components of deprival value: replacement costs, value in use, and net realisable value. Members debated the various measurement criteria available and concluded that the papers presented should be amended and resubmitted to the Board to reflect the differing views presented. No conclusions were reached.

The following resources were referred to:

• Measuring Fair Value, FASB June 2001 (PDF 101k).
• Fair Value, Deprival Value and Depreciated Replacement Cost, Australian ASB, February 2001.

A presentation by the IASB project manager identified two issues that the project would need to address:

• should a transaction paid for in shares be accounted for the same way as a transaction paid for in cash, and
• if so, how should it be measured.

The arguments for recognition included that such a transaction was a purchase transaction like any other where resources were acquired and consideration given in exchange for the resources.

The arguments against recognition were: The company is not party to the transaction (it is a transaction with owners); no services are received (employees paid a salary already); no cost and therefore no charge; EPS would be hit twice; and that there are adverse effects to such a charge (reduction in share schemes). The IASB discussed each of these, and rejected the arguments in each.

The share-based payments can be measured at historic cost, intrinsic value, or fair value. Each of these was discussed. Practical problems encountered with measurement include unlisted companies. Measurement date can either be grant date, service date, vesting date, or exercise date. The merits of each were discussed with no conclusion being reached as to which one was preferred by Board members.

IASB will analyse the responses received by the national standard setters around the world who exposed the G4+1 Paper.

The Board concluded that this is a project they should address. A paper will be presented and discussed with the SAC at the October SAC meeting.

IASB Meeting

IASB identified four aspects of a project on business combinations:

• Scope and plan for the project
• Definitions that determine the scope of IAS 22
• The methods of accounting for business combinations
• Acquired intangible assets

Issues could include:

• The method or methods of accounting for business combinations.
• Definitions of such terms as business combination, joint ventures, and transactions among entities under common control.
• Acquired intangible assets other than goodwill.
• Goodwill. Amortisation and impairment testing.
• Negative goodwill. Definition, recognition, and amortisation.
• Acquisition provisions.
• In process research and development. Is it a recognisable intangible asset and, if not, whether it should be charged as an expense at acquisition or included in goodwill.
• Improvements. There are some business combinations issues under consideration in the Improvements Project. These could be addressed in this project.
• Disclosures and transition.

Definitions

The reason that definitions of the terms business combinations, joint ventures, and transactions among entities under common control are important is because those definitions determine whether particular transactions do or do not come under the scope of IAS 22.

Methods of accounting for business combinations

Three methods under consideration are:

• purchase method,
• pooling of interests method, and
• fresh start method.

Acquired intangible assets

This aspect of the project would focus on intangible assets other than goodwill acquired in a business acquisition.

Points Raised During Board Discussion

Among the points raised during discussion were the following:

• Further discussion is needed on what a business combination is. Japan will provide cases where the pooling method is believed to be appropriate. Consideration is to be given to all the jurisdictions where work has already taken place.
• Certain transactions (such as multiple entities roll-ups) might be or they might be included with acknowledgement that purchase accounting is not necessarily the best answer but the accounting for such combinations is to be addressed in the second phase of the project.
• Some Board members believe that there is a difference between mergers and acquisitions and argued that fresh start accounting may be more appropriate. Even when there is a true combination of equals, a new entity will emerge meaning that carry over (pooling) is not appropriate.
• Discussion on acquired intangibles focussed upon whether this can be addressed without re-opening IAS 38.
• It is important to decide what goodwill is in order to decide how to test for impairment. The main issue is whether or not goodwill is an asset. IASB will seek to understand how the FASB reached their answers. FASB will present their rationale at the next meeting. Under the new rules in the US, there will probably be much less goodwill.
• Board members expressed divergent views on the subject of negative goodwill.
• Acquisition provisions should be addressed without re-opening all the existing rules on liabilities.
• There appear to be two ways of interpreting the current IAS with regard to purchaed in-process research and development: either write-off (at least the research bit) or subsume it in goodwill. The project must address this specifically.
• The project should address the question of what is the appropriate date for valuing the equity for acquisition purposes. SIC 28 also addresses this.
• The Standing Interpretations Committee is considering reverse acquisitions.
• The definition of joint control can be made more robust. The AICPA and G4+1 definitions will be considered. Should unanimous consent for decision-making by venturers be a condition?
• Common control is currently not defined. There was an agreement that common control in IAS 22 involves common control before and after transaction.
• After considerable discussion on, the Board reaffirmed its tentative view expressed at the June meeting that there should be one method of accounting for all business combinations: the purchase method.
• Regarding acquired intangible assets, IASB members agreed that these should be recognised, but the key issues were identification and measurement. Among the characteristics for identifying acquired intangibles that the Board discussed were (a) does it meet the definition of an asset and (b) is it either separable from the business or does it result from contractual or legal rights.
• IAS 22 includes a provision that intangible assets cannot be recognised if this will create negative goodwill. The staff proposed that this be withdrawn as it is inconsistent with asset recognition generally.

IASB Meeting

• First-Time Application of IAS will be carved out as a separate agenda project (see description Above.
• Limited revisions to IAS 39 will be carved out as a separate agenda project. This project will include improvements to IAS 32 and IAS 21 as well.
• Elimination of the following alternatives will be considered:
  • IAS 2 choice of FIFO and LIFO,
  • IAS 8 choice of benchmark vs. allowed alternatives for changes in accounting policies and fundamental errors,
  • IAS 17 option to expense or allocate initial direct cost on operating leases of the lessor,
  • IAS 21 option whether to expense or capitalise exchange losses in certain severe devaluation situations (SIC 11 also is relevant),
  • IAS 21 option to translate goodwill using closing rate or historical rate,
  • IAS 23 option to expense or capitalise borrowing costs,
  • IAS 27 and IAS 28 choices of of cost, equity method, or available-for-sale under IAS 39 for investments in subsidiaries and associates in the parent's/investor's separate financial statements.
  • IAS 31 option to account for joint ventures using proportionate consolidation or the equity method.

At its meeting with the Standards Advisory Council, IASB presented the following as its proposed initial technical agenda:

• Preface
• Transition and First-Time Application of IAS
• Improvements Project
• Financial Instruments, including Limited Revisions to IAS 39, Derecognition, and the Joint Working Group proposal
• Disclosure of Banking Activities
• Insurance Contracts
• Business Combinations
• Measurement
• Share-Based Payments
• Derecognition of Assets and Liabilities - both financial and non-financial assets
• Performance Reporting Second Priority Projects
• Impairment
• Intangible Assets
• Lease Accounting
• Research and Development Research Projects
• Revaluations
• Extractive Industries
• Framework - especially definitions of assets, liabilities, equity, income and expenses.
• Liabilities and Equity
• Accounting for SMEs -- whether special guidance was needed for small and medium sized unlisted entities
• Management Discussion and Analysis - whether IASB should provide guidance on the preparation and presentation of information outside of the normal financial statements.