(morning)

A group of IASB Board members met with representatives of the European Financial Reporting Advisory Group (EFRAG) in an open session to discuss aspects of the FASB-IASB convergence activities.

PAAinE

The EFRAG representatives explained that they have established 'Proactive Accounting Activities in Europe' (PAAinE) as a partnership between EFRAG and the European national accounting standard setters to encourage early debate within Europe and to develop European views on accounting issues.

Equity-Liability Distinction

EFRAG's view is that the existing equity-liability classification requirements in IAS 32 Financial Instruments: Presentation are not satisfactory. "Those requirements are proving a barrier to the wider adoption of IFRSs in certain European countries and are damaging the credibility of IFRSs generally".

However, EFRAG does not support the IASB's ED on Puttable Instruments and Obligations Arising on Liquidation "because the amendment is so narrow and rules-based". The EFRAG representatives reported that there is a PAAinE project addressing possible long-term solutions to Europe's problem with IAS 32. EFRAG also noted that the issue is being addressed in the IASB's Framework project and also by the FASB in its liabilities and equity project. EFRAG representatives urged the IASB to speed up its work in this area, possibly by using the PAAinE project results. Representatives of both EFRAG and the IASB noted the importance of resolving this issue on the basis of a clear principle rather than ad hoc rules.

Financial Statement Presentation

The EFRAG representatives indicated that they are not persuaded of the need for fundamental change in this area. EFRAG noted that the IASB has developed a set of 'working principles' on financial statement presentation but has not invited comment on them. EFRAG believes that the IASB should invite comment. Issues of concern to EFRAG include:

• 'Cohesiveness' of the financial statements as a working principle does not relate to the qualitative characteristics
• Insufficient emphasis on inter-entity comparability
• Insufficient emphasis on relevance
• Presentation of 'strategic value' should be as important as liquidity
• Define objectives of individual financial statements

Representatives of the IASB explained that cohesiveness refers to common classifications of items across financial statements. In response to questions, representatives of EFRAG explained that 'strategic value' means information about utility, not just liquidity.

Business Combinations Phase II

EFRAG does not believe it is appropriate to either propose or implement any major changes to the existing measurement model in IFRS 3 before the debate on measurement has been concluded. EFRAG does not see how the proposed Amendments to IFRS 3 Business Combinations will achieve more useful information such as through increased comparability or transparency.

EFRAG does not support the proposed requirement for the acquirer to measure the fair value of the acquiree as a whole at the date of acquisition, because the fair value of the consideration paid is affected by the merger announcement. In response, representatives of the IASB said the IASB is studying whether the measurement can be made immediately before the announcement.

EFRAG does not support the 'full goodwill method' and does not see the benefits of this method especially in situations when the acquirer obtains less than 100% of the equity interests of another entity.

Conceptual Framework

EFRAG noted that a PAAinE project is under way and the project's first paper will be issued in the next few weeks. The paper discusses 'a number of fundamental underlying issues relating to the Framework that need to be resolved before work on a Framework (or revising the Framework) can begin. Those issues include:

• What is the purpose of the Framework? Who are its primary users - standard-setters or preparers?
• Who are the users of financial reporting and what are their information needs?
• To which entities should the Framework apply?
• To which types of financial reporting should the Framework apply?
• What is the authority of the Framework - EFRAG believes it should be mandatory.
• Where in the hierarchy of IFRSs does the Framework fit?

Representatives of EFRAG expressed concern about the proposals in the IASB's Discussion Paper on the Objectives and Qualitative Characteristics. Concerns relate, among other things, to:

• insufficient emphasis on stewardship, accountability, and prudence as objectives;
• representational faithfulness and verifiability do not adequately replace reliability as a qualitative characteristic; and
• a need to support the assertion that the ability of an entity to generate net cash inflows is the primary focus of financial reporting.

Revenue Recognition

The PAAinE group is developing a paper on Revenue Recognition, which will be published by December 2006.

Borrowing Costs

EFRAG has decided not to support the proposals in the IASB's ED on Borrowing Costs. Among other reasons, EFRAG is concerned that because the IASB ED will not be fully converged with FASB Statement 34, borrowing costs will continue to be a reconciling item for IFRS preparers registered with the US Securities and Exchange Commission. IASB representatives indicated their understanding that the SEC staff believes the IASB ED and SFAS 34 are sufficiently converged not to regard the differences as requiring reconciliation. IASB agreed to follow up with the SEC.