This is a joint project of the UK Accounting Standards Board and IASB. The project covers presentation and disclosure, not recognition and measurement.

The Board first discussed the principles that should underlie an enterpriuse's performance report.

• Principle 1 accepted: Recycling of income and expense items should not be allowed, that is, items should be reported in the performance statement as income or expense only once. Profits should not be based on a notion of realisation. The Board noted that realisation means something different in different countries. In Europe and Asia realisation refers to net profit available for distribution. However, in the United States realisation refers to capital maintenance. A critical issue in Europe would be whether 'mark to market' gains are distributable. The Board noted that distributable profits are not an accounting issue but a legal issue of countries concerned. The focus of the standard should be to provide greater transparency and useful information to the investors. Transitional provisions will include disclosures (particularly narrative) as well as possibly dual reporting.
• Principle 2 accepted: Information in the performance statement should help to predict rates of change so the users can make better judgements. Segment reporting will help with this. Segment reporting may be aggregated in the performance statement.
• Principle 3 accepted: There is a need to distinguish between costs of debt and costs of equity -- to enable assessment of return on equity and return on total capital employed. However, practical concerns were noted, including ambiguity as to where pension or insurance costs should be classified.
• Principle 4 rejected: A split between operating and non-operating profits should not be made as it could mislead users. In practice, many entities have more than one core operation and it can change with time so it is difficult to make such a split and it may not always be appropriate. The issue of whether gains and losses relating to the same activity can be netted against each other was not decided.
• Principle 5 accepted: Differentiation between trading gains and holding gains was accepted as a working principle.
• Principle 6 accepted: Changes in fair values of assets in a period should be split based on causes of the change, for example, value changes resulting from performance during the period, changes in economic conditions, and changes in market expectations. Some Board members raised concerns regarding the significant amount of judgement that would be required to make this split and its usefulness in helping to predict with the future. The concept was accepted but the detail will be developed at a later stage of the project.
• Principle 7 accepted: There should be segregation of gains and losses recognised in the period that result from a choice of accounting convention. For example, the profit on disposal of a fixed asset will be different if the accounting convention chosen is historical cost rather than revalued amounts.
• Principle 8 accepted: A prescribed format and subtotals for the performance statement is needed, but management should be given freedom to specify key performance indicators by having discretion over line items provided and the sequencing of those items. Management would not be allowed to add their own subtotals. Presentation of the performance statement needs to be discussed before the detail of this principle is decided.

The Board decided to revise IAS 19 to eliminate inconsistencies and complexities surrounding the accounting for post-employee benefit plans. The main paragraph identified for revision was paragraph 58, which can result in an actuarial loss being deferred on the balance sheet if there is a surplus in the pension fund. The corridor principle was also identified as complex. No decision was made on the solution to these issues. Possible solutions will be presented at the next IASB meeting.

IAS 1, Presentation of Financial Statements

• The Board discussed whether to retain or remove the 'fair presentation override' in IAS 1. A vote on retention of the override was split 8 in favour of retaining and 6 against retention.
• The Board agreed, however, that it is necessary to strengthen the wording currently proposed for the exposure draft to (a) restrict the override to 'unique fact patterns' and (b) to use the words 'false and misleading' as opposed to just 'misleading'.
• A working group of the Board will be set up to explore the options for a mechanism to avoid abuse of the override, either at an overall Board level or in individual jurisdictions.

IAS 17, Leases

• The Board considered a paper proposing clarification to IAS 17 on how a lease of land and buildings should be treated.
• The Board agreed that IAS 17 should be amended to clarify that where there is a lease of land and buildings, the land element should be classified as an operating lease in accordance with paragraph 11 of IAS 17 and the building element should be classified as an operating or finance lease applying the normal conditions in IAS 17.
• Based on discussions at the meeting with liaison standard setters, the Board agreed to eliminate the choice in IAS 17 on how a lessor accounts for initial direct costs incurred in negotiating a lease.

IAS 40, Investment Property

• The Board agreed that the decision to remove the present choice of accounting for investment properties under either a fair value model or a cost model should be removed from the Improvements Project.
• The Improvements Exposure Draft will note that the Board intends to address this issue in conjunction with the Performance Reporting project.

IAS 16, Property, Plant and Equipment

• The Board agreed that IAS 16 should require a components approach for depreciation, but that it should refer to identifying all 'material' components.
• Regarding cost capitalisation, the Board agreed that references to start-up costs, pre-operating costs, pre-production costs, and similar items should be removed and that more general principles should be provided.

IAS 23, Capitalisation of Borrowing Costs

• Based on discussions with the liaison standard-setters, the Board agreed to remove from the Improvements Project the issue of whether eliminate the choice in IAS 23 of capitalising borrowing costs that meet certain conditions. At previous meetings, the Board had tentatively decided to remove this option from IAS 23.

Process Issue - Disclosure of Operational Risks

• The Financial Activities project has identified an issue in relation to the disclosure of operational risks. It has been acknowledged that disclosure of operational risks is a matter for all organisations, not just those engaged in financial activities and, therefore, the proposals being made as part of the IAS 30 project should be considered for all organisations, potentially resulting in a consequential amendment to IAS 1
• The Board agreed that this is not a matter that can be 'rushed through' the Improvements Project and it was decided that the matter would be dealt with in conjunction with the IAS 30 project.

IAS 16, Property, Plant and Equipment

Exchanges of similar items of property, plant, and equipment

• Exchanges to be recorded at fair value for similar assets.
• This principle is to be extended to previously recognised intangible assets, provided that fair value can be reliably measured. IAS 38.34-35 will be amended to emphasise reliable measurement. This type of transaction is envisaged to be rare.
• Revenue items will be dealt with under IAS 18 review at future meetings.

Items of property, plant, and equipment held for sale

• No changes are to be made to IAS 16 for this. They are to be treated in the same way as other items of PPE.
• Items will continue to be depreciated and tested for impairment. IAS 36.9(f) will be amended to include ceasing to use the asset as a trigger for impairment review.

Revaluation Group Proposals

• No changes proposed to IAS 16 for the Revaluation Group's comments.
• Timing of the Revaluation Group's meeting is such that it cannot feed into the Improvements Project, as their first meeting is in March.
• The Board recognises that the measurement basis is a major issue but this will not be solved as part of the Improvements Project.
• SIC 6 re capitalising costs is to be withdrawn.

Value in Use and Tax

• The post tax liability should be included in future cash flow calculations when performing a goodwill impairment review.
• IAS 12 prohibits discounting of cash flows. This is inconsistent with IAS 38 but will not be changed at the moment.
• The treatment of tax cash flows under IAS 37, Provisions will be dealt with under the improvements project.

Reverse acquisitions

• Guidance is based on Canadian rules.
• IAS 22.12 to be replaced.
• Examples will be included of accounting for reverse acquisitions in the new guidance.
• They are rare situations.
• The consolidated financial statements will be in the name of the legal parent, the original acquirer.
• A control approach is adopted to identify the acquirer.
• An ownership approach is adopted to identify the minority interest.
• Comparatives show the acquiree's net assets.
• Guidance will be included on the implications on EPS.

Cost of acquisition

• IAS 22.24 principles to be used.
• It is calculated as the number of shares the acquiree would have had to issue to get the same % shareholding as the acquirer, multiplied by the fair value of the acquiree's shares.

Accounting in the consolidated financial statements

• Assets and liabilities are added together using the pre-combined carrying amounts, using the control concept.
• The legal parent's books are adjusted for fair values.
• Issued capital is the legal subsidiary's capital before acquisition plus the cost of acquisition. This is based on the ownership principle.
• The number of issued shares is the legal parent's shares in issue after acquisition.
• Accumulated profits are those of the legal subsidiary based on percentage of ownership.
• Minority interest is to be calculated using the ownership principle. It is the shareholders of the legal subsidiary that did not take up the offer of shares in the group. The minority only has interest in part of the group rather than the group as a whole. Minority interest is calculated based on the net assets of the legal subsidiary at the balance sheet date.

Disclosure of recoverable amount

• There is a conflict between usefulness to users and the magnitude of the extra disclosures proposed that the Board hopes to address by including a compact example of the type of disclosure it would like to see.
• Key assumptions on which the cash flow projections are based should be disclosed. No list will be provided of examples as often it is seen as exhaustive even though it is not meant to be. Entities will have to decide on key disclosures themselves and disclosure the assumptions on which the cash flows are most sensitive.
• If assumptions do not reflect past experience, that fact and the justification must be disclosed.
• A description and amount of the cash flows are to be disclosed.
• If the projected period is greater than 5 years, disclosure is to be expanded beyond those in IAS 36. Detail is needed of the sensitivity growth rate assumptions.
• If goodwill is spread over a large number of cash generating units, disclosure will not have to be made for all units.
• Only similar cash generating units' disclosures can be aggregated.

The aim of this session was purely to walk through some different examples and review the accounting implications of various models used. The 25 January meeting will run through the draft Statement of Principles continuing the insurance discussion. The examples reviewed were artificial and unofficial. They are based on unrealistic assumptions that are necessary to focus on the impact of the choice of the accounting treatments.

• Example 1 was a year by year method, which is purely a cash accounting method. This is not popular with accountants due to this resulting in an up front profit and then losses being recognised later in the contracts life.
• Example 2 was a year by year method with an onerous contract, provided for under IAS 37. This has the effect of smoothing out profits over the life of the contract but year 1 is still loss making with a large profit in year 2 (again in the early years of the contract).
• Example 3 is a pure prospective method, which is a US GAAP method. This method has no risk adjustment, and the majority of the profit is recognised in year 1. Income after year 1 is the investment earnings only. It gives an odd provision on the balance sheet that is actually a very large debit balance that reverses over time.
• Example 4 is the approach proposed by the Steering Committee. It is a prospective method with market consistent risk adjustment. It gives a profit in year 1 but this profit is small and is fairly consistent over the life of the contract.
• Example 5 was an embedded value method, which is very popular with UK analysts. It spreads profit evenly over the contract with a similar pattern as the pure prospective method. The cash flows are discounted with risk, but the discount is at the embedded asset rate. There is an embedded value asset on the balance sheet that gives a notional value of cash flow adjusted for risk that the regulator requires the company to use. The liability on the balance sheet is the number that the regulator wants (which is required by the legal structure in some countries).

Example 4 seemed to be accepted by the Board, with further discussion planned at Friday's meeting.

Discussion focused on chapters 4 and 5 of the draft statement of principles prepared by the steering committee. Click for Project Information and Links to Download the DSOP.

Chapter 4 - Estimating the Amount and Timing of Cash Flows

Principle 4.3

This principle was accepted, although there are issues around defining income tax, which need to be returned to.

Principles 4.4 and 4.5

In general, these were accepted, although there are issues with reliability, especially pertaining to future events. This is mitigated in part by the future event having a small probability associated with it.

Principle 4.6

There was discussion as to whether this principle was consistent with the proposed changes to IAS 16 as with regards the words 'reasonable and consistent'. It was noted that directly attributable costs are different according to whether you look at individual contracts or groups of contracts, and that the broader the group the more costs will be directly attributable.

Principle 4.7

This is related to exit values in a more general sense, and should be linked to other work done on exit values, as it is not insurance specific. It is not relevant to entity specific values.

Principle 4.8

It was only reluctantly concluded by the Steering Committee that fair value should reflect the insurer's own credit standing. Board members had issues with a sentence that started 'conceptually' and then talked about 'practical considerations'. Again this work needs to be considered more widely than just insurance contracts.

This concept is not specific to insurance contracts except:

• insurance companies exist to pay out , hence it is wrong to consider a scenario where they become insolvent; and
• users of the financial statements will look at the balance sheet to calculate solvency ratios. These may be distorted by liabilities decreasing in value as the entity's credit standing decreases. This is also an issue for banks. Principle 4.9 This was accepted in theory but it was noted that it has practical implications for other areas of accounting (i.e. it is not insurance specific). Principle 4.10 This was accepted in principle, but it was pointed out that if the Board accepts this it will be an extremely controversial area. It was noted that it is not the Board's place to determine solvency issues, such as ensuring that an insurance company has the resources to pay out in the event of a natural disaster. Principle 4.11 This was accepted. Chapter 5 - Adjustments for Risk and Uncertainty Principle 5.1 This was accepted. Principle 5.2 This was accepted. It was pointed out that the cash flow method will be best when risk doesn't run off evenly with time, which is usual. It was noted that the discount rate method will be better for disclosure purposes, and that in practise, it is currently the discount rate method that is used predominantly. Principle 5.3 The most useful information for users is a market basis price for entity specific cash flows. The issue is how to determine these. Some are easy, such as interest rate risk, as there are observable prices. However, it is harder when there are no observable prices, and even when there are, there may be knock-on effects, which are hard to assess. For example, a change in interest rates may change lapse rates. The words 'consistent methodology' were felt to be too restrictive. Methods should change as they evolve. The idea is to restrict random changes, not to prevent companies evolving their methods. It was considered as to whether market premium risk adjustment guidelines should be given (as they are in Canada). If they were it should be by way of practice guidance for actuaries on a national level, as international level would be too high. Additionally, the guidance must be capable of evolving over time. Principle 5.4 There were issues with diversifiable from whose point of view, as it may vary depending on whether it is viewed from an insurance company, policyholder or capital market investor's point of view. Undiversifiable risk is much easier to measure, and the lack of reliability of measuring diversifiable risk is grounds for exclusion. Additionally, there are links with the unit of account section, as the degree of aggregation will affect the amount of diversifiable risk. Principle 5.5 This needs to be looked at and discussed again as conclusions here depend on the conclusion for principle 5.4. Additionally, as it currently stands a unit of account is not defined, leaving entities a free choice. The Steering Committee was aware of this but unable to come up with a good definition. Some Board members were uneasy with no definition or guidelines in this area. Principle 5.6 This was accepted in theory, although it was noted that practical implementation may take a while as many companies don't currently have the systems in place, and those that do (mostly the larger entities) only use the models for pricing rather than measurement purposes. Also, the link between this area and IAS 39 was noted (whether to separate out embedded options and how to measure them). Principle 5.7 This was accepted in principle, although some Board members felt that the 'exceptional cases' qualifier was not necessary. Principle 5.8 This was accepted in theory, but it was noted that it was irrelevant to entity specific values. Also it was pointed out that it should be consistent with the JWG. Principle 5.9 This was accepted.