The Board reviewed a revised draft of a Discussion Paper on Accounting Standards for Small and Medium-sized Entities (SMEs). The draft reflected decisions that had been made by the Board in March 2004 as well changes resulting from a review by members of the IASB's Advisory Panel on SMEs.

The Board asked that further changes to the draft be made, including the following:

• Clarify that the objectives of financial reporting set out in the IASB Framework are appropriate for SMEs as well as for entities following full IFRSs.
• Full IFRSs, rather than IASB standards for SMEs, should be regarded as appropriate for entities that are economically significant in their home country based on criteria such as total assets, total revenue, number of employees, degree of market dominance, and the nature and extent of external borrowings.
• If an SME that otherwise is following IASB standards for SMEs elects to follow a treatment in an IFRS that differs from the treatment in the related IASB standard for SMEs, it must follow the entire IFRS, not just selected parts of it.
• Explain that while initially the Board will issue a single comprehensive exposure draft of 'SME versions' of all existing IFRSs (including IASs) and interpretations, once the initial set of IASB standards for SMEs is in place the Board expects to keep them up to date by including SME-related proposals in each new exposure draft or draft interpretation. Moreover, the effective dates of new or revised IASB standards for SMEs would be the same as the effective dates of new or revised IFRSs.

The Board voted (12 in favour, 1 opposed) to approve the Discussion Paper for publication subject to the opportunity to review and comment on a ballot draft of the document. There will be a 90-day comment period.

The Board was asked whether IFRIC 1 should be re-exposed due to the consequential amendment proposed to IFRS 1 that was added to the final standard. The Board did not believe this required re-exposure.

The Board was made aware of difficulties in the transition requirements in IAS 39 for first-time adopters using IFRS 1 to apply fully the retrospective approach without the impracticability exception for day one profit previously recognised. The Board also noted this was contradictory to US GAAP which limits the retrospective approach to 25 October 2002. The Board therefore decided to converge with US GAAP to only require retrospective application back to 25 October 2002. Companies would have the choice to retrospectively apply earlier.

The Board will effect this amendment by adding it to the IAS 39 guarantees exposure deraft due out very shortly. There was concern as to the moving of the stable platform; however, the Board noted this change will make first-time adoption easier.

The Board also decided to add guidance to prevent 'day 2' gains from being recognised.

The Board first discussed the recognition of contingent liabilities in a business combination. The Board concluded that only liabilities that meet the IASB Framework's definition of liabilities should be recognised as part of the combination. Therefore, stand-alone contingent liabilities would not be recognised.

The Board further discussed the principle by which assets and liabilities should be considered part of the business combination. The Board concluded that only identifiable assets and liabilities that exist at the date of combination should be recognised. The Board will further develop this principle and discuss its application.

The Board decided to amend IAS 28 and IAS 31 to require that an investment that moves from the equity method of accounting to IAS 39 accounting be measured at fair value, not at the carrying amount of the equity method investment, when significant influence is lost. Further, the Board decided to require an investment be fair valued when control is lost and significant influence was or was not retained.

The Board decided that when the investment is fair valued, all amounts in equity (for instance, translation adjustments, net investment hedges) should be recycled to income. This accounting would be required regardless of how the change occurred (such as sale of shares or dilution of shares). If an entity has significant influence somehow, only that portion of the investment lost would be recycled from equity.

The IASB (in conjunction with the staff of the UK Accounting Standards Board) explored further steps in a model for lease accounting based on the analysis of contractual rights and obligations and the identification of resulting changes to assets and liabilities. This approach could require the recognition of assets and liabilities by both the lessor and the lessee. The discussion focused on the accounting for lease payments that are variable either in whole or in part.

The outcome of these discussions will be a discussion paper on lease accounting that will take preliminary views for a future IASB exposure draft. Therefore, the document will not be neutral in its view of accounting positions. While there were significant discussions, only one vote was taken. That is, when a rent is set at 80% of market plus a variable return, the initial asset and liabilities should be measured based on market rent.

The Board further noted that the decisions in this project should be consistent with those decisions make in the revenue recognition project. Further discussions are expected.

The IASB preliminarily discussed a paper that will be discussed during its joint meeting with the FASB on Friday. The IASB made several tentative decisions/statements:

• Distinctions between components of comprehensive income such as revenues and gains provide useful information to investors and creditors.
• The present distinction between revenues and gains is ambiguous and difficult to operationalise.
• Increases in assets as a result of production can give rise to a component of comprehensive income.
• Increases in assets as a result of production give rise to revenue (although there was concern about the several definitions of 'revenue' used by the Board members). That piece of comprehensive income should be labelled something like 'income from production' or 'production income' rather than a gain.
• Reporting subcontracting and outsourcing activities separately provides useful information to investors and creditors. This information should be provided on the income statement.
• Revenues arise for a reporting entity from the performance by a third party of a contractual obligation to a customer for which the reporting entity continues to be obligated. A legal layoff ob a contractual obligation to a customer does not eliminate this liability.
• Outsourcing revenues do not reduce the amount of revenues-they just change the aggregation of expenses.

These decisions and statements will be further discussed at the joint meeting with the FASB.

Joint IASB-FASB Meeting

The IASB and FASB discussed how to account for the tax effects of acquisitions of assets that are not accounted for as a business combination where the amount paid is different from the tax base of the asset acquired.

The staff noted that IAS 12 prohibits an entity from recognising a deferred tax liability or asset for taxable temporary differences that arise from the initial recognition of an asset or liability in a transaction which is (i) not a business combination, and (ii) at the time of the transaction affects neither accounting profit nor taxable profit ('initial recognition exemption').

They also noted that EITF 98-11 concluded that when accounting for the tax effect of single-asset acquisitions in which the amount paid differs from the tax base (or tax basis under US GAAP) of an asset, an entity should allocate the consideration paid between the asset and the related deferred tax asset or liability. The EITF also concluded that the simultaneous equations method should be used to determine the assigned value of the asset and the related deferred tax asset or liability.

It was further noted that the IASB tentatively decided to eliminate the initial recognition exception, but expressed concern at converging with the accounting treatment prescribed by EITF 98-11. As the FASB had indicated they may be willing to move away from the EITF 98-11 treatment the IASB further considered the issue and tentatively concluded that in these situations, an entity should allocate the consideration paid between the asset and the related deferred tax asset or liability using the simultaneous equations method; however, any tax benefit in excess of the cost of the related asset is recognised immediately in profit or loss.

The FASB had considered five alternatives that were also presented to the joint meeting, these being:

Alternatives that Retain Simultaneous Equations to Calculate to Final Book Basis

• Alternative 1 - adopt the IASB 's proposed answer which is to compute asset values using the simultaneous equations and record any calculated deferred credits in income.
• Alternative 2 - retain EITF Issue 98-11 guidance.
• Alternative 3 - compute asset and DTA/ DTL (deferred tax asset/ deferred tax liability) using simultaneous equations and record any calculated deferred credits as a purchase discount allowance to the DTA. Alternatives that Use Fair Value to Compute Final Book Basis
• Alternative 4 - record non-monetary asset at fair value, DTA/DTL using Statement 109 [IAS 12 ], and any calculated deferred credits as a gain on purchase.
• Alternative 5 - record non-monetary asset at fair value, DTA/ DTL using Statement 109 [IAS12 ], and any calculated deferred credits as a purchase discount allowance to the DTA.

None of the joint Board members indicated a preference for the simultaneous equations alternatives. It was noted that under Alternative 5 the discount would need to be tracked and recorded in profit and loss when it is realised.

In a joint vote of the two boards, the majority preferred Alternative 5 (12-9).

The staff noted that the purpose of the discussion was to inform the FASB of the main amendments to IAS 37.

Constructive obligation

The IASB proposes:

• Iintroducing into the definition of a constructive obligation the notion that the counterparty should reasonably be able to rely on the entity to discharge its responsibilities (rather than the counterparty having a valid expectation that the entity will discharge its responsibilities).
• Providing more explanatory material to assist entities in determining whether they have a constructive obligation.

Restructuring provision

The IASB proposes withdrawing the present guidance for the recognition of restructuring provisions in IAS 37 (paragraphs 70-83). In its place, they propose that the Standard specifies that liabilities arising from a cost associated with a restructuring are recognised on the same basis as if they arose independently of a restructuring.

The IASB proposes providing specific guidance for applying the above principle to costs that are typically incurred in a restructuring:

• Termination benefits.
• Costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity.
• Costs to terminate a contract before the end of its term.

Termination benefits

The Board proposes that:

• The recognition of termination benefits depends on whether those benefits relate to employees 'past service or are paid in exchange for employees 'future services (ie are a 'stay bonus').
• No liability for termination benefits is recognised until the entity has communicated its plan of termination to the affected employees. More specifically:
• Termination benefits that relate to employees' past services are recognised when the entity has a present obligation to provide termination benefits. In the case of involuntary termination benefits, this is when the entity has a formal plan of termination that it has communicated to the affected employees. In the case of voluntary termination benefits, this is when the employees accept the entity's offer of voluntary redundancy.
• Termination benefits that are payable in exchange for employees' future services are recognised over that period of future service.

Costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity and Costs to terminate a contract before the end of its term

The IASB proposes additional guidance to the existing requirements relating to onerous contracts. The guidance would make clear that if a contract becomes onerous as a result of an entity's own actions, no provision is recognised until that action occurs. They will also propose that the measurement of a provision for an ongoing operating lease commitment takes into account the estimated sublease rentals that the entity could reasonably obtain regardless of whether it intends to enter into a sublease.

Amendments from the Business Combinations Project - Definitions of Contingent Liabilities and Contingent Assets

The IASB proposes redefining contingent liabilities and contingent assets as follows:

• A contingent liability is a conditional obligation that arises from past events that may require an outflow of resources embodying economic benefits based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
• A contingent asset is a conditional right that arises from past events from which future economic benefits may flow based on the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

The IASB will explain that a contingent liability or asset (conditional obligation or right) is sometimes accompanied by an unconditional obligation or right that satisfies the definition of a liability or an asset.

As a consequence of the revised definition and analysis of a contingent liability, they proposed:

• Separating the requirements in IAS 37 that relate to determining whether an entity has a present obligation from those that relate to whether that present obligation should be recognised.
• Clarifying that in cases such as guarantees and warranties, the outflow of resources required to settle the provision (unconditional obligation) is the provision of services rather than the possible payment under the contract.

It was agreed that FASB would further discuss these issues.

The joint boards considered the scope of a project to converge accounting for R&D; expenditure. The staff noted that they believe this would require a reconsideration of fundamental asset recognition and measurement issues that apply in particular to all internally generated intangible assets. The staff believed this would not be a realistic short term goal and proposed that the project be removed from the scope of the short-term convergence project.

The joint boards noted that this was an important issue but would not be fully resolved in a short-term project. They requested the staff to consider whether there were any issues that could be converged in the short-term noting that there needs to be a more fundamental re-examination of accounting for intangible assets.

The staff noted the IASB decisions made at the IASB meeting on 21 April. The staff noted that other than the decision on fair value measurement when control or significant influence is lost, which may still be considered by the FASB, the Boards have converged on these issues.

The IASB, FASB, and UK ASB (the Boards) discussed priorities and topics for moving forward on a standard on reporting comprehensive income. The short-term goal of this project is to develop a discussion paper that will include the preliminary views of the Boards on several issues, including:

• Should there be a single statement of comprehensive income, which includes a subtotal similar to the concept of "income from continuing operations" or "profit and loss"?
• Agreement on what constitutes a primary financial statement.
• Agreement on the number of years to be presented in comparative financial statements and disclosures.
• Agreement on whether to require the direct method for the statement of cash flows.

In addition, the Boards will discuss (and if possible include preliminary views in the discussion paper) on the following:

• Should there be the notion of "recycling"?
• Develop principles for disaggregating information on each required financial statement.
• Defining subtotals and totals required to be reported.

The Board noted that the key and most difficult issue is the notion of whether recycling should be permitted and wanted this issue to be addressed immediately. For example, if the Board agreed that recycling should not be allowed, the following items would be recognised immediately in profit or loss (and not recognised in equity is as the current requirement):

• Gains/losses on cash flow hedges.
• FX gains or losses currently recognised in equity.
• Gains/losses on assets classified as available for sale.

In addition this project is likely to affect:

• Whether the notion of "cash equivalents" in the cash flow statement should exist.
• Should EPS be presented and if so how.

The Boards concluded that it intends to issue a discussion paper in about one year on as much of the above as possible. The Boards will also form a joint working group made up of 15-20 members (from all backgrounds) to assist the staff with this project. The Board also noted that this project is intended to incorporate all industries.

The staff noted that the purpose of the discussion was to set the framework for undertaking joint projects. They noted that these joint projects would have staff from both boards and would have similar papers resulting for consideration by the two boards. It was noted that the two boards would retain their individual decision making processes.

The joint boards agreed to start a joint project on conceptual issues staffed equally by staff of the two Boards. It was agreed that the project would commence in dealing with issues that have caused problems in individual standard setting projects.

The Board also concluded that the following projects should be undertaken in conjuction with the FASB:

• Joint project on liability extinguishments - FASB lead.
• Joint project on comprehensive income - UK ASB/IASB lead.
• Modified approach: Liabilities and equity - FASB lead.
• Modified approach: Insurance - IASB lead.

The Board will discuss further projects (including consolidations) during tomorrow's session.

Joint IASB-FASB Meeting

The boards continued their discussions and requested the staff to prepare a summary of the conclusions for confirmation.

The joint boards discussed the distinctions between components of comprehensive income such as revenues and gains and the merits of such distinctions.

There was concern expressed that although the distinction was believed to be useful, the distinction has proved in the past to be very difficult to operationalise due to the ambiguity of the distinction. It was noted that the distinction did not necessarily imply a gross versus net presentation.

The joint boards requested the staff to further consider the distinction for future discussion.

The joint boards considered whether increases in assets as the result of production can give rise to a component of comprehensive income and whether such increases in assets as the result of production give rise to revenue.

Some board members expressed concern as to the concept of recording revenue as a result of production. It was noted that this could arise where inventory items that were recorded at fair value such as agriculture. Certain board members believed these items should be dealt with separately and this project should focus on the remainder of the items.

It was agreed that the staff would examine the issue further and prepare examples for further consideration by the boards.

The joint boards considered whether information about a reporting entity's subcontracting and outsourcing activities is useful to investors and creditors, and whether information about subcontracting and outsourcing should be provided in the income statement. It was noted that for these purposes subcontracting involved the customer and outsourcing did not.

It was noted that where the contracts resulted in legal layoff of rights and obligations, revenue would not be recorded by the entity that had passed over the legal obligations.

Certain of the joint board members expressed concern as to how to distinguish between subcontracting without legal layoff and outsourcing. The staff proposed that revenue should be allocated between own performance and subcontracting without legal layoff or outsourcing revenue. The joint boards did not express support for this allocation.

The joint boards considered nonreciprocal transfers. The staff proposed defining a nonreciprocal transfer received as "a transaction in which an entity receives an asset or cancellation of liabilities without directly giving value in exchange" The staff further proposed that nonreciprocal transfers should be excluded from revenue. The joint boards agreed that this was a labelling issue and the avoidance of concentration on the use of customer in the revenue definition would avoid the potential problem.

IASB Meeting with National Standard Setters

IASB Chairman Sir David Tweedie opened the meeting, welcomed everyone, and introduced the two trustees who were attending to participate in the constitutional review discussion.

The trustees' constitutional review committee has identified ten issues for review. Other issues could be added. A series of public hearings or round-tables will be held.

The National Standard Setters (NSS) were then invited to make comments on the issues identified.

1. Whether the objectives of the IASC Foundation should expressly refer to the challenges facing small-and medium-sized entities (SMEs):

Comments on the need for such a provision in the Constitution were mixed and the Committee will need to decide whether the language of the Constitution adequately addresses the position of SMEs and emerging economies.

The NSS comments were mixed with some questioning why this particular grouping should be particularly identified and others believing it to be an important area to be addressed.

2. Number of Trustees and their geographical and professional distribution:

Some respondents argued for greater representation from the Asia-Oceania region as well as emerging economies; many respondents referred to what was felt to be the over-representation of certain regions. One possibility raised would be to provide for equal numbers of Trustees from Asia-Oceania, Europe and North America. The Trustees will also need to consider the appointment process for choosing new Trustees, including the Chairman.

A general discussion on the role of the trustees and whether they should be broadly based or representative of those, in particular geographical areas, who use the standards. Mixed views were expressed. A number of comments were made that it should be important to achieve diversity within the trustee body and there should be a strong public interest. Some comments were made that there should not be any numbers attached to any particular characteristic or geographical area.

3. The oversight role of the Trustees:

There is a view that the Trustees should strengthen the language regarding their oversight (particularly over the IASB's deliberative procedures), and demonstrate more clearly how they are fulfilling this function. The Committee has not reached conclusions on this matter, but the suggestions of establishing an internal compliance committee and holding additional direct consultations with the SAC were raised.

Although there was some support for this, concern was expressed has to how it would be implemented.

4. Funding of the IASC Foundation:

The Committee or another group of the Trustees will need to examine the funding structure of the IASC Foundation. It is noted that a long-term funding committee of the Trustees has already been established and is examining options.

Comment was made that it would be useful to have some form of mandatory funding but it was acknowledged that this would be difficult to achieve this. Further comment was made that reliance on funding from publications may clash with other objectives.

5. The composition of the IASB:

The Committee has not taken a position on the geographical background of IASB members, but noted that the majority of respondents called for the Committee to examine the issue. The Committee will need to analyse further the questions of the appropriate mix of professional backgrounds and full-time versus part-time members.

Various comments were made including:

• The workload mitigates against part-time members which would require their number to be limited but not removed completely.
• The composition criteria should be removed and replaced by criteria that board members be representative of the four groupings and of where the standards are used.

6. The appropriateness of the IASB's existing formal liaison relationships:

The Committee needs to assess the appropriateness of the existing formal liaison relationships and whether more guidance is needed in the Constitution regarding the role that liaison relationships play.

Comment was made as to the benefits of liaison to both sides and that care should be taken to involve new areas where IFRS are used.

7. Consultative arrangements of the IASB:

The Committee will need to examine the IASB's consultative arrangements, including the mandatory steps of the IASB's due process. The Committee notes that it may not be desirable to enshrine in the Constitution detailed steps regarding due process. The IASB at its own initiative will soon be releasing a document that sets out proposed interim improvements in its consultative arrangements, and the Committee and the other Trustees will monitor the response to that document.

The NSS welcomed the IASB's initiative but believed these issues should not be incorporated into the constitution. Further comment was made that checks and balances similar to the role played by regulators or government in national arenas should be considered. There was some disagreement on this with some believing the voluntary use of IFRS by individual countries was a check and balance in itself.

8. Voting procedures of the IASB:

At present the approval of a standard requires a simple majority of the IASB. Many respondents have called for the IASB to adopt a 'super-majority' approach.

Comment was made that such a change would not have made a difference in approving the majority of documents.

9. Resources and effectiveness of the International Financial Reporting Interpretations Committee (IFRIC):

The Committee has not had the opportunity to address issues related to the IFRIC raised by respondents. The IFRIC is already conducting an internal review of its procedures, and recommendations will be made to the Trustees. However, given the likely increase in demand for IFRIC Interpretations, the Committee will need to decide whether the present constitutional arrangements for the IFRIC are adequate. Members of the SAC noted a tension that possibly exists between, on the one hand, an IFRIC that responds to the growing demand for timely guidance and, on the other hand, the desire to maintain a principles-based approach to standard setting.

It was noted that IFRIC would be performing a review of its procedures. Comment was made that supported the role of IFRIC as the interpreter of IFRS but concern was expressed as to whether IFRIC could cope with the anticipated increase in interpretation requests and if not whether other bodies would start interpreting IFRS. Others noted that interpretation bodies often have a lesser due process requirements in order to achieve a more timely response and that this should be considered. Other comment was made that short time frames made it difficult in an international arena, and in particular in non-English speaking areas, to consider the issues and respond timeously.

Comment was made that IFRIC should not be used to perform board tasks or research.

10. The composition, role, and effectiveness of the SAC:

The responses showed that there was a widespread belief that the IASC Foundation and the IASB could make better use of the SAC. The Committee has asked the SAC to make recommendations on its role and operations. The Committee has agreed to examine whether an independent chairman of the SAC is needed and whether that chairman would need to commit a significant amount of time to the role.

No comment was made.

The staff set out the results of the discussion at the joint IASB - FASB meeting for discussion. Various NSS made comments for consideration.

Measurement - Impairment

The group discussed a preliminary conclusion arising from the research project that fair value is the most relevant objective for measuring the recoverable amount of an impaired asset and thus should be used when it can be measured with acceptable reliability.

The tentative conclusion continued that where fair value could not be measured with sufficient reliability, a hierarchy of measurements, ending where there was no information in historical cost, would be used.

The group noted the tentative conclusion that many non-contractual assets used in revenue generating processes cannot be assessed individually and, accordingly, must be assessed in the aggregate within individual cash generating units and the alternative view that assets should only be assessed individually

The group noted the tentative conclusion that impairment of assets forming part of cash generating units should be measured according to a two-stage approach:

• measuring impairment in the capacity of individual assets to contribute to the cash generating unit; and
• then measuring the recoverable amount of the impaired cash generating unit, and attributing the loss to the individual assets and liabilities that comprise the cash generating unit.

The group noted the tentative conclusion that it may be necessary to recognize impairment of an asset on initial recognition under certain circumstances. It was noted that a solution was needed to cover the belief that some assets such as motor vehicles lose a significant portion when initially used.

Initial Measurement

The group noted a synthesis of the alternative measurement bases, focusing on a four-level measurement hierarchy. The four levels are:

(a) Level 1 -There is an observable market price for assets or liabilities that are identical or similar to the asset or liability to be measured on or near the time of initial recognition, and appropriate adjustments can be made for (i) any differences between the market traded assets or liabilities and the asset or liability to be measured and (ii) any time difference.

(b) Level 2 -Failing an observable market price meeting the conditions of Level 1, there is an accepted model for estimating the market price of the asset or liability to be measured on initial recognition, and all material inputs to the model reflect observable market prices or reliably measurable phenomena that can be expected to be the basis of market participants' determinations within the model.

(c) Level 3 -Failing the ability to estimate fair value with acceptable reliability (that is, to meet the conditions of Levels 1 or 2):

• an asset should be measured on initial recognition on the basis of the fair value of the consideration paid in exchange for it, provided that this amount can be reliably estimated and absent persuasive evidence that the amount is not recoverable; and
• a liability should be measured on initial recognition on the basis of the fair value of the consideration received in exchange for it, provided that this amount can be reliably estimated and absent persuasive evidence that the amount is not representative of the amount owed.

(d) When the conditions of Levels 1, 2 or 3 cannot be met, an asset or liability should be measured on initial recognition on the basis of an accepted model or technique using entity specific data that can be estimated reliably. Such entity specific data is used to the extent that market data that can be estimated reliably are not available without undue cost and effort, and provided that the entity specific data and supporting assumptions are not demonstrably inconsistent with observable market expectations.

It was further noted that when none of the above measurement alternatives can be applied, the basic conditions for recognition of an asset or liability appear not to have been met.

The discussion noted that the NSS have a number of roles. Broadly these would be:

• To facilitate involvement in the IASB processes by encouraging their local jurisdiction to comment to the IASB.
• Informing their local jurisdiction of IASB developments.
• Commenting on IASB documents.
• Leading and participating in IASB projects including research projects.
• Encouraging non-liaison standard setters to participate in these projects.
• NSS should avoid substantive changes to IFRS in their local jurisdiction.
• If a NSS considers that an issue requires interpretation it should request the IFRIC or IASB to deal with the issue.
• If a NSS believes an issue is a local issue only, it should confirm that with others.
• NSS should assist educational activities in their local jurisdictions and contribute to IASB educational material.

The project will examine issues associated with accounting for upstream activities. Specifically, this will include the treatment of:

• reserves/resources, which will include determining whether:
  • reserves/resources can or should be recognised as assets on the balance sheet;
  • predevelopment costs incurred following the discovery of reserves/resources should be capitalised or expensed if reserves/resources are not recognised;
  • predevelopment costs incurred prior to the discovery of reserves/resources should be capitalised or expensed; and
  • reserves/resources information should be disclosed, and if so, what information.
• other issues identified in the 2000 Issues Paper and implementation issues arising from the application of IFRSs by entities conducting extractive activities.

Comment was made that the project should not be an overall extractive industries project but should be restricted to those issues that are unique to extractive activities.

There was general support for the approach outlined and for the formation of an advisory committee.

The IASB and FASB have agreed to improve and converge as much as possible relating intangible assets and research and development in particular. The NSS agreed that the longer term research project on intangible assets should continue and should provide as much input on conceptual issues as is possible to the convergence project.

The project team recommended that the research project address the following issues:

• the structure of joint ventures;
• the substance of joint ventures and the effect of legal form on the substance;
• the definition of a joint venture;
  • the concept of joint control;
  • contractual arrangements as the basis for joint ventures; and
  • the concept of an entity;
• the appropriate method of accounting by venturers for interests in joint ventures; and
• disclosures by venturers about interests in joint ventures.

In addition the following issues would be researched:

• types of instruments giving effect to the joint arrangements;
• structures used for the joint arrangements;
• commercial and legal drivers for the choice of particular structures;
• the substance of joint arrangements and the effect of form on the substance;
• control of assets and responsibility for liabilities;
• nature of the investor's participation in the joint arrangement; and
• the accounting treatment of joint arrangements by the venturers.

There was general agreement with the approach.

In addition the research team was asked to consider what steps could be taken to promote convergence in the near term given a leaning on the part of the IASB to remove the proportional consolidation option in IAS 31.

The group considered a summary of the activities of the working group.

The working group noted that the management commentary should be subject to qualitative characteristics in the way that information contained in financial statements is. This could be done by expanding the scope of the existing IASB Framework to apply to financial reports or developing a separate framework for management commentary.

The principles proposed by the working group are:

Principle 1 - Financial Statement and Management Commentary Content

Financial statements must meet the objective outlined in the IASB Framework. This requires that they provide information about the financial performance, position, and changes in financial position achieved by the entity reporting. Management commentary should provide information on the key business factors and strategic and operating decision processes that generated those outcomes.

Principle 2 - Management Perspective

Management commentary should supplement and complement financial statement information by providing an analysis of the financial position and performance through the eyes of management, sharing their insights with the users. Management commentary should not simply replicate information conveyed through the financial statements.

Principle 3 - Strategic Focus

Management commentary should have an orientation to the future, reflecting the vision, strategy, and key performance drivers of the reporting entity. Management commentary should focus on the strategies in place for generating value for investors.

Principle 4 - Context

Management commentary should discuss the financial information within the context of the operating principles and goals established by the reporting entity.

The staff set out the background to the research project and its purpose, being to examine the rights and obligations arising under lease contracts. In terms of the approach the lessor would recognise assets reflecting the right to receive the lease payments and the residual right in the leased asset, and the lessee would recognise an asset reflecting the right to use the asset for the lease period and a liability reflecting the obligation to pay the lease payments.

In response to a question it was noted that the obligation to return the asset would not be reflected.

It was further stated that if a lease has a minimum lease period created either by an option to extend the lease term or a cancellation clause, the rights and obligations would be reflected for the minimum period. In addition rights created by the option would be initially reflected based on the premium inherently included in the lease payments.

If payments are linked to price changes such as a consumer price index, the rights and obligations reflected would be based on the estimated cash flows taking account of their timing and uncertainty. In response to a question about whether this could be measured reliably, staff replied that this still needed to be considered but could be seen to be representationally faithful in that changes would be recorded when they occur.

If lease payments are conditional on the lessee's usage, the lessor would reflect the additional obligation to stand ready to allow the lessee to purchase the additional usage and the lessee would reflect the option to purchase more usage. It was noted that the potential benefit to the lessor may be akin to an intangible asset reflecting the expectation of more profitable business.

If the lease payments are conditional on the lessee's profits or other performance such as turnover, two alternative approaches were proposed. The first would include the estimated amount of the variable lease payments in the rights and obligations reflected. The second would consider the variable payments as a stake in the business which would be akin to an equity interest in the business and consequently would not be included in the rights and obligations reflected.

There was some discomfort expressed as to the second view, and it was noted that the IASB tentatively supports the first view.