The following improvements were discussed and tentative decisions reached:

IAS 1 Presentation of Financial Statements

Items not covered by a specific Standard or Interpretation

IAS 1.22 provides guidance on how to account for items that are not covered by existing IAS or Interpretations of IAS by the SIC.

The Board agreed that when a specific Standard or Interpretation is not available on this subject, management should use its judgement considering requirements and guidance in IAS and Interpretations of IAS dealing with similar and related issues. This amendment is made because reference to the Interpretations of Standards by the SIC is not included in the current Standard.

Presentation issues around the classification between current / non-current liabilities

IAS 1.63 states that an enterprise should continue to classify its long term interest-bearing liabilities as non-current, even when they are due to be settled within twelve months of the balance sheet date, if the loan is to be refinanced on a long-term basis.

The Board tentatively agreed, for reasons of convergence with other standard-setters, that refinancing after the balance sheet date shall not be taken into account in the classification of liabilities as current/non-current, because it does not provide evidence of a condition that existed at balance sheet date.

IAS 1.65 deals with borrowing agreements that incorporate covenants which have the effect that the liability becomes payable on demand if certain conditions related to the borrower's financial position are breached. In these circumstances, the liability is classified as non-current only when specific conditions are met.

The Board agreed that if, at the balance sheet date, the lender holds an absolute right to demand repayment immediately, it is inappropriate to classify the liability as non-current.

IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies

The decision made at the June 2001 IASB meeting to drop the distinction between fundamental errors and other material errors will be incorporated in the proposed revised Standard.

The Board agreed to delete the allowed alternative treatment for the treatment of changes in accounting policies and fundamental errors (recognition of the amount in the income statement). Therefore, material errors and retrospective changes in accounting policy will be accounted for by adjusting the opening balance of retained earnings.

Impairment testing

The Board discussed the issue of the second step of the impairment of goodwill and its possible inconsistencies with the impairment rules for other assets under IAS 36. The majority of the Board members agreed that goodwill should be tested for impairment consistently between IAS and FAS 141/142 ('we should get the same figures') despite the inconsistency. Therefore:

• the implied value of goodwill will be calculated as the difference between the recoverable amount of the goodwill's cash-generating unit and the fair value of all the assets and liabilities at the date of the test;
• an impairment loss will be recognised if the implied value of goodwill is less than the carrying amount in the books;
• however, some assets (and liabilities) at the date for which a fair value is calculated may not be reflected in the books. Even if those assets are not on the books, goodwill should be impaired as a result of the test above. This means that, if some assets are not reflected in the books but for which fair value is considered to arrive at the implied value of goodwill, it is possible that an impairment loss will be recognised for goodwill where the recoverable amount of the cash generating unit is higher than the aggregate fair values of the cash-generating unit's recognised assets and liabilities. This would be contrary to the current requirements under IAS 36.

Contingent liabilities

On 18 December 2001, the board discussed the issue of the recognition and measurement of contingent liabilities in a business combination. The issues raised were:

• Does IAS 37 allow the recognition of a contingent liability in the balance sheet after the acquisition?
• How should those contingent liabilities be measured subsequent to acquisition and should it be a different basis than the measurement of other liabilities under IAS 37? The proposal would be to override the IAS 37 recognition criteria for contingent liabilities recorded in a business combination.

The Board tentatively agreed that:

• A contingent liability should be recognised in a business combination and initially measured at its expected value,
• This contingent liability should subsequently be remeasured to fair value according to IAS 37. Some Board members however acknowledged that the conclusion could be different under FASB depending on the decisions on Business Combinations phase II. Measurement date for equity securities issued IAS 22, Business Combinations, currently requires the fair value of the purchase consideration given in a business combination, including equity securities issued as purchase consideration, to be measured at the date of exchange. Although the US Standard FAS 141, Business Combinations, requires, as a general rule, the cost of an acquired entity to be determined as of the date of acquisition (being the date that assets are received and other assets are given, liabilities are assumed or incurred, or equity interests are issued), FAS 141 states that, in the case of equity interests issued, the market price for a reasonable period before and after the date the terms of the acquisition are agreed to and announced should be considered in determining the fair value of those equity interests. The Board considered at this meeting whether to retain the current approach in IAS 22 or move to an approach in which equity securities issued as purchase consideration are measured at the earliest date that a substantive agreement between the parties is reached and announced to the public. The board also wanted to consider whether, as part of the measurement of those equity securities, price movements for a reasonable period before and after the measurement date should be considered. The board discussed the proposal of the staff relating to which date should be the date 'a substantive agreement is reached'. The board tentatively decided that IAS 22 should be revised to require the 'date of agreement' and that it should be the date when substantive terms are agreed, ('date an agreement is reached and announced'). The staff was however required to provide guidance on the 'agreement date' especially when dealing with hostile take-overs.

The Board approved the following final Interpretations:

• SIC 27, Evaluating the Substance of Transactions in the Legal Form of a Lease;
• SIC 28, Business Combinations - 'Date of Exchange' and Fair Value of Equity Instruments;
• SIC 29, Disclosure - Service Concession Agreements;
• SIC 30, Reporting Currency - Translation from Measurement Currency to Presentation Currency (some changes in the wording to a number of paragraphs of the Interpretation are to be made, but the substance of these paragraphs remains unchanged);
• SIC 31, Revenue - Barter Transactions Involving Advertising Services; and
• SIC 33, Consolidation and Equity Method - Potential Voting Rights Redeemable by Holder. SIC D32, Intangible Assets - Website Costs, was not approved as a final Interpretation. The Board objected to the lack of convergence of the paragraphs dealing with the initial graphical design of a website with other similar literature on the topic. For instance under US GAAP, EITF 00-2, Accounting for Website Development Costs, requires capitalisation of these costs. The SIC proposed to expense the cost of initial graphical design as incurred. No objections to the other paragraphs were raised. The Board concluded to ask SIC to consider holding a meeting by teleconference (which would be open to public listening) to discuss initial graphic design costs further. SIC D34, Financial Instruments - Instruments or Rights Redeemable by the Holder, was not approved as a final Interpretation by IASB. Because of divergent views presented by respondents to SIC D34, the Board decided to address the issue as part of its project to improve IAS 32.

The Board was asked to consider amendments to IAS 39, Financial Instruments: Recognition and Measurement to adopt a simpler approach to the derecognition of financial assets. There are currently inconsistent derecognition models applied in IAS 39, control versus risks and rewards, and therefore different conclusions can possibly be reached under different paragraphs. The IAS 39 Implementation Guidance Committee (IGC) has previously tried to eliminate some of these inconsistencies with its interpretations, inspired by the principles raised by the Joint Working Group, and many of the interpretations of the IGC dealing with derecognition will be incorporated into the new section of IAS 39 on derecognition.

The new requirements will be split between:

• Derecognition of financial assets including an explanation of the model and measurement issues
• Repurchase agreements and security lending operations
• Derecognition of financial liabilities

There was unaminous agreement by the Board to adopt a continuing involvement model for derecognition. This model requires that an asset or liability, or component thereof, be derecognised to the extent that the entity has no continuing involvement in the asset or liability. This condition is met if the transferor gives up control of the rights that comprise a financial asset or a portion of a financial asset and cannot give them back. If continuing involvement is retained, the cash flows related to the retained risk must continue to be recognised. This may result in the recognition of assets greater than original balance with related liability also recognised. Continuing involvement would exist through call and put options, forwards, guarantees, subordinations, and other means. There was agreement that this model significantly simplifies the accounting for derecognition.

Where financial assets are sold through an SPE, generally they will be consolidated in accordance with SIC 12, Consolidation - Special Purpose Entities. On an ongoing basis, the investor in the SPE needs to consider whether they have maintained continuing involvement.

Repurchases and security lending will not result in derecognition and the IGC interpretations regarding right of first refusal, wash sales and clean up calls are to be incorporated into the ED. This does not change the principle requirements for the derecognition of financial liabilities and the current IGC interpretations are to be incorporated.

Further discussions of IAS 39 are to take place at a future meeting on a review of the sufficiency of the disclosure requirements of IAS 32 and IAS 39.

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.

The Board tentatively agreed that venture capital investments (and entities with similar characteristics, such as investment companies, to be defined) are subject to the requirements of IAS 27 and should consolidate entities where they are controlled. In all other circumstances, investments in entities should be measured at fair value.

Currently, Chapter 1 to 6 of the Draft Statement of Principles (DSOP) prepared by the Insurance Steering Committee are available to the public. They may be downloaded from IASB's Website. Chapters 4 to 6 were presented to the Board at the December meeting in Paris.

Also, the Board was given an update of the field visits. At the moment 10 insurance companies have been visited in 5 countries. The main focus of the field visits is to assess practical implementation issues. It was found that companies already using an embedded-value approach are keen to use a prospective method; however companies currently not using an embedded-value approach are not so keen. The key points the insurance companies visited were concerned about were:

• risk adjustment;
• using a stochastic model, as conceptually it is sound but difficult to implement; and
• availability of technical and human resources, particularly for the smaller companies.

It was also mentioned that the International Actuarial Association has established a subcommittee to develop an internal standard/guidance to help actuaries implement the Insurance DSOP.

The Board continued its discussion of Chapter 3 of the DSOP from its November meeting, further examining the concepts of 'entity-specific value' and 'fair value'. It was discussed that in practice 'entity-specific value' and 'fair value' have been adequately defined and will probably produce similar results. The main difference between the two concepts could be the nature of the cash flows. The Board expected however, that in most cases the majority of the cash flows would be the same.

The Board discussed in detail the concept of 'entry value' and 'exit value' as described in Paragraph 3.40. The difference between the two concepts would be due to transaction costs and different markets (referring to primary and secondary markets). It was also discussed whether 'exit value' was in fact consistent with the 'entity-specific value' methodology.

The Board then considered Chapters 4 to 6 of the DSOP, starting with Chapter 4, Estimating the Amount and Timing of Cash Flows.

Principle 4.1 (Expected Present Value of All Future Cash Flows) was discussed, in particular the notion of 'expected present value', which is defined further in paragraph 4.9. It was mentioned that when using a stochastic approach, the number of scenarios to be examined would depend on the circumstances. There is little guidance given in this area as to the number of scenarios, and whether one single best estimate would suffice in certain situations. Companies will have to develop systems in order to perform such simulations.

The Board's discussion revealed an uneasiness concerning the type of cash flows to be included in the calculation of 'expected present value' and the potential for a profit to arise on initial recognition. Several Board members noted that that because of the valuation of 'risk and uncertainty' one would not expect an up-front profit very often.

Principle 4.2 (Renewals) was then discussed. It was clarified that if a cash flow decreases the insurer's liability or creates an asset, it should still be included if the policyholder holds potentially renewable options.

The issues of obligations and rights, and asset recognition and revenue recognition, were discussed and debated extensively. One question raised was whether an entity has rights to future resources if it does not control the inbound cash flows.

The issue of intangible assets was discussed, in particular, whether customer relations should be included in cash flows because of the direct relation to the contract. However the question was asked as to whether there is a market price for this intangible asset.

The Board did not discuss any more Principles beyond this point. It will be decided before the next Board meeting how the discussion on the Insurance DSOP will proceed. The meeting concluded with no formal decisions being made. The principles were discussed so that they may be regarded as basic premises with which to analyse the remainder of the DSOP.