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Improvements Project

Date recorded:

The following improvements were discussed and tentative decisions reached:

IAS 17, Leases

Long-Term Leases of Property Assets

The Board discussed accounting for leases of land, which currently under IAS 17 must be accounted for as an operating lease. As a result, long-term leases cannot be classified as an investment property under IAS 40, Investment Property, and potentially valued at fair value. It was recognised as not being an issue in all environments, but in some countries, including Hong Kong and UK, it is a big issue. The Board tentatively agreed to amend IAS 40 and to require either operating or finance leases of investment property to be accounted for as investment property in accordance with IAS 40. This may also result in a review of the definition of investment property.

The discussion also raised the issue of whether there is a requirement to separately account for land and building leases. It was tentatively agreed that in assessing whether a lease is financing or operating, where the lease contains multiple components, the lease should be split into those components (subject to ability to split) for the purpose of assessment. If the lease cannot be split, accounting as a finance lease, where in substance that is its nature, despite the land element, was raised as a potential accounting method and is to be discussed with the national standard setters.

Initial Direct Costs Incurred By Lessor

The Board favours eliminating one of the alternatives for accounting for initial direct costs - expense or capitalise. Certain members of the Board expressed a preference to expense initial direct costs; however, as they recognise that this conceptually conflicts with the current leasing model, and does not result in convergence in many instances, they have agreed to discuss the issue further with the national standard setters. It was also noted that expensing would not be consistent with other IAS.

The Board also discussed the definition of which costs could be capitalised, if this were the resulting method. There was general agreement that these costs should be the direct and incremental costs and may include both internal and external costs. Further discussion will take place on IAS 17 at a future meeting.

IAS 15, Information Reflecting the Effects of Changing Prices

The Board tentatively agreed to withdraw IAS 15 as it is not currently needed.

IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries

Exemptions from Consolidated Financial Statements - Wholly-Owned Subsidiaries

IAS 27 exempts wholly-owned subsidiaries from the requirement to prepare consolidated financial statements. The Board discussed whether to remove this exemption. The Board tentatively agreed that an exemption is still required in certain circumstances given that IAS has been/will be written into the law in many jurisdictions. However, the exemption should not apply to financial statements of publicly accountable entities (for which a clear definition is to be developed), and if the exemption is used certain disclosures will be required.

Measurement of Investments in Subsidiaries in a Parent's Separate Financial Statements

The Board discussed the measurement of subsidiaries in parent entity financial statements. Views were expressed in favour of all three current methods -- cost, equity accounting, and IAS 39 -- but there was considerable debate regarding how IAS can apply in parent entity financial statements if IAS requires consolidation. This issue will be discussed further at a later meeting after the rules on exemptions have been finalised and the background on all views is better understood.

The current exclusions from consolidation included in IAS 27 -- temporary control and severe long-term restrictions -- were introduced into the agenda. Preliminary discussions took place regarding the concept of control, potential fair value measurement, and tightening the criteria for temporary control to a one year limit. This is to be added as a future agenda item.

Minority Interests

The Board emphasised that they had previously agreed to present minority interests in equity. However, current practices for accounting recognition and measurement should not change. The consequences of equity classification (for example, step acquisitions and dilution gains and losses) are to be discussed in phase II of the business combinations project.

Existing SIC Interpretations

The Board tentatively agreed that SIC 33, Potential Voting Rights, should be incorporated into IAS 27. However SIC 12, Consolidation - Special Purpose Entities, should not be. Early next year the Board will look at adding a separate project on SIC 12 onto the agenda with the view of discussing it while the current projects' EDs are out for comment.

IAS 28, Accounting for Investments in Associates

The Board discussed whether they should continue to include IAS 28 in the improvements project if a future project on equity accounting is going to take place, but decided that since this may not progress in the near future, and because IAS 39 is under revision, guidance is required now.

Guidance on Circumstances in Which the 20% Presumption Is Overcome

The Board tentatively agreed that additional guidance and disclosure is required for circumstances in which the presumption that an investor has significant influence if it holds 20% or more of the voting power of the investee may be overcome. US GAAP will be considered in this process.

Recognition of Losses under the Equity Method

The Board tentatively agreed that an investor's share of losses in an associate should be recognised only to the extent of the investment in the associate, since to recognise an associate's losses against other assets overrides the requirements of IAS 36, Impairment of Assets. However, it was noted that there must be clear guidance on what is the investment at the time of acquisition, and this cannot subsequently be changed. This will revise the current requirements of SIC 20, Equity Accounting Method - Recognition of Losses, and be directly incorporated into the standard.

Existing SIC Interpretations

The Board tentatively agreed that SIC 3, Elimination of Unrealised Profit and Losses of Transactions with Associates, and SIC 33, Potential Voting Rights, should be incorporated into the standard. Measurement of investments in associates in an investor's separate financial statements and exceptions from equity accounting will be discussed at a future meeting.

Correction list for hyphenation

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