Analysis of Comments on the ED

This session was a continuation of the redeliberations from the February Board meeting on the Annual Improvements exposure draft published in October 2007.

The purpose of this session was to get Board approval for another ten staff recommendations in response to comment letters received from constituents to allow proceeding to balloting for these amendments. The items presented to the Board at this meeting were:

• Government loans with a below-market rate of interest (IAS 20)
• Unit of production method of amortisation (IAS 38)
• Components of borrowing costs (IAS 23)
• Disclosure of estimates used to determine recoverable amounts (IAS 36)
• Current/non-current classification of derivatives (IAS 1)
• Measurement of subsidiary held for sale in separate financial statements (IAS 27)
• Presentation of finance cost (IFRS 7)
• Status of the Implementation Guidance (IAS 8)
• Point of sale costs (IAS 41)
• Biological transformation (IAS 41)

The Board reaffirmed that it plans to publish the final Annual Improvements document in May.

Government loans with a below-market rate of interest (IAS 20)

The purpose of this amendment is to remove an inconsistency between IAS 20 Government Grants and Disclosure of Government Assistance and IAS 39 Financial Instruments: Recognition and Measurement with regard to imputation of interest on below-market interest rate loans. The amendment would change IAS 20 to require imputation of interest on such loans and that the difference between proceeds received and carrying amount on initial recognition is a government grant.

Commentators raised practical difficulties as such loans include specific terms that are not present in commercial loans and that subjective adjustments would have to be made by preparers to arrive at fair value. The staff acknowledged those concerns, but expressed doubts about practical difficulties making the amendment impracticable and noted that it believed the benefits outweigh the cost.

One Board member asked how this imputation is done in practice. The Board had a short discussion on this. Another Board member noted that the amendment addresses two issues: the loan and the government grant. It was noted that constituents might be concerned with recognising a profit on day one and interest expense in later periods.

The staff then noted that it proposes to change the drafting of new IAS 20.10A based on the comment letter of one constituent as it would avoid using the term 'imputation of interest', which is a term not used in IAS 39. Furthermore, it proposed to require prospective application of the amendment, that is, the amendment is applicable only to new government loans.

The Board agreed.

Unit of production method of amortisation (IAS 38)

The amendment proposes to remove the last sentence in IAS 38.98 as the term 'rarely, if ever' is interpreted in practice as meaning 'never'.

The comment letters received raised concerns about the continuing divergence as 'expected pattern of consumption of the expected future economic benefits embodied in the asset' would need clarification and about the possible implication from the Basis for Conclusions of this amendment that the change could only apply to service concession arrangements.

The staff noted that it will circulate proposed changed wording for the Basis for Conclusions to address the last point. Regarding the first issue staff highlighted that amortisation, by its very nature, is an estimate and recommended to continue with the amendment.

The Board agreed.

Components of borrowing costs (IAS 23)

No Board member requested to discuss this issue further. Accordingly, the proposed amendment will go directly to balloting.

Disclosure of estimates used to determine recoverable amounts (IAS 36)

No Board member requested to discuss this issue further. Accordingly, the proposed amendment will go directly to balloting.

Current/non-current classification of derivatives (IAS 1)

The proposed amendment aims to address inconsistent guidance in IAS 1 regarding the classification of derivatives as current or non-current. IAS 1.68 and IAS 1.71 seem to imply that derivatives always have to be classified as current.

Constituents were concerned that the issue arises from the presumption that 'held primarily for the purpose of trading' in IAS 1 is equivalent to 'held for trading' in IAS 39 and that the amendment proposed would not resolve this issue. A second concern was that the label 'held for trading', which is used as a heading for a measurement category in IAS 39, causes the confusion and IAS 39 should be amended as appropriate.

One Board member expressed some sympathy over the comment on changing IAS 39. The staff noted that IAS 39 could not be easily fixed and that the approach taken in the exposure draft comes to the same result.

The staff proposed to proceed with the amendment but to revise the wording in IAS 1.68 and IAS 1.71 to better explain the differences in the similar terminologies. The staff provided proposed wording, but this wording was omitted from the observer notes.

The Board agreed to the revised wording and to proceed with the amendment.

Measurement of subsidiary held for sale in separate financial statements (IAS 27)

The amendment changes IAS 27 to clearly state that an investment in a subsidiary for which an entity opts to account for under IAS 39 in the entity's separate financial statements is continued to be accounted for under IAS 39 when it is classified as held for sale.

The Board had a short discussion on the implications of those amendments on the separate and consolidated financial statements of the same entity.

The staff recommended proceeding with the amendment. The Board members were also presented with drafting changes that should clearly state the accounting for investments in subsidiaries accounted for using the IAS 39 model. These changes were omitted from the observer notes.

The Board agreed.

Presentation of finance cost (IFRS 7)

No Board member requested to discuss this issue further. Accordingly, the proposed amendment will go directly to balloting.

Status of the Implementation Guidance (IAS 8)

The amendment aims to clarify the status of implementation guidance as the current wording of IAS 8.7 could be misinterpreted as requiring mandatory application of the Implementation Guidance.

Respondents to the Exposure Draft expressed concerns over the perceived reduction of weight of the Implementation Guidance in IFRSs.

The staff proposed two possible approaches to address concerns by constituents:

• View A: Retain paragraph 9 to IAS 8 largely unamended; and proceed to amend only IAS 8.7 and IAS 8.11.
• View B: Redraft the amendment to IAS 8.9 to take into consideration the varying context and weight of different types of guidance between standard; and proceed with amendments to IAS 8.7 and IAS 8.11.

The proposed changes to the amendments for both view A and view B were omitted from the observer notes.

The staff recommended proceeding with the approach taken in view B.

The Board had a short discussion to understand constituents' concerns and agreed to proceed with view B.

Point of sale costs (IAS 41)

The amendment proposes to remove the term 'point of sale costs' with the notion 'costs to sell'.

Some constituents expressed concerns that the new term 'costs to sell' does not have the same meaning as 'point of sale costs'.

The staff presented in the Agenda Paper a detailed analysis of both terms and concluded that the terms have the identical meaning in the context of the standard. It accordingly proposed to continue with the amendment as drafted, but also proposed to expand the Basis for Conclusions to clarify that incremental costs refer to costs that arise on sale.

The Board agreed.

Biological transformation (IAS 41)

The amendment proposes to remove the prohibition on taking 'additional biological transformation' into account when determining fair values using discounted cash flows.

Respondents that were not supportive of the amendment highlighted that it would conflict with the objective of measuring the fair value of the asset in its current location and condition. Other respondents expressed concerns over the proposed inclusion of harvesting in the definition of biological transformation on the basis that harvesting is carried out by humans and is therefore not part of the biological transformation process.

The staff proposed to finalise the amendment but to make the following changes to the ED:

• Expand the Basis for Conclusions to make clear that the reason for using a discounted cash flow model is to estimate a market based value of the asset in its current location and condition
• Remove the word harvest from the proposed change of the definition of 'biological transformation' and replace the term 'biological transformation' with the term 'biological transformation or harvest' throughout the standard where appropriate
• Require prospective application of the amendment

With regard to the first point one Board member stated that this clarification would better be placed in the main body of the standard. The staff agreed and noted that it would change the drafting accordingly.

The Board agreed to proceed with the amendment.

Way forward

All items discussed at this meeting will go to balloting on an item by item basis (after redrafting, if applicable). The staff noted that it might not need the April Board meeting to discuss sweep issues.