IAS 33, Earnings per Share

The Board discussed whether EPS may be presented in parent-only accounts. There was concern over whether the presentation of two EPS figures (one for the consolidated accounts and one for the parent-only accounts) would be misleading. The Board noted the usefulness of this figure in limited situations and decided to retain the option proposed in the Exposure Draft. The Board further decided that, to avoid confusion, the Standard should prohibit presentation of the parent-only EPS amount in the consolidated financial statements (either on the face of the financial statements or in the notes).

A first pre-ballot draft will be distributed to the Board members later this week. One Board member noted that the Board's decision to classify put-options as a liability in its proposed amendments to IAS 32 may change their effect on the EPS calculation. The Board noted that it expects to complete the improvements to IAS 33 prior to the amendments to IAS 32 and, therefore, it may have to make a consequential amendment to IAS 33 once the project on IAS 32 is completed.

The staff also noted that the FASB has decided to converge with the IASB on the calculation of diluted EPS. Therefore, there is no need to consider a possible change to IAS 33 in this regard.

Assets Disposal

A final pre-ballot draft will be sent to the Board members during this week. The staff noted that FAS 144 removed the exception from consolidation for entities for which control is intended, at acquisition, to be temporary. The exemption exists in IAS 27. The Board noted that if this exemption were removed from IAS 27, the effect would be that groups of assets may only be de-consolidated if they meet the criterion of being held for disposal. The Board decided to propose removing this exemption from IAS 27 in the Exposure Draft.

The Board noted that there would be a measurement difference between the Exposure Draft and FAS 144 in that the Exposure Draft would not reduce the fair value by costs expected to be incurred to sell the assets. The Board decided to converge with US GAAP on the recognition criteria and to hold the measurement issue to Business Combinations Phase II.

IAS 12, Income Taxes

The Board discussed the following four issues relating to deferred taxes:

• Goodwill and negative goodwill
• Investments in subsidiaries, branches, associates, and interests in joint ventures
• Intercompany transfers of assets remaining within the group (different tax rates between the transferor and the transferee)
• Foreign non-monetary assets and liabilities

Goodwill and negative goodwill. The staff recommended that deferred taxes be recognised for goodwill and negative goodwill. Both US GAAP and IAS 12 prohibit the recognition of deferred taxes on goodwill and negative goodwill. The Board decided to leave IAS 12 as it is because (a) it is already converged with US GAAP, (b) of the practical difficulties with tracking goodwill into perpetuity, and (c) there may not in many cases be a difference between the tax base and the carrying amount.

Investments in subsidiaries, branches, associates, and interests in joint ventures. Under IAS 12, a deferred tax liability is not recognised for taxable temporary differences for investments in subsidiaries, branches, associates, or joint ventures if certain criteria are met. At its April 2003 meeting, the Board decided to eliminate the exception for investments in associates. The Board did not reach any further conclusions on this issue and requested the staff prepare a follow-on paper addressing different types of investments for the Board to consider at a future meeting.

Intercompany transfers. US GAAP and IAS 12 require recognition of deferred taxes on the difference between an asset's tax base and its carrying amount if the carrying amount is adjusted as a result of an intercompany transfer within a consolidated group. However, the deferred tax is measured using the buyer's tax rate under IAS 12 and using the seller's tax rate under US GAAP. The Board agreed (7-6, one abstention) with the Staff recommendation to leave IAS 12 as is. The Board asked the staff to liaise with the FASB to seek convergence on the rate to be used.

Foreign non-monetary assets and liabilities. The staff asked the Board to decide whether a deferred tax should be recognised in the consolidated financial statements when the assets or liabilities are remeasured locally (in a foreign subsidiary) due to the change of the foreign currency. The Board decided that a deferred tax should be recognised by a vote of 11 to 3. Therefore IAS 12 will be not amended, and a difference with US GAAP will remain. The Board asked the staff to liaise with the FASB to seek convergence.

The Board discussed six issues relating to questions raised in ED 2. The Board was not asked to make any decisions at this meeting, as other standard setters will be addressing these issues in the near future and it will be helpful to the staff and the Board to understand their views on the issues. The Board will address these issues in the July 2003 meeting with the intention to make tentative decisions.

The Board first discussed the proposal to measure employee share-based payments based on the fair value of the equity instruments granted (Question 7 in ED 2). The staff noted that a majority of the respondents supported the conclusion in ED 2 to measure these services by reference to the fair value of the options granted, as the option's fair value is more readily determinable than the fair value of the services received. A few Board members suggested adding in the notion of a rebuttable presumption; however, there seemed to be a majority supporting the requirement in ED 2. Specifically, several Board members were concerned that allowing employee options to be valued at the excess of the fair value of the services received over the current cash salary would generally result in a value of zero, which they felt was clearly inappropriate.

Question 11 of ED 2 proposed that, in the absence of an observable market price for options granted, an option pricing model that takes into account various factors (such as exercise price of the option, life of the option, current price of underlying shares, volatility in the share price, dividends expected, and risk free interest rate over the life of the option) should be used. The Board confirmed its intention that the Black Scholes model should not be prescribed; however the standard will indicate that it is one model that would be appropriate. The Board also noted that since valuation models are being improved and updated, the final standard should not give prescriptive guidance.

ED 2 proposed that the option be valued based on its expected life, not its contractual life (Question 12). The Board reiterated its support for that model. The Board also reiterated its support for including in the grant date measurement the effects of a reload feature (Question 14). The Board noted that several valuation experts have suggested that models to value reload features have been sufficiently developed and should cause little problem in practice.

Question 15 of ED 2 asked respondents to identify other common features of employee share options for which the IFRS should specify requirements. The staff noted that items consistent with the fair value measurement should be picked up in the final IFRS (for example, the effect of black-out periods on the fair value calculation).

The final issue discussed was the general form of the final standard. Specifically, the staff asked the Board whether the final standard should be more principle-based or more prescriptive (Question 16). The Board confirmed that the final standard should not be as prescriptive as some respondents requested. While there will be some guidance on how to determine fair value, there should be room left for more appropriate valuation valuations to develop. Therefore, while the Board may not prescribe a model, it will prescribe the parameters within which the model should operate.

The staff presented a paper summarising the 13 active projects, 7 research projects, and other projects being discussed by the IASB. The Board noted that it and the staff are currently over-stretched and that no items should be added to the active agenda until some are taken off. This may mean that certain research projects being conducted by partner standard setters may have to be delayed until the Board and staff have sufficient time and other resources to devote to them.

The staff noted that it may implement a process by which projects on the agenda can be reviewed to determine whether they should remain on the active agenda. While it would be rare that an item actually be removed, the staff believes this will provide it and the Board some added discipline. The staff noted that there were no projects on the current agenda it intends to consider for removal at this time.

The Board discussed the timetable and the contents of the project on consolidation, and in particular, special purpose entities (SPEs). The staff proposed that a final Standard could be issued on March 2004 - a timeline several Board members found ambitious. The staff also proposed to address SPEs first and consolidation second. One Board member noted that the general principle should be the same and that it may be useful to reverse that order.

One Board member noted that until the IASB decides whether the underlying principle for consolidation should be legal control, latent control, or effective control, this project cannot progress. One Board member clarified that effective control means the entity currently has control, while latent control implies that the entity has the ability to obtain control (for instance, by exercising options that would give it controlling voting power). There seemed to be general agreement in favour of the effective control principle.

The staff noted that the result of this project (while still undetermined) may be a new IFRS on consolidations-replacing IAS 27.

Some Board members want to include in this project the issue of derecognition of leases and financial assets, to obtain consistency on the treatment of these transactions. All agreed that they first have to redefine the notion of control in IAS 27 - whether it is a legal or effective control - before considering SPEs. Discussion of this issue should be planned with the FASB.

Definition of an insurance contract

Financial risk is defined as the "risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or similar variable". This list of variables in Phase I is the same as the list of variables in IAS 39's definition of a derivative, except that it uses "similar variable" (per current IAS 39) rather than "other variable" (per the Exposure Draft of amendments to IAS 39).

The Board noted that a residual value guarantee on an individual's house would be considered a derivative if the value of the guarantee is based on a broad market index versus the actual condition of the house (which would be considered an insurance contract). The Board agreed to conform the language by using the word "other" for clarification.

The Board agreed that the insurance risk has to be significant from the policyholder's view, and therefore the definition will be amended to include that phrase.

Disclosure

The current pre-ballot draft of the ED has much of the disclosure requirements in the implementation guidance as opposed to the standard itself. Several Board members expressed concern that the requirements for disclosure in the standard could not be understood without reference to the implementation guidance and the basis for conclusions. The staff suggested that the standard should remain principle-based and therefore not have detaild specific disclosure requirements. One Board member noted that because insurance products differ significantly, it would be inappropriate for the standard to prescribe specific disclosure requirements.

The Board decided to retain this format. However, a question will be asked in the Exposure Draft for comment.

Financial liabilities with a demand feature

At its April meeting, the IASB decided to require that financial liabilities with a demand feature (such as demand deposits) be measured at an amount not less than the actual demand amount. Therefore, this amount will not consider timing of estimated payouts.

The staff noted that this conclusion creates a measurement problem, as IAS 39 requires that transaction costs be deducted from the initial measurement of the financial liability. For example, if an entity incurs a financial liability for 100 with related transaction costs of 20, that contract would be initially recognised at 80 under the pre-ballot Exposure Draft. If a demand feature were present, the liability to perform under that contract would need to be increased to 100. Therefore, the 20 of transaction costs would be reversed out.

The Board noted this issue and that it relates to a fundamental issue of measurement - one that can not be solved in Phase I. Some Board members believe this topic should be discussed in IAS 39. However, there was concern that this issue would significantly slow down the amendments to IAS 32 and IAS 39. The Board agreed to retain the current decisions without any further guidance.

Dissenting views

The Board briefly discussed the views of the 4 members who will dissent to the pre-ballot draft and the various reasons for their dissent.

One Board member expressed concern that the "authoritativeness hierarchy" in IAS 8 is being suspended in this project and that a "sunset" provision be added. That is, if Phase II is not completed by 1 January 2007, all companies must follow the hierarchy established in IAS 8 for insurance contracts. The Board agreed to add this provision.

A ballot Draft should be sent next week to the Board members. The Exposure Draft is expected to be sent to the printers on 3 July 2003. Comments will be requested by 31 October 2003.

The staff noted that this project is also being taken on by the US FASB and that the Board should seek additional convergence with the FASB. There was some concern that the FASB is diverging from the positions the IASB has already taken. The FASB is currently working on definitions that would distinguish between "business activity" and "financial activity" - a distinction the IASB and the G4+1 had determined to be fruitless. Additionally the FASB has not taken any decision yet regarding the format (2 columns versus 1 column). The staff was asked to continue to work closely with the FASB staff.

The purpose of this discussion was to convey the findings of the initial field visits with the Board and staff. The staff and Board members noted the following major themes and issues:

• Many users and preparers asked for a single number as "the" measure of performance (like net income).
• Preparers want more flexibility to represent their company in a way that is consistent with their business.
• Concern that the proposed approach did not work for a financial institution or a conglomerate with financial activities.
• Many users see merit in the approach proposed.
• The Board has a major educational task at hand.

The Board also discussed the following details:

(a) Net income and recycling. The Board agreed to retain the current model (13-1). There will be a future discussion of how this decision will affect IAS 32/39.

(b) Inventory impairments. The Board agreed (9-5) inventory impairments should be presented in the remeasurement column.

(c) Write-downs of accounts receivable. The Board agreed (8-6) that the item should be presented in the operating profit and the remeasurement column.

(d) Pensions.Some concerns have been raised regarding the interim report as the entities reported that it would be difficult to split the pension costs because they will not have the information. This issue will be discussed later. The Board agreed (12-2) to stay with the current model.

(e) Provisions. It was agreed that the initial recognition should be in column 1 (profit before remeasurements) and subsequent remeasurement in column 2 (remeasurements).

(f) Other business profit. The Board decided to retain the category of other business profit and to allow items in this category to be moved up to operating profit.

(g) Income from associates. The Board agreed (8-6) that income from associates should be presented in financial income. The Board agreed (14-0) that income from associates should be presented net of tax.

(h) Financial and financing distinction. The Board agreed to keep the distinction that interest on liabilities would be presented in financing expense while interest income from financial assets would be presented in operating. This would require an entity that switches from an overdraft to a positive cash position to track the interest income and expense. This may be an area of divergence with the FASB.

(i) Banking activities. Several Board members expressed concern that the current proposals do not address well issues related to financial institutions and conglomerates. No decisions were made.

The Board will address the following items at its next meeting:

• Tax
• Earnings and earnings-per-share
• Function versus nature
• Adoption date
• Convergence with the FASB
• Descriptors
• Presentation on the face of the statement
• Segment reporting and cash flow statement

Full goodwill method

The Board agreed during its November 2002 meeting to use the full goodwill method to recognise goodwill in the acquisition of less than a 100% controlling interest in an acquired entity. However, the Board redeliberated that decision and the staff proposed several alternatives for discussion.

Five Board members expressed serious concerns with the full goodwill method for various reasons, including reliability of measurement and relevance. One other Board member was still uncertain as to how this could be measured reliably but would not object to the issuance of the Exposure Draft. The Board agreed to retain the full goodwill method (9-4 and 1 abstention) in the current project and to proceed on this basis.

Fair value hierarchy

The Exposure Draft for phase II will include a fair value hierarchy (developed in co-ordination with the FASB) as follows:

• Level 1 - fair value should be determined by observable markets.
• Level 2 - fair value should be determined by adjusting observable transactions for similar items.
• Level 3 - fair value should be determined by use of a valuation technique.

The staff has proposed changes to this hierarchy as a result of the FASB deliberations on its fair value measurement project. There is concern that the hierarchy in IAS 39 could appear to be different from the proposed hierarchy in business combinations. However, the Board noted that each hierarchy is specific to the transactions it relates to (business combinations versus financial instruments). They should be consistent in theory.

The Board agreed to accept the changes to the hierarchy. However, it was noted that in Wednesday's discussion of IAS 39, the staff has proposed removal of Level 2. If removed in IAS 39, level 2 should also be removed from this proposed standard.

The Board discussed the types of contractual rights and obligations that could give rise to revenue. The Board determined that conditional rights (performance has not occurred) should not give rise to revenue.

The Board noted that under the staff's proposal, conditional rights could give rise to a fair value gain or loss. For example, if an entity submitted a purchase order for 1 unit at the fair value price of 100and, prior to delivery, the fair value increased to 105, the purchaser would have a gain of 5 and the seller a loss of 5. Therefore, the seller would record revenue of 100, cost of sale (say 80), and a loss of 5 from the fair value movement of its stock prior to delivery.

The board decided that pre-performance assets and liabilities would be carried at fair value at initial recognition and subsequent remeasurement. Post-performance assets and liabilities would be subject to another standard. The staff was asked to continue consideration of this model in co-operation with the FASB staff.

During the May 2003 meeting, the Board agreed with IFRIC'S overall intention to account for the two forms of rights to reimbursement the same way - fair value through the income statement. The two forms are as follows:

• contractual rights to receive reimbursement in the form of cash, and
• rights to reimbursement other than contractual rights to receive cash

The staff has therefore requested that the IASB amend IAS 39 to scope out contractual rights to receive cash related to decommissioning liabilities and allow the IFRIC to require changes in fair value be recognised through the income statement. The Board agreed by an 11-3 vote. The result is that two exposure drafts will be issued: one amending IAS 39 and one for the IFRIC interpretation. It is expected that the respondents will comment on the two exposure drafts as a package.

The Board discussed the following issues related to IAS 32 and IAS 39:

• Pass-through arrangements
• Fair value measurement guidance
• Macro hedging
• Cash instrument hedging
• Contracts on own equity-definitions and principle
• Sensitivity disclosures
• Other finalisation issues

The Board discussed whether to permit an obligation to pay a disproportionate share of the cash flows of the original asset to qualify for pass-through accounting (portion) or whether as a condition for pass-through accounting, the entity retains no or a fully proportionate interest in the original asset.

The Board noted that IAS 39 as drafted is not clear and that additional guidance must be given on how to apply the requirements to pass-through arrangements. The observer notes contained a Flowchart of the staff's proposal that is integral in understanding the Board's proposal. It should be noted that the first step of the process is to determine the reporting entity-which could include an SPE that is consolidated as a result of SIC 12. Therefore, the test would be conducted through the viewpoint of the consolidated entity, and not the individual entity that "sold" the assets to the SPE.

The Board agreed 12 to 1 (with one abstention) to approve the decision tree in the flowchart. The Board did not believe this change would require re-exposure.

Fair value measurement guidance

The Board discussed several issues related to determining fair value when (a) a quoted price in an active market exists, (b) recent market transactions when no active market exist, and (c) the use of valuation techniques when no active market exists. The Board made the following decisions related to when a quoted price in an active market exists:

• Valuation techniques may not be used to measure fair value when an active market exists.
• IAS 39 will be clarified to require the use of quoted rates when an active market for that rate exists.
• Bid-ask prices should be used in determining fair value. Mid-market prices should not be used since they may result in immediate gains.
• When more than one active market exists for which an asset or liability can be disposed of immediately without cost or risk (that is without bundling or any modification), the most advantageous market price should be used. The most advantageous market price is the one that results in the highest price.
• Blockage factors should not be considered, as it is uncertain whether they exist and, even if they exist, whether their value could be determined reliably.
• The final standard will clarify that entities may adjust the quoted market prices for changes in factors that affect the price of the instrument at the balance sheet date.
• The final standard will not contain guidance on what constitutes an active market.

• The Board agreed to remove the second level of the fair value hierarchy so that when an active market does not exist, a valuation technique should be used. The Board clarified that one input to the valuation technique may be to look at recent market transactions for similar items.
• The price received in an inactive market should be the best indicator of the fair value as proposed in the Exposure Draft. Therefore, an entity that purchases assets in an active market, packages these assets, and sells the package in an inactive market could have a gain on the transaction.

Macro Hedging

The Board agreed (14-0) to change the Exposure Draft to permit an entity to use fair value hedge accounting for a portfolio hedge of interest rate risk. The key elements of the proposed approach are as follows:

1. The entity identifies a portfolio of items whose interest rate risk it wishes to hedge. The portfolio may comprise both assets and liabilities.

2. The items are grouped into time categories based on their expected (not contractual) re-pricing dates.

3. The net position in each timer period is established and the entity decides how much of that net position it wishes to hedge. The entity designates assets (or liabilities, but not both) equal to the amount it wishes to hedge as the hedged item, rather than the net amount. The designation is of an amount of a specific currency rather than of individual assets. The assets (or liabilities) from which the hedged amount is drawn must be items:

• Whose fair value changes in response to the risk being hedged,
• That could have qualified for fair value hedge accounting under IAS 39 had they been hedged individually, and
• Included in narrowly defined and consistently determined time buckets.

5. The entity designates a hedging instrument for each time period. The hedging instrument may be a portfolio of derivatives containing offsetting risk positions.

6. The entity measures the change in the fair value of the hedged item that is attributable to the hedged risk. This gain or loss is reported in the income statement and in one of two separate line items in the balance sheet. The change in value is not allocated to individual assets.

7. The entity measures the change in the fair value of the hedging instrument and reports this gain or loss in the income statement and as an adjustment to the carrying amount of the hedging instrument in the balance sheet.

8. Ineffectiveness is reported in the income statement as the difference between the amount determined in 6 and that referred to in 7.

As noted from earlier discussions, the Board decided to require liabilities with demand features (such as demand deposits) to be measured at the higher of its fair value or amount that could be demanded. A liability measured at the amount that could be demanded today does not have interest rate risk and therefore, some Board members believe cannot be subject to a fair value hedge. The Board did not make a decision on this matter and has asked to staff to develop this issue further.

The representative of the Federation Bancaire de l'Union Europeenne (FBE) expressed concern that ineffectiveness of an under hedge (for example, a hedge 100 of a portfolio of 150 because 50 is expected to be prepaid; however only 25 is prepaid) would be taken through income the same as an overhedge. The Board confirmed its conclusion, noting the fact that the use of expected time buckets does not appear to permit any other choice. The staff and Board will continue to work on the mechanics of applying this approach and will readdress this at the next Board meeting.

The Board discussed several issues related to how to make this approach workable. Additionally, the Board decided that this issue must be re-exposed. The staff will undertake the task of preparing a pre-ballot draft for the July 2003 meeting.

Cash instrument hedging

The Board concluded that financial instruments other than a derivative (a "cash instrument") should not be designated as a hedging instrument other than for foreign currency risk.

Contracts on own equity

At its April 2003 meeting, the Board determined that contracts that either (a) involve an obligation to deliver cash or other assets or (b) may be settled using a variable number of own shares as a means for payment should be classified as a liability, not equity. The result of this decision requires amendments to the definitions of financial assets, financial liabilities, and equity instruments in IAS 32. The Board finalised changes to these definitions to incorporate the April decision.

Sensitivity disclosures

The Board tentatively decided (8 to 3) that sensitivity disclosures should be provided for fair values estimated using a valuation technique for each valuation assumption not supported by observable market prices. Certain Board members are concerned that the requirement for sensitivity disclosures could be quite onerous, for example when 100 models with 4 different variables each that are not supported by observable market prices exist. The Board will discuss this issue further at its September 2003 meeting.

Finalisation issues

The Board decided that the final amendments to IAS 32 and IAS 39 should be issued in two stages. The first versions of IAS 32 and 39 will be those that include the all decisions that are not being re-exposed. The second and final versions will include the decisions from issues re-exposed. The Board is taking this approach to try to ensure users in countries adopting IFRS in 2005 have as much of the final standard as possible in hand when preparing for 2005.

As a result of a letter received from the Japanese Accounting Standards Board, the Board reconsidered its recent decision on the impairment of available-for-sale equity securities. The Board reversed its earlier decision to stay with the proposal in the Exposure Draft. That is, an impairment of an available-for-sale equity instrument would create a new cost basis. Therefore, increases in value should be recognised as equity. The Board also clarified that the decrease in fair value must be prolonged in order for an impairment loss to be recognised - consistent with existing implementation guidance. The Board confirmed that the impairment of debt securities should be accounted for similarly to the impairment of originated loans.

The Board noted that the work of the EITF on Issue 02-03 should be followed, and if EITF makes a decision the IFRIC may want to look at issuing similar guidance.

Currently, there is one issue the Board has determined requires re-exposure (macro hedging). However, the Board noted one other issue to be discussed in July that may require re-exposure - that is, the conflict between IAS 32/39 and the Exposure Draft on share based payments. One Board member expressed his intent to dissent to both IAS 32 and IAS 39, while one additional Board member expressed his intent to dissent to IAS 39.

Project plan

The staff presented the project plan for completing the Business Combination project Phase I. The Board agreed with the proposed timetable, and that the final Standard should be issued in March 2004.

Analysis of comments received on questions in ED 3

The staff reported the results from the comment letter analysis on ED 3. Question 8 relating to the proposal that goodwill not be amortised will be discussed at the next meeting in London.

Question 1 - Scope

The Exposure Draft proposed to exclude from the scope of the IFRS business combinations in which separate entities or operations of entities are brought together to form a joint venture, and business combinations involving entities under common control. Commentators were asked whether they believe these scope exclusions are appropriate and, if not, why not. The Exposure Draft also proposed to include in the IFRS a definition of business combinations involving entities under common control, and additional guidance on identifying such transactions. Commentators were asked whether they found the definition and additional guidance helpful in identifying transactions within the scope exclusion and, if not, what additional guidance should be included and why. The Board concluded at this time to leave the scope exceptions as proposed in the Exposure Draft.

A majority of the respondents agreed with the scope exclusion (joint ventures and entities under common control) because it is a part of the Business Combinations Phase II project. The Board will not change the definition of common control. However there is some concern whether the Board narrowed the definition of joint ventures too far as a result of this project. The staff will explore whether all owners must have joint control or whether only the entity in question has to be one of the entities with joint control.

The staff will research issues raised on the definition of a business combination, as the current definition requires that the entities be operating (that is, does an acquisition by a holding company meet the definition of a business combination?).

Question 2 - Method of accounting for business combinations

The Exposure Draft proposed to eliminate the pooling of interests method and to require all business combinations in its scope to be accounted for by the purchase method. Commentators were asked whether this is appropriate and, if not, why not. If commentators believed the pooling of interests method should be applied to a particular class of transactions, they were asked why, and to provide criteria for distinguishing those transactions from other business combinations.

The Board was agreed (unanimous) to keep the purchase method only as proposed.

Question 3 - Reverse acquisitions

Under IAS 22, a business combination is accounted for as a reverse acquisition when an entity (the legal parent) obtains ownership of the equity of another entity (the legal subsidiary) but, as part of the exchange transaction, issues enough voting equity as consideration for control of the combined entity to pass to the owners of the legal subsidiary. In such circumstances, the legal subsidiary is deemed to be the acquirer.

The Exposure Draft proposed to modify the circumstances in which a business combination could be regarded as a reverse acquisition by clarifying that for all business combinations effected through an exchange of equity interest, the acquirer is the combining entity that has the power to govern the financial and operating policies of the other entity (or entities) so as to obtain benefits from its (or their) activities. As a result, a reverse acquisition occurs when the legal subsidiary has the power to govern the financial and operating policies of the legal parent so as to obtain benefits from its activities. Commentators were asked whether this is an appropriate description of the circumstances in which a business combination should be accounted for as a reverse acquisition and, if not, under what circumstances, if any, a business combination should be accounted for as a reverse transaction.

Commentators were also asked whether they believe the guidance in Appendix B of ED 3 on the accounting for reverse acquisitions is appropriate and, if not, why not. They were also asked whether any additional guidance should be included and, if so, what specific guidance should be added.

The Board agreed to stay with the proposal (13-0) and to add some additional guidance regarding consolidated accounts and individual accounts. In addition, the Board will clarify that all of the tests required to determine the acquirer for regular acquisitions will need to be completed for reverse acquisitions.

Question 4 - Identifying the acquirer when a new entity is formed to effect a business combination

The Exposure Draft proposed that when a new entity is formed to issue equity instruments to effect a business combination, one of the combining entities that existed before the combination should be adjudged the acquirer on the evidence available. Commentators were asked whether they believe this approach is appropriate and, if not, why not.

The Board agreed (12-1) to retain the proposals in the ED 3. The Board also agreed to add additional guidance on how to determine the acquirer when more than two entities are involved. The Board asked the staff to consider the US SFAS 141.

Question 5 - Provisions for terminating or reducing the activities of the acquiree

Under IAS 22, an acquirer must recognise as part of allocating the cost of a business combination a provision for terminating or reducing the activities of the acquiree (a "restructuring provision") that was not a liability of the acquiree at the acquisition date, provided the acquirer has satisfied specified criteria.

The Exposure Draft proposed that an acquirer should recognise a restructuring provision as part of allocating the cost of a business combination only when the acquiree has, at the acquisition date, an existing liability for restructuring recognised in accordance with IAS 37. Commentators were asked whether they believe this proposal is appropriate and, if not, what criteria an acquirer should be required to satisfy to recognise as part of allocating the cost of a combination a restructuring provision that was not a liability of the acquiree, and why.

Most commentators agreed with the proposal, but a majority of preparers disagreed as they did not believe the proposal reflects economic reality. The Board agreed to retain the position in the ED as they believe they have already clearly addressed the preparers' concerns in the Basis for Conclusions.

Question 6 - Contingent liabilities

The Exposure Draft proposed that an acquirer should recognise separately the acquiree's contingent liabilities at the acquisition date as part of allocating the cost of a business combination, provided their fair values can be measured reliably. Commentators were asked whether this is appropriate and, if not, why not.

Some comment letters said that this proposal was inconsistent with the Framework and IAS 37. Additionally, concern was expressed over the different treatments for contingent assets and contingent liabilities. However, the Board confirmed its decision that the contingent liability should be recognised at fair value (12-2).

The ED proposed that contingent liabilities be recognised at fair value with changes recognised in income until the contingent liability meets the requirements of IAS 37. The Board asked the staff to work on a fair value measurement model and to look at IAS 39 and FASB Statements 141 and 142 for guidance. This issue will be further discussed at a future Board meeting.

Question 7 - Measuring the identifiable assets acquired and liabilities and contingent liabilities assumed

IAS 22 includes a benchmark and an allowed alternative treatment for the initial measurement of the identifiable net assets acquired in a business combination, and therefore for the initial measurement of any minority interests.

The Exposure Draft proposed requiring the acquiree's identifiable assets, liabilities and contingent liabilities recognised as part of allocating the cost to be measured initially by the acquirer at their fair values at the acquisition date, so that any minority interest in the acquiree would be stated at the minority's proportion of the net fair values of those items. This proposal is consistent with IAS 22's allowed alternative treatment. Commentators were asked whether they believe the proposed measurement is appropriate and, if not, how the acquiree's identifiable assets, liabilities and contingent liabilities recognised as part of allocating the cost of a business combination should be measured when there is a minority interest in the acquiree, and why.

The Board agreed to retain the approach proposed in the ED (13-0) and noted the FASB intends to converge with this decision.

Question 9 - Negative Goodwill

The Exposure Draft proposed that if negative goodwill exists, an entity should:

(a) reassess the identification and measurement of the acquiree's identifiable assets, liabilities, and contingent liabilities and the measurement of the cost of the combination; and

(b) recognise immediately in profit or loss any excess remaining after that reassessment.

Commentators were asked whether they believe this treatment is appropriate and, if not, how any such excess should be accounted for and why.

The majority of the comment letters disagreed with the proposal. Some comment letters cited the asymmetric treatment of goodwill and negative goodwill, while others noted that recording assets at an amount greater than what was paid is inconsistent with the historical cost concept.

The Board agreed to stay with the proposal in the ED 3 (12-1) for the reasons set out in the Basis for Conclusions.

Question 10 - Completing the initial accounting for a business combination and subsequent adjustments to that accounting

The Exposure Draft proposed that if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination occurs because either the fair values to be assigned to the acquiree's identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer should account for the combination using those provisional values. Any adjustment to those values as a result of completing the initial accounting is to be recognised within twelve months of the acquisition date. Commentators were asked whether they believe twelve months from the acquisition date is sufficient time for completing the accounting for a business combination and, if not, what period would be sufficient and why.

The Exposure Draft also proposed that with some specified exceptions carried forward as an interim measure from IAS 22, adjustments to the initial accounting for a business combination after that accounting is complete should be recognised only to correct an error. Commentators were asked whether they believe this is appropriate and, if not, under what other circumstances the initial accounting should be amended after it is complete and why.

Most of the comment letters agreed with the window of 12 months, and the Board agreed to stay with this proposal (12-1). The Board also decided that the adjustment of provisional amounts should retrospective (13-0), and business combinations outside of this 12-month window should only be adjusted for the correction of an error (13-0).