Changes in Decommissioning Liabilities

The IFRIC is considering three approaches, as set out below. IASB staff noted that IFRIC supports approach (a).

(a) Capitalise that part of the total change in a decommissioning liability that relates to current and future periods.

(b) Capitalise only the effect of a change in the estimated cash flows that relates to current and future periods. The effect of a change in the discount rate would be recognised in current period profit or loss.

(c) Recognise the effect of all changes in either the cash flows or the discount rate in current period profit or loss.

In discussing the three approaches, several Board members expressed a concern that the proposal does not distinguish between:

• changes that do not affect the asset infrastructure and belong in the current period (or, if a production cost, capitalised in inventories), and
• changes that affect the infrastructure. The Board agreed that these should be distinguished and that the interpretation should apply only to the latter. The Board noted, and agreed with, the IFRIC's view that IAS 37 requires the discount rate used in measuring provisions to be adjusted to a current rate at each reporting date. Two Board members indicated they would vote against a draft interpretation being issued based on the current IFRIC decisions. Accounting for Reimbursements from Decommissioning Funds The IFRIC requested the Board to consider scoping out of IAS 39 "a right to receive a reimbursement in cash from a fund" in respect of a provision. The IFRIC would then be able to issue an interpretation on how to measure these reimbursements in cash and services on the same basis. The board asked to the staff and IFRIC to explore the implications of scoping this out of IAS 39 and of requiring fair value treatment of these items within IAS 39 before making a decision.

The active research project on leasing is a joint project with the UK Accounting Standards Board. The Board discussed a project plan, which will be discussed with the Standards Advisory Council in June prior to being finalised by the Board in July.

This is a joint research project being conducted with the US Financial Accounting Standards Board.

The staff presented four views of revenues as the basis for developing a definition of revenue:

• The gross Inflows View
• The Liability Extinguishment View
• The Broad Performance View
• The Value Added View

Definition of revenue: The gross inflows view defines revenues in terms of the consideration from the reporting entity's customers over which the reporting entity obtains control.

Alternative interpretations of that view reflect revenue as the stated contract price, the amount paid by the customer, or the amount received by the reporting entity.

Liability Extinguishment View

Definition of revenue: Revenues are decreases in the reporting entity's liabilities to customers resulting from the extinguishment of its performance obligations for which it is primarily liable. Those obligations are extinguished by providing goods and services to customers, either directly by the reporting entity itself or indirectly by having third parties provide them on its behalf.

Under the liability extinguishment view, revenues arise only from the extinguishment of "performance obligations". A performance obligation is a legally enforceable obligation of a reporting entity to its customer, under which the entity is obligated to provide goods or services. Performance obligations are extinguished by the performance of the reporting entity's promises to provide the customer with goods or services, regardless of whether the entity does so directly or indirectly.

Other obligations that can arise from customer contracts are debt obligations and "custodial obligations". With custodial obligations, the reporting entity is the "custodian" of assets for another entity, such as a customer or a taxing authority. A custodial obligation may be defined as an obligation requiring the reporting entity to pass on assets to other entities for activities it is not responsible to perform.

Broad Performance View

Definition of revenue: Revenues are increases in the reporting entity's assets (including inflows of assets or enhancements of assets) or decreases in its liabilities resulting from activities that are integral to the provision of products (goods and services) by the entity itself that are ultimately destined for customers.

The key feature of this definition is that the reporting entity generates revenues only in respect of the activities it performs itself.

Under the broad performance view, if the reporting entity provides goods it owns to customers, revenues arise from satisfying its performance obligation to provide those goods. This is regardless of whether the reporting entity subcontracts the manufacture of part or all of those goods, and whether the entity owns those goods momentarily.

The definition of revenues includes inflows of additional assets and enhancements of existing assets resulting from activities that are integral to the entity's provision of goods and services.

Value Added View

Definition of revenue: Revenues are the excess of the value of the reporting entity's outputs in the form of goods and services that it creates over the costs of its inputs in the form of materials and services that it purchases from other entities.

Value added might be defined more narrowly by also excluding the value of all other factor inputs such as the wages of the reporting entity's employees or interest accrued to its creditors. That would leave profit as the measure of revenues. Yet another possibility might be to interpret value added as the entity's gross margin.

During its last meeting, the FASB rejected the "Gross Inflows View" and the "Value Added View" and asked its staff to concentrate on the other two views. The IASB Board also rejected the "Gross Inflows View" and the "Value Added View" as drafted. They believe the "Value Added View" has predictive value disclosure benefits and may be reconsidered from that point of view at a later stage.

There was support for considering what should be excluded from revenue under the "Gross Inflows View" view (for example, custodial and agency collections) and comparing this to the two remaining views.

Board members questioned whether the remaining two views encompassed asset enhancement, such as growth in agricultural assets. Staff suggested that such enhancement is within revenue under the "Broad Performance View" not under the "Liability Extinguishment View". One Board member suggested the Board should not be concerned whether this is classified as revenue or as "other gains".

Several Board members expressed support for subdividing revenue into components, such as sales and gains on assets (if included).

The staff asked the Board to consider whether once they had agreed on a definition of revenue, they would want to consider the recognition criteria on a different view. The Board did not support this, though a formal vote was not taken.

Derecognition of Financial Assets

The Board decided to abandon a complete shift to the continuing involvement model proposed in the Exposure Draft. Therefore, the Board decided to retain an approach largely consistent with the current IAS 39, with some modification and clarification. The staff presented a flowchart to illustrated the four steps of the revised decision making process on derecognition:

1. Identify the assets transferred.

2. If substantially all of the benefits and risks have been transferred, then derecognition of the assets is appropriate. The Board clarified that a sale with a repurchase option at fair value would not disqualify derecognition.

3. If substantially all of the benefits and risks have been retained, no derecognition is allowed. This assessment will usually be based on an assessment of the variation of the present value of net cash flows-a test that will be similar, if not identical to the test in step 2 above.

4. If you have answered no to questions 2 and 3, then you would assess whether you have retained control over the assets transferred. The entity would continue to recognise the assets to the extent it could be forced to reacquire the assets. This would result in a similar approach for these items as the continuing involvement approach.

The assessment of whether the entity has retained or transferred control is based on whether the transferee has the right and ability to sell the asset. For example, if an entity is required to put the assets back to the transferor, but the assets are available in the market, then the transferee may be able to sell and therefore, derecognition may be appropriate. Conversely, if the assets are not traded in the market, the put would prohibit sale of the assets and, therefore, derecognition would not be allowed. The final standard would also remove the limit of the liability to the strike price of the call option that was proposed in the Exposure Draft.

The Board decided to provide guidance related to the continuing involvement approach in the final standard for servicing, gains and losses, and non-cash collateral issues. The Board clarified that if there was a sale with a guarantee, then derecognition would still be possible, as the focus would be on whether the transferee can sell the asset.

Pass-Through Arrangements

The Board concluded that it should issue further guidance on pass-through arrangements. The focus of the assessment should be on the transferor, and not on the rights of any of the transferees. The staff's proposal was that pass through arrangements would only work if a proportion of the risks were transferred. That is, if the risks and benefits are shared proportionally (e.g. share in all losses based on ownership retained), then that proportion transferred would be derecognised.

The Board noted that IAS 39 requires the transfer of significant risks and benefits in order for derecognition. If these assets are transferred to an SPE, SIC 12 would most likely require consolidation of the SPE if a majority of the risks and benefits were retained by the SPE. Therefore, in many normal securitization transactions, the assets would be derecognised in the transfer to the SPE, only to be re-recognised when the SPE is consolidated.

One Board member clarified that this is a contradiction with the current IAS 39, specifically as clarified by IGCs 35-1, 35-2 and 35-3. Current IAS 39 uses the notion of "portion", not "proportion". Therefore, derecognition should be allowed for the portion of the asset in which benefits and risks have been transferred.

The Board noted this was only an issue when the pass-through arrangement transfers a disproportionate share of the risk (which was acknowledged is the most common type of transaction). Based on this Board member and other members' concern over the staff recommendation, the Board will re-deliberate this issue in the June 2003 meeting.

Macro Hedging

The Board noted that it is currently working on a model with several European banks that would allow for fair value hedge accounting for a macro hedge of interest rate risk. This model would:

• Not require the designation of the hedging instrument to individual assets
• Not spread change in fair value over line items in the balance sheet, but allow for one item as an asset and one item as a liability. It should be noted that these positions should not be shown net.
• The assets should be classified based on their expected maturity. Pre-payment risk would not need to be measured as it would already be included in the measurement of the asset or liability.

The Board noted that it was trying to finalise this position with the European banks for its June 2003 meeting. If this issue is not resolved by that time, the Board intends to revert to its original position of not allowing macro hedge accounting. The reason for this deadline is that this issue may require re-exposure. The Board did note, however, that it was hopeful an acceptable solution could be found in time.

Basis Adjustments for Non-Financial Assets and Liabilities

The Board has previously voted to prohibit basis adjustments for the forecasted purchase or sale of a financial asset or liability. The issue discussed at this meeting was whether or not to provide an option to basis adjust for non-financial assets and liabilities in the final standard. The Board concluded (8 to 5 vote, 1 abstention) to allow an entity the option of whether to basis adjust for non-financial assets and liabilities. The 5 no votes believed that basis adjustments should be prohibited.

The Board noted that it is likely that this conclusion will change based on the current measurement project on the Board's agenda. However, this change would not be expected for some time.

Hedge of Portions of Non-Financial Assets and Liabilities

The Board clarified that hedging the rubber component of a forecasted purchase of tires (for example) was prohibited in IAS 39, unless regression analysis proved that the movement in the price of rubber almost fully offset the movement in the price of tires. That is, the Board noted that the 80 to 125 range at inception of the hedge is not enough to determine whether the instrument qualifies as a hedging instrument. That is, IAS 39 requires that the expectation be that the movements in the hedged item and hedging instrument is almost fully offset-a much higher threshold (e.g. "upper nineties").

The Board clarified that the entity would not be hedging the rubber component of the tire, but the price of the tire. The Board noted another example in that an entity could not hedge the A-rated component of a AA-rated portfolio. The Board noted that this is a clarification of the current IAS 39 and that implementation guidance should be provided.

Internal Contracts

Internal rate risk

The Board considered whether internal transactions (i.e. transactions between entities in the same reporting entity or group), could be designated as hedging instruments or hedged items under IAS 39. However, these contracts would need to be eliminated in the normal consolidation procedures. The Board asked to the Staff to add an example to the final standard that clarifies the right accounting treatments.

Foreign currency risk

The Board agreed to not change the accounting for foreign currency risk. This will be different from US GAAP, which allows movements in hedges of internal foreign currency transactions to be treated differently.

IAS 21

The Board clarified that receivables/payables between group entities can be classified as hedged items.

Segment

The Board clarified that segment results should report the gains or losses from the internal contracts, even if these contracts are eliminated in consolidation.

Loan Impairments

The Board considered whether a loan asset that has been individually assessed for impairment and found not to be impaired should be included in a collective assessment of impairment as proposed in the Exposure Draft. The Staff recommended that the loan should be included in a portfolio, however no provision should be recognised until an identifiable event occurs and the result of that event is measurable.

The Board noted that IAS 39 is an incurred loss model and not an expected loss model. Therefore, the aggregation of loans into portfolios with similar characteristics is vital to the proper assessment for impairment. Therefore, large loans that are known to be bad or good should probably not be included in the same portfolio of smaller loans to entities with different credit ratings. The Board asked the Staff to clarify the term "similar characteristics" in the final standard. The Board agreed with the Staff recommendations (11/2)

Economic Compulsion

The Staff proposed adding an example in the final standard that would require a liability be recognised based on the probability of dividend distributions. The Board agreed to go further and add an additional example that would require a liability be recognised for the following transactions:

Company A issues preferred shares that are redeemable at 1/1/200X. If Company A does not redeem the shares with cash, then the holders will be able to convert the shares into a fixed number of common shares whose current value is say, 100 times the value of each preferred share. Company A is economically compelled to redeem the shares for cash and therefore a liability should be recognised.

The Board unanimously agreed with the additional example and the staff's proposal.

Re-exposure Issues

The Board considered whether or not the topics discussed during the meeting should be individually re-exposed:

The staff noted that the majority of respondents to ED 2 supported measuring share-based payments at grant date. Respondents believed grant date measurement could be applied either:

• by measuring all factors at the time of initial recognition and not subsequently adjusting for experience or changes in estimates (the units-of-service approach in ED 2 is an example of this), or
• by making a best estimate at initial recognition and adjusting for changes in those estimates over time (the approach under FASB Statement 123, Accounting for Stock-Based Compensation, is an example of this).

The staff noted that under ED 2, grant date measurement was used, for practical reasons, as a surrogate for service date measurement, because the Board believed that on grant date the contract was an executory contract and performance only commenced as service was provided.

The staff noted that the majority of respondents did not support the units of service approach, generally citing the difficulties of incorporating performance conditions into measurement. After discussion, the Board agreed not to retain the units of service approach that was proposed in ED 2 and, instead, to use the approach set out in SFAS 123.

The Board agreed the following:

• To use a grant date measurement model (vote 12-1).
• To include an estimate of performance and vesting conditions within this measurement and adjust thereafter for changes in the estimates (vote 10-3).
• To use this approach for practical reasons (vote 11-2).
• There should be no reversal of expenses where the option vests but is not exercised (vote 13-0).
• The expense should be recognised over the vesting period (vote 11-2).

Earnings Per Share

The Board agreed to keep this project as an improvement project, and convergence issues will be dealt with at a later stage.

IAS 11, Construction Contracts

The Board decided that the convergence project will not address any revenue recognition issues. Nonetheless, the Board recognises that there is an IFRS-US GAAP difference in the area of construction contracts: When it is not possible to use the percentage of completion method, IAS 11 requires the use of the cost recovery method while US GAAP requires the use of the completed contract method.

The Board agreed to ask the IFRIC to look at the criteria US GAAP has in SOP 81-1 for combining and segmenting contracts and consider whether the guidance is consistent with IAS 11 and whether an interpretation should be issued.

Amendments to IAS 37

Contingent Assets and Contingent Liabilities

The Board indicated its intention to remove the notion of probability from the recognition criteria for provisions. They noted that they did not believe this was a change in the standard but merely a cleaning up of redundant wording. The Board agreed to change the definition of contingent assets and liabilities to:

The Board specified that under these definitions, items would be contingent if the past event had occurred but there was uncertainty as to the outcome of the confirming event. The Board asked the staff to add examples to clarify the consequences of this change. In addition the Board asked the staff to add a flow chart to illustrate the steps for recognising a provision.

The Board discussed whether the recognition criteria for contingent assets (virtually certain) should be changed to be symmetrical with contingent liabilities. Currently, losses and related insurance gains are recorded in different periods. The Board recognised that a problem exists but expressed concern about addressing it in a short-term project without thinking through the implications.

Restructuring provisions

The Board agreed to change the treatment of onerous contracts, as follows:

• If a contract is onerous as a result of a decision to stop using the underlying item and the contract can be terminated, a provision is recognised at the date of notice of termination.
• If the contract cannot be terminated, a provision will be recognised when the underlying item is no longer used.
• If the contract is onerous as a result of price changes the provision will be recognised at the time of the price change.

The Board also concluded that an onerous contract provision should include recoveries (for instance, sub-leases) based on prices that could be obtained in the market.

Constructive obligations

The Board agreed to include some clarifications to the wording in the standard.

Measurement

The Board agreed that a provision should be measured at the amount that would be rationally paid to settle the obligation at the balance sheet date. References to the 'most likely outcome' would be removed as this would be inconsistent with this principle.

The Board agreed to clarify that provisions should be remeasured at each reporting date using a current discount rate.

Disposal of Non-Current Assets and Reporting of Discontinued Operations

The Board discussed various issues related to this project and agreed:

• Not to replace the term 'held for sale' with 'retired from active use'.
• To include in the scope of the ED:
  • intangible assets,
  • assets held by entities in extractive industries,
  • long term customer relationships,
  • insurance contracts, and
  • associates.
• To use the definition of a 'discontinued operation' as per FAS 144 but to specifically request comment on this in the ED
• To use the term 'highly probable' instead of 'likely'

Disclosures Relating to Post-Employment Benefits

The Board agreed to include sensitivity disclosure requirements in respect of significant actuarial assumptions. This disclosure would be required individually for each significant assumption.

The staff updated the Board on the progress of the pilot field tests conducted in the UK. The Board was not asked to make any decisions during this meeting. The Board plans to discuss this project at its June 2003 meeting.

Participants did not raise any major objections during the pilot tests, and there seemed to be a general understanding of the purpose of this standard. The preparers noted that the performance reporting standard would require a specific format for the income statement, which may not present the results in a manner consistent with an entity's business model. On the other hand, the users recognise the benefits of a single format for making comparisons between companies and across industries.

The staff presented the Board with details of some of the issues raised during the field tests:

Definition and Presentation of 'Financial' and 'Financing'

Participants expressed concerns whether financing activities should be separated, problems with the definition of financing, and practical difficulties.

Presentation of Write-downs of Accounts Receivable

Intuitively, preparers and users believe that this charge should be in a different column and different row from what the Board intends to mandate.

Presentation of Inventory Impairments

The Board did not discuss this issue.

Allocations of Tax

Many participants want to allocate the tax expense between columns (remeasurements vs. non-remeasurements).

Definition of 'Earnings'

Many participants would like to add this item, as it is a key for communication to the market.

Proposed Voluntary Early Adoption in 2005

Some participants raised concerns that if the standard is issued before 31 December 2005, an option to early adopt would hurt comparability. Conversely, some constituents wanted to change once for the adoption to IFRS and therefore wanted to adopt by 2005.

Issues Regarding Banking Activities

Financial institutions expressed some concerns on the split between operating and financing activities. They believe it is not really relevant for their businesses, as much of the expenses would be in operating, but all of the income in financing. Financial institutions also noted that the requirement to present gross interest income and interest expense is not meaningful as the institutions manage net interest. That is, the gross numbers are volatile with offsetting positions.

Financial institutions also believe it may be more appropriate to show gains and losses from trading activities in the first column, as it is a margin generating activity and not a true remeasurement.

The Board will deliberate and make decisions on many of these and other issues at its June 2003 meeting.

The Staff updated the Board on the work of the Financial Activities Advisory Group from December 2002 to date, focusing on the area of capital risk disclosures. Following, the Board discussed specific issues and agreed on the following:

• The standard should not require disclosure of capital requirements imposed by external parties (regulators). However, entity-specific targets and industry standard targets would need to be disclosed. The entity would also be required to disclose the fact (if applicable) that a breach has occurred at any point during the reporting period and the quantitative steps taken to correct that breach. The entity would be required to disclose the existence of forbearance, if one occurs.
• There is a need for a final standard by 2005, as it simplifies and improves the capital risk disclosures from those in IAS 30 and 32. The staff will work to complete an ED that the Board can expose in 2004, so that entities would be able to voluntarily adopt the standard for 2005. However, the Board's agenda is extremely full, and the effective date of a final Standard may have to be delayed until after 2005. If this project is not in place by 2005, IAS 30 and 32 will still apply to capital risk disclosures.
• This project will not address improvements to IAS 14, Segment Reporting.

Disclosures for Minority Interests

The Board discussed the effects of classifying minority interests on the disclosures to be required. The Board concluded that IAS 1.86 is clear that a reconciliation for minority interest would have to be provided in the statement of changes in equity. The most likely presentation would be an addition of one column in the statement of changes in equity, as illustrated in Appendix A of IAS 1.

Comment Period, Effective Date, and Transition - Minority Interest Decisions

The Board agreed that it will issue two exposure drafts in this project; one related to business combinations and one related to minority interests (amendment of IAS 27). Both EDs will be issued together and will have a 90-day comment period.

The proposed effective date will be 1 January 2006 for both standards. Earlier application will be optional. The requirements would have to be applied retrospectively, unless impracticable. However, all business combinations that occur after the earliest business combination that has been retrospectively restated must also be restated.