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Improvements to Existing International Accounting Standards

Date recorded:

The Board addressed improvements to IAS 1, 2, 16, 21, 24, and 33. In addition, the Board was presented with papers that discussed suggested improvements to IAS 8 and 10 along with the withdrawal of IAS 15.

IAS 1, Presentation of Financial Statements

The Board addressed several issues related to IAS 1. The Board concluded that the final standard should provide guidance on the presentation of minority interest in the income statement. The Board tentatively decided to require a subtotal for net profit and loss attributable to controlling shareholders on the face of the income statement. As a result, profits associated with controlling and minority shareholders must be presented separately on the face of the income statement. Sub-points h and g should be deleted from paragraph 76 of the proposed IAS 1.

The Board decided that operating income or loss should remain undefined in the final standard and should be addressed in the performance-reporting project.

The Board discussed the meaning of the phrases "undue cost or effort" and "impractical" used in current IFRS literature to determine when the requirements of a standard should not be followed. The Board noted that the term "impractical" is synonymous with impossible. That is, if it is impractical, the entity just can't do it no matter how much time or money is spent to determine the answer. Conversely, the "undue cost or effort" phrase is meant to be a lower threshold that is focussed more on whether the benefit exceeds the cost of accumulating the information. The Board requested the staff to prepare a paper on when these phrases are used to insure that the right phrase is used in each circumstance. The Board noted that its intention in First-Time Application is for an "undue cost or effort" exception.

IAS 2, Inventories

The Board decided to retain the elimination of the LIFO approach to accounting for inventory. Therefore, only the FIFO, weighted average, or specific identification approaches will be allowed. The Board also decided to retain the requirement to reverse impairment losses recorded on inventory. The Board discussed the scope inclusion for broker-dealers that are measured at net realisable value with the change in value in recorded in the income statement (paragraph 1c). The Board decided to clarify that scope inclusion to brokers that deal in commodities. In addition, the Board decided to replace the phrase "net realisable value" with "fair value less cost to sell and complete".

IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events after the Balance Sheet Date IAS 15, Information Reflecting the Effects of Changing Prices

While the Board was presented with papers on IAS 8, 10, and 15, there was no discussion related to those items. It would appear, therefore, that the decisions represented in the exposure draft have not been changed. This may be clarified in the IASB's Update newsletter.

IAS 16, Property, Plant and Equipment

The Board discussed several issues related to the improvements to IAS 16, including exchanges of assets, the components approach, and residual value. At its November 2002 meeting, the Board tentatively decided to require that exchanges of assets must have "economic substance" for the exchange to be recorded at fair value. The Board gave guidance to the staff on how to incorporate this requirement into a final standard, which included looking to demonstrated transactions with other parties and attributes related to the terms of the transfer. No decisions were made.

The Board clarified that the components approach is a method of getting a more precise calculation of depreciation. There are questions related to how far down an entity should go to determine a component and the Board clarified that the entity should use its best judgement as to how small the components should be for an accurate calculation of depreciation. The Board clarified, however, that if repair and/or replacement of an item that is not a separate component occurs, that amount should be expensed. If the asset is a separate component, then that amount should be capitalised and the replaced asset should be written off.

The Board confirmed its decisions to require revaluation of residual values on property plant and equipment on an annual basis and to prohibit recognition of credits to depreciation as a result of a change in the residual value. The staff presented an example where the residual value increased above the current amortised cost but below the original cost. The Board was split (7 to 7) over whether the credits up to the original cost should be recognised. The 7 who believe that the credits should be recognised were split over whether to spread the credit over the remaining life of the asset (6 members) or take the gain immediately (1 member). The Board will discuss this issue further.

The Board discussed the IFRIC's current project on recording changes in decommissioning liabilities. The Board noted that not all of the change in the liability should go to the asset, and the revisions to IAS 16 should make this clear. One member noted that the decision by the IFRIC was inconsistent with US GAAP (FAS 143). The staff did not believe convergence in this area was desirable.

IAS 21, The Effects of Changes in Foreign Exchange Rates

The Board confirmed its decision that an entity's functional currency should be the currency of the primary economic environment in which the entity operates. The Board stated its intention that paragraphs 7 and 8 of the revised IAS 21 should be looked at as a hierarchy when determining an entity's functional currency. The Board also noted that there is no such thing as a "group functional currency" and that the final revised standard should make this clear. The Board also decided to require disclosure of why an entity has changed its functional currency, if applicable.

One Board member noted that IAS 29 in its current state is too hard to implement and that the Board should address revisions to its requirements at a future date. There was agreement on adding this to a longer-term improvements project.

The Board confirmed its decision that a reporting entity should be permitted to present its financial statements in any currency. However, the Board views this as a convenience translation from the functional currency of the entity that should be translated at the spot rate. The Board noted that the final standard should clearly distinguish between a presentation currency and a convenience translation.

The Board reaffirmed its decision to eliminate the allowed alternative in paragraph 21 of IAS 21 to capitalise certain exchange differences. One member noted this decision continues an accounting option not based on difference in underlying circumstance and is inconsistent with US GAAP.

The Board discussed whether goodwill and fair value adjustments to assets and liabilities should be considered assets and liabilities of the foreign operation and translated at the closing rate. Several members noted that this decision is inherently requiring pushdown accounting for goodwill. The Board decided to retain the position in the exposure draft and further decided to require goodwill and fair value adjustments to be translated at the closing rate. The Board decided to allow prospective application (but permit retrospective application) for acquisitions after the effective date that give rise to goodwill.

The Board decided to keep the net investment exception to providing changes in the exchange rate in the profit and loss accounts.

IAS 24, Related Party Disclosures

The staff noted that several comment letters requested that management compensation be a required disclosure. Several Board members expressed concern with this requirement, as it would require the Board to define management compensation. The Board tentatively decided to amend the exposure draft to require this disclosure. Therefore, the staff was asked to develop a working definition of management compensation, which the Board suggested should include items such as stock compensation, use of airplanes and apartments, etc.

The Board decided to delete paragraph 3 from the exposure draft - disclosures of related party transactions between consolidated entities. The Board clarified its position that if transactions are eliminated in the financial statements presented, those transactions need not be disclosed. However, if transactions are not eliminated, then those transactions must be disclosed.

IAS 33, Earnings Per Share

The proposed approach to calculating EPS in the exposure draft is based on taking an average of the interim periods presented. The Board noted that not all jurisdictions have similar interim reporting requirements and therefore a different EPS figure could be obtained merely as a result of reporting on a quarterly basis versus a semi-annual basis. The staff noted that the annual reporting period is its own distinct period. The Board decided to withdraw the approach in the exposure draft and replace it with an accumulative method approach. The Board noted that this method would be a divergence from US GAAP. The staff was asked to liaise with the FASB to converge in this area towards an accumulative method approach.

The Board noted that the objective of diluted EPS is to obtain the maximum dilution possible. Therefore, the Board decided that if an instrument can be settled in shares, it should be included in the diluted EPS calculation. This is consistent with SIC 24 (which would be withdrawn and included in the final standard) but inconsistent with the requirements of IAS 32. However, the Board noted that EPS is merely a calculation of a ratio, and therefore consistency with other standards is not required. The Board noted this decision is in conflict with US GAAP and therefore requested that the staff liaise with the FASB to obtain convergence.

The Board also concluded that mandatorily convertible securities should be included in the basic EPS calculation, as their issuance depends only on the passage of time, which is a certainty. The Board discussed the presentation of EPS in parent only financial statements and agreed to allow such presentation if it is useful to the users.

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