Post-employment benefits

Disclosures

The Board discussed certain disclosure issues in the exposure draft (ED) of proposed amendments to IAS 19:

Staff recommended that further information be disclosed about plan assets (by major asset class, including the expected rate of return), although US GAAP does not have a similar requirement (SFAS 132). Staff noted that this disclosure is required by UK GAAP.

There was some debate regarding the usefulness of this disclosure, particularly for multi-national entities considering that different expected rates of return would prevail at country/jurisdiction level and not necessarily at the 'major asset class' level. Aggregation of information to the major asset class level would negate the usefulness of the disclosure.

The Board voted 8 to 6 against the staff recommendation; therefore the disclosure will not be required in IAS 19.

There was general support for the requirement of sensitivity information about medical cost trends. SFAS 132 requires this disclosure. Board members made the point that the focus when considering this disclosure, should be based on the materiality of medical costs in the context of the entity. Staff were asked to make this clear in the drafting together with the fact that specifying a 1% change would be inappropriate in jurisdictions with high inflation. Subject to these amendments, the Board voted 13 to 1 for this requirement to be included in IAS 19.

The ED proposed the disclosure of the amounts for the current period and previous four periods of the present value of the defined benefit obligation, the fair value of the plan assets, the surplus or deficit in the plan, and the experience adjustments arising on the plan assets and liabilities. SFAS 132 does not require these disclosures. FRS 17 in the UK does. Staff recommended that this requirement not be included in IAS 19.

General discussion ensured with Board members making the points that:

• the requirements were viewed as information overload;
• the UK requirement was intended to be an anti-avoidance type mechanism that would guard against preparers achieving a certain accounting outcome in certain years but reversing that in subsequent years;
• there would be no significant additional cost to preparers for providing this information as it is required for each year (the ED proposes that the preparer merely provides a summary of the current year together with the past four periods; information which should be readily available from its previous financial statements). The point was made that it would be logical that the preparer extracted this information and not the user.

The Board voted 13 to 1 against the staff recommendation; therefore IAS 19 will contain this disclosure requirement.

Group Plans

The ED proposed that, in their separate or individual financial statements, group entities that met specified criteria could treat group plans as multi-employer plans. Group entities that did not meet the criteria should apply defined benefit accounting using a reasonable basis of allocation. Subsequent to the September discussions, the staff recommended that IAS 19 be amended to require defined benefit group plans that share risks between individual group entities to be accounted for in the separate or individual financial statements of the group entities as follows:

• by measuring the plan in accordance with IAS 19 based on assumptions applicable to the plan as a whole (it is assumed that this information will generally be available to the group as a whole); and
• allocating the plan to individual group entities in accordance with the current agreement or stated policy for charging out the net defined benefit cost, if there is such an agreement or policy; or
• if there is no such agreement or policy, to the individual group entity that is legally the sponsoring employer for the plan.

The Board noted that the staff proposal would be problematic but agreed with the recommendation, to9 be supported by additional disclosure requirements, as the best solution at this point.

Multi-Employer Plans

IFRIC's concerns about the draft interpretation D6 were relayed to the Board - primarily measurement and allocation difficulties. The point was made that the accounting for group plans and multi-employer plans should be consistent. The Board decided to make a clarification through its project on amending IAS 19 (not an amendment) that where there is an agreement, the allocation for accounting purposes under a multi-employer plan should be on the basis of that agreement provided the information is available.

The IFRIC Chairman gave an overview of IFRIC operations together with a status summary of various projects.

The Board was then asked to approve certain interpretations:

IFRIC Amendment to SIC-12

Approved.

IFRIC - Emission Rights

One Board member made the point that the IFRIC's consensus could be viewed, not as a government grant, but rather, a revenue recognition issue in general. Some debate ensured around this point. The Board however approved the issue of this Interpretation.

IFRIC - Determining Whether an Arrangement Contains a Lease

The point was made that the transition requirements would not be consistent with EITF 01-8, with Staff reiterating the point that IFRIC's position on this issue had been swayed by the potential loss of comparability if prospective application was required.

Concern was raised regarding the wording in the interpretation that referred to 'portions' which emanates from legacy differences in the underlying Standards (SFAS 13 and IAS 17). The Staff were asked to include in the basis for conclusions, explicit statements around the areas that had been converged and differences that remained between this Interpretation and EITF 01-8 as a result of such legacy differences.

The Board approved the Interpretation subject to the amendments discussed.

The IASB has, to date, received over 100 comment letters on the SME discussion paper, all of which are posted on the IASB website. The Board had before them an analysis of 41 of those comment letters. All of the comment letters will be included in an analysis to be presented at a future meeting. As the short time between the closure of the comment period and the meeting had not allowed a complete analysis to be prepared, the Board discussed some of the main concerns raised by constituents but deferred any decisions to a future meeting.

The Board noted that most respondents did not support a 'clean slate' approach to the development of an SME standard, rather advocating the development of an SME standard from the base provided by existing IFRS. However, a majority of respondents supported the Board being open to the possibility of differences in the framework and/or the recognition and measurement principles between SMEs and full IFRS.

The Board discussed what 'user needs' are in the context of SMEs. It was noted that while a majority of respondents supported differences from full IFRS when they can be justified by reference to 'user needs' no respondents had provided helpful comments describing what those 'user needs' are. A number of Board members expressed discomfort with proceeding with the project without doing more comprehensive research into user needs. However, it was suggested that rather than an academic study, the most appropriate way forward would be to create either an exposure draft or an invitation to comment on certain topics which would give constituents a model to comment on.

The Board noted that the intended application of the SME standard had been poorly understood. They clarified that any entities that are publicly listed or otherwise publicly accountable should be required to prepare accounts using full IFRSs. Other entities could use the SME standard. However, a jurisdiction might choose to push full IFRSs down to a wider group of preparers. Accordingly it was noted that there would be two groups of users of the SME standard - those without public accountability that are required to prepare financial reports in accordance with IFRSs by their jurisdiction, and those who voluntarily compile IFRS financial reports.

The Board noted that certain decisions regaqrding application of the SME standard were jurisdictional, rather than the choice of the IASB, and expressed a need for jurisdictions to be educated as to the decisions they must make in respect of the application of the SME standard, particularly the interpretation of when an entity is considered to be of 'economic significance' to a jurisdiction.

Board member Tom Jones, who has been appointed the chair of the SME sub-committee, noted the importance of the IASB completing this project on a timely basis. He noted that there are a number of jurisdictions out there that would develop their own SME regimes if the IASB did not. He also noted that there is a wide range of users in relation to SMEs, including but not limited to investors, creditors, banks,and governments. The Chairman of the IASB has appointed a sub-committee to assist the Board in completing this project considering both its significance and its urgency. It was noted that the sub-committee would maintain an open mind about recognition and measurement differences and will consider both the simplification approach and the reorganisation approach to completing the SME project.

The SME sub-committee, consisting of Tom Jones (chair), Gilbert Gelard, Jim Leisenring, Tricia O'Malley, Bob Garnett, Geoff Whittington, and Paul Pacter (IASB staff director for SMEs) will meet prior to the November Board meeting to consider the analysis of all comment letters, will present its preliminary thoughts at the November Board meeting, and will bring a proposal for the best way forward with this project to the December IASB meeting.

Backwards Tracing

The IASB and FASB staff have been jointly working on the 'backwards tracing' issue. Backwards tracing refers to the process of remeasuring, in the current year, the after-tax amounts of gains and losses that occurred and were reported in prior years. In researching the differences between IAS 12 and SFAS 109 on the backwards tracing issue, the Staffs identified that backwards tracing was a subset of a bigger difference between the two Standards, namely intraperiod allocation (i.e. the manner in which the two Standards allocate income taxes to different components of comprehensive income). The Board had an educational session on this issue, consequently, no decisions were made.

During discussions and consideration of the examples prepared by the Staff, the point was made that FAS 109 and IAS 12 requirements are quite similar although the two Standards use different terminology.

There was general consistency of views in that Board members seemed to favour an approach that resulted in items other than income/loss from continuing operations attracting the discrete rate of income tax and the residual being allocated to the continuing operations result.

In concluding, the staff suggested that they prepare a joint paper for consideration at the next meeting, by both the IASB and the FASB, dealing with both intraperiod allocations and backwards tracing with a "simple" solution recommended.

The Board considered a paper addressing a number of issues relating to fair value measurement, and some sundry issues to be dealt with in respect of the Phase II Business Combinations project.

The IASB reaffirmed its decision from the September meeting that the Business Combinations exposure draft should incorporate the definition of fair value currently being considered by the FASB in its Fair Value project (for which the comment period on an exposure draft has recently closed). The IASB's exposure draft will note in the basis for conclusions that the revised definition of fair value is only, at this time, being considered for incorporation into IFRS 3, and not into all pronouncements that require the use of a fair value measurement. The basis for conclusions will outline the future process for including the new fair value definition in other pronouncements.

The Board discussed whether it is important to assess whether a counter party is 'knowledgeable' in determining fair value. It was agreed that for the purposes of exposure the references to 'knowledgeable parties' and 'the absence of compulsion' contained in the FASB Fair Value Exposure Draft should be retained.

It was agreed that the exposure draft should retain the requirement in the FASB Fair Value Exposure Draft to utilise multiple valuation techniques in determining the fair value of an asset for which a market price is not readily available, and that the guidance included in the FASB exposure draft should also be included in the IASB's Business Combinations Phase II exposure draft. The Board agreed that consistent with the FASB proposal, the use of multiple valuation techniques should be required unless it causes 'undue cost or effort' and noted that this exemption is less stringent than the normal wording used by the IASB that exempts entities from certain requirements where they are 'impracticable'.

The Board discussed the guidance contained in the FASB Fair Value Exposure Draft on identifying an active market. The IASB agreed to incorpore this guidance in its Business Combinations Phase II exposure draft, but that the examples should be changed to reflect a wider variety of possible active markets, as all of the examples in the FASB Fair Value Exposure Draft were US-specific.

The Board agreed that the guidance on using market inputs in obtaining fair values that was included in the FASB Fair Value Exposure Draft should be included in the Business Combinations Phase II Exposure Draft.

The Board discussed whether to use the term 'immediate access' rather than 'reasonable access' in identifying markets by which fair value can be measured with reference to. The Board discussed the true meaning of 'immediate access', including discussions related to the inaccessibility of certain markets by entities in other time zones. It was agreed that the term 'immediate access' was appropriate, but that it should be clarified that simply because a market is closed for trading on balance sheet date this does not mean an entity cannot be considered to have 'immediate access' to this market.

The Board agreed to adopt the FASB guidance stating that a fair value is determined by reference to the most advantageous market to which an entity has access. However, it was agreed that the ED should clarify that these are markets to which an entity has access at this time, rather than markets an entity can foresee having access to in a number of years.

The Board agreed that no unintended consequences arise from applying the requirement to use bid prices for assets and ask prices for liabilities to non-financial assets and non-financial liabilities. It was noted that the scenario in which this is likely to be most relevant is in relation to commodities, the markets for which behave in a similar manner to those for financial assets and financial liabilities. Therefore the Board agreed to include this requirement in the Business Combinations Phase II ED.

The Board agreed that, consistent with the FASB, they would require that for offsetting positions, the mid-market prices should be used for the matched portion.

The Board considered the issues of accounting for transactions where entities are brought together by contract alone without the obtaining of an ownership interest. The Board agreed that these transactions should be within the scope of the Phase II business combinations project. Because it seemed likely that an acquirer would be able to be identified for all such transactions with the aid of the existing IFRS 3 guidance, no further guidance would be added on this issue. The Board noted that it is not possible to consider 'fresh start' accounting as part of this project because such a wide conceptual change would surely have consequences to other transactions rather than just those described above.

The Board confirmed its view that in transactions where entities are brought together by contract alone, the total amount to be recognised by the acquirer should be the fair value of the business acquired. The Board also agreed that the Exposure Draft should explicitly state that such an accounting entry should be affected by putting the credit side of the entry to equity, and noted that much confusion had been expressed about this matter.

The Board will deliberate Business Combinations Phase II again at a future meeting with the intention of issuing an exposure draft in the near future.

The IASB joined with the FASB to attend a presentation by two representatives of the CFA Institute. The session was educational, and no decisions were made. The presentation started with executive director of the CFA Center outlining the new structure of the CFAI, and congratulating the Boards, particularly the FASB, on the manner in which they have stuck to their principles amidst overwhelming political pressure on accounting for stock options. The CFA Institute supports the position of the FASB and is encouraging its members to lobby to ensure this position is not overruled by the US Senate.

The presentation outlined the deficiencies, from the point of view of financial analysts, of the current financial reporting model. These include that it is based primarily on historical cost not fair value, and that different items are classified in different manners (profit and loss normally classified by function while balance sheet is normally by nature). From the point of view of analysts it would be preferable if no netting were allowed, no off-balance-sheet items were allowed (if a transaction affects the current wealth of existing equity holders it should be reflected in the primary financial statements), direct cash flow statements should be required, all transactions should be classified by nature, fair value measurements should dominate, and there should be no accounting entries such as deferrals, amortisations, and recycling.

The presenters discussed a possible financial reporting model that emphasises separating cash flows, accruals, and fair value changes to show a comprehensive method by which opening balance sheet flows to the closing balance sheet.

The Board members discussed the advantages and disadvantages of such a model, asked questions about the mechanics of the model, and discussed illustrations. The CFA Institute plans to issue a publication outlining this model in more detail in early 2005.

The Board considered a discussion paper relating to issues that arose at the last meeting when a pre-ballot draft of an exposure draft was considered. The Board discussed at length the definition of constructive obligations, and when, if at all, such obligations should be recognised. The Board agreed that provisions arise from a greater group of items than just contractual obligations, but that the dividing line between what should be recognised and what should not is not clear. The Board agreed that staff should consider this issue further, particularly with reference to the existing examples in IAS 37, and for consistency with decisions made to date in the revenue recognition project. It was agreed that a key characteristic of an item that should be recognised is that an entity have little or no discretion in the outflow of future economic benefits.

The Board discussed the issue of whether a difference in accounting should arise when a liability arises from a lawsuit as opposed to a possible change in the law. It was agreed that until the law is enacted, no resulting liability should be recognised. It was agreed that this point would be clarified in the basis for conclusions.

The Board agreed not to incorporate the requirements of IFRIC 1 into the revised IAS 37, as the requirements of IFRIC 1 are more relevant to IAS 16 and should be incorporated into that standard when it is next updated. The Board agreed to propose withdraw paragraphs 48 and 49 (considering the impact of future events on the measurement of a provision) from existing IAS 37 in the exposure draft.

The Board considered whether to ask a question of constituents to highlight that there is a requirement to remeasure a provision at the current discount rate. It was agreed that this is unnecessary as this requirement is made clear by IFRIC 1. The Board discussed the requirements of IAS 37 in relation to offsetting reimbursements, and agreed some editorial amendments to clarify that this is not allowed. The Board agreed to break the existing paragraph 53 into two paragraphs, one dealing with the recognition of reimbursement assets and the other dealing with their display.

The Board will consider the issues in relation to the reimbursement ceiling at its November meeting, as well as certain issues relating to IAS 19, with a view to issuing an exposure draft in the near future.

At the previous joint meeting, the Boards discussed a staff proposal to undertake a joint project to develop a common conceptual framework for both Boards. The objective of this project is to develop a single framework that both converges and improves the existing frameworks of the two Boards.

There was general support for a framework that would apply initially to the private/business sector only, with its applicability to other sectors being considered later. Some Board members expressed the view that ultimately, they would prefer to have a framework that was applicable to every sector, despite that being a challenging project.

The following additional points were made during the discussion:

• Qualitative characteristics (such as reliability and relevance) should be dealt with early in the project together with recognition and measurement issues as these are intricately related.
• The issue of whether derecognition occurs when the recognition criteria cease to be met after initial recognition should be addressed.
• There is lack of a comprehensive disclosure framework. As a result, incremental disclosure requirements in individual standards are sometimes viewed as making financial statements difficult to comprehend. A disclosure framework should therefore be considered.

Staff gave an indication that a timeline of about five years was considered appropriate to complete this project. Some Board members expressed concern over this timeframe. Staff agreed to draw up a detailed project plan as well as consider the staffing requirements for this project.

There was general support for the staff recommendation that the conceptual framework should be a single document with the following structure:

• An executive summary that sets out all of the key concepts, similar to the 'highlights' section at the start of each FASB concepts statement.
• Following the executive summary, the main body of the conceptual framework would contain a section for each part of the framework, such as objectives, qualitative characteristics, elements, etc. Each section would contain all of the relevant key concepts, repeated from the executive summary, and accompanied by further explanatory material.
• A basis for conclusions, to explain why the Boards reached decisions on particular issues, including why they rejected any alternative approaches.

The point was made that staff should consider external assistance with the drafting and layout of the document in order to make it easy to read and generally more presentable.

The Boards agreed on a multi-phase project that would initially deal with convergence issues and improvements while focussing on the 'cross cutting' issues that have been problematic in the past. After that, the Boards will then deal with the issue of filling in the gaps in the existing frameworks.

The Boards supported a staff proposal that an initial document should be sent out to constituents for comment. That document would set out the issues facing the Boards related to the conceptual framework, without pre-empting Board deliberations on how the project will unfold. This suggestion was supported as it was seen by some members as a way of communicating with constituents as well as managing expectations.

The Boards also agreed to consider issuing a similar document drafted in non-technical language as was done by the ASB in the UK. A journalist may be approached in this regard.

The Boards discussed a paper in which the fair value ED issued by the FASB was applied to certain revenue recognition examples. In addition, the Boards were asked to answer certain questions that would provide the staff with direction on this project.

In going through the various examples, the Boards agreed that absent evidence to the contrary, actual exchange prices (in other than active markets) should be presumed to be consistent with fair value.

Foreign Subsidiary Exceptions

The issue discussed was whether the foreign unremitted earnings exceptions in SFAS 109 and IAS 12 should be retained. Taxation experts gave a presentation to both Boards on the functioning of the US Foreign Tax Credit. After some discussion, citing the complexity of this issue, the Boards agreed to follow the staff recommendation to retain the current exceptions in the standards. In addition, to achieve convergence, the Boards agreed to amend the language in IAS 12 so that it is similar to that in SFAS 109 and US APB Opinion 23 on unremitted foreign earnings.

Staff were also asked to bring to the Boards a paper setting out disclosure suggestions that would enhance the current requirements.