Update on the status of the Memorandum of Understanding Between the IASB and FASB, including current priorities

Date recorded:

This session considered the Recommendations of a Working Group (PDF 81k) of IASB and FASB Board members and staff tasked by the chairmen of the respective Boards with reviewing the 2006 Memorandum of Understanding (PDF 68k) and suggesting changes to it.

Wayne Upton (IASB staff) introduced the session noting that the group's objective was to 'outline the improvements to existing IFRS that are needed to facilitate mandatory adoption of IFRS in all major capital markets.' In developing their recommendations, the group assumed that (a) for capital markets not yet adopting IFRSs, the target date of mandatory adoption is no later than 2013; and (b) a 'quiet period' of at least a year before that date is provided. Therefore, the timescale that the MOU could realistically contemplate is the progress that could be made between April 2008 and around mid-2011.

The 30 June 2011 date was also a constraint: it represents a date on which there is a considerable IASB member turnover (including the Chairman and Messrs McGregor and Yamada). Another constraint was that a project to amend a standard should be undertaken only when it would result in a 'substantive improvement' in financial reporting. Sue Bielstein (FASB staff) noted that, to succeed, the Boards needed to establish almost immediately both their objective in amending a standard and the scope that that objective implied. The meeting then turned to discuss projects identified by the working group.


Revenue recognition

The working group assigned a 'high priority' to this project and recommended that the Boards proceed on the basis of the 'customer consideration' model to be included in the forthcoming Discussion Paper (DP), because that that model has sufficient support (or the least opposition). In particular, the Boards would need to address the following areas:

  • (a) The definition of a performance obligation.
  • (b) When/how performance obligations are satisfied/extinguished.
  • (c) When, if ever, the initial amount assigned to a performance obligation should change for reasons other than performance.
  • (d) The accounting for conditional obligations such as rights of return.
  • (e) Disclosure.
  • (f) Testing the conclusions reached against existing practice problems.

An IASB member noted that he was fundamentally opposed to the approach being taken to the MOU. He noted that the working group's memorandum was prepared without involving any of the project teams and, as such, without their views on whether the working group's suggestions were capable of being achieved. He thought that the concept of trying to issue as many final documents as was implied by the memorandum was totally unrealistic - both in terms of what the Boards could realistically accomplish and what constituents would accept. In addition, the Board member was highly critical of the implied consequence of the working group's approach: that there would be inconsistent treatment of similar items. This was especially critical for performance obligations.

Addressing the revenue recognition project proposals directly, several IASB members were prepared to accept the working group's recommendations, but did not want the significant work and study that had gone into the forthcoming DP to be lost: constituents needed to be given a clear idea of where the Boards were likely to go. In particular, the measurement (and re-measurement) of performance obligations was critical. These IASB members were expecting that they would develop an approach to measurement that was a hybrid of the 'customer consideration' and the 'asset and liability' models, but that performance obligations would be re-measured.

A FASB member noted that the recommendation that the conclusions reached must be field tested was critical to the successful implementation and completion of the project.

The IASB Chairman noted that the IASB would issue the Revenue Discussion Paper and that the project would continue to be in the MOU.


Fair value measurement guidance

The working group recommends that this project should be completed by mid-2011 by limiting its objective to the following:

  • (a) Amending existing IFRS to replace the various measurement terms used with either entry price or exit price based on the intent of the existing standard.
  • (b) Defining exit price identically to FAS 157.
  • (c) Defining a comparable entry price, and providing disclosures about entry and exit price measurements.

The staff noted that the IASB would not have the time to re-debate or re-tune things in FAS 157; nor would they be able to discuss 'when' fair value should be the measurement requirement: that is, the existing IFRS requirements as to when fair value is used would remain. In any event, the disclosures about 'Level 3' measurements contained in FAS 157 would be useful and would represent an improvement to IFRS reporting.

IASB members agreed, but noted that they should be able to debate areas of confusion or areas in which FAS 157 had proved difficult to apply.


Consolidation policy

There was a fair degree of confusion about this topic. Both the FASB and IASB are under high-level pressure to 'do something' on consolidation and other standards as a result of the current economic situation. IASB members were worried that the progress made by the IASB staff on control and consolidation policy should not be lost in the rush to respond to the Financial Stability Forum (IASB) and the President's Working Group on Financial Markets (FASB).

The staff noted that the 'effective control' model would need additional guidance when it was applied to special purpose entities and that some of the principles underlying FIN 46R might be adapted to good effect.



The staff noted that significant progress toward a replacement standard has been made in the form of a staff research paper developed in consultation with a team of Board advisors. More work is needed, however, primarily to address securitisation issues. As such, the staff was not in a position to make specific recommendations and discussion was deferred to October 2008.


Financial statement presentation

The staff noted that this project remains a priority, but that the scope should be limited to presentation on the face of the primary financial statements and related note disclosure. The staff clarified that the consequences of this limitation would be that tax allocation would not be addressed in detail, and that the current 'net of tax' display of items in Other Comprehensive Income, discontinued operations, and equity items would remain as the only items presented net of tax for the moment.

An IASB member was concerned that the Board had gone on record, in papers and in Board debates, as saying that financial statement presentation would 'solve' many of the contentious problems in other projects - for example, post-employment benefits and insurance.

Two IASB members suggested that the re-scoped project would not result in a 'substantive improvement' in financial reporting and should not be included in the revised MOU. Two FASB members supported this view.


Post-employment benefits

The staff noted that the IASB had issued a discussion paper on phase 1 of its project focused on measuring cash balance plans, elimination of 'smoothing' devices (the Corridor), and income statement presentation of changes in plan assets and benefit obligations. The DP offers alternatives for the display of the change in the pension benefit obligation but no preferred view. The staff noted that they did not think there was sufficient Board member support for a single charge to profit and loss, but they also thought that there was not sufficient support for any one of the OCI approaches either.

Board members questioned the 'challenging and problematic' aspects of the project: were the challenges technical or push-back from constituents? The staff noted that some challenges are technical, but some are resistance to change. An IASB member asked what the push-back would be like if the IASB was unable to fix the presentation issue. The IASB chairman noted that the IASB would then 'be in trouble.'

The staff acknowledged that some matters included in the DP might need to be removed from any subsequent ED (for instance, cash balance plans).


Lease accounting

The staff noted that significant lessee obligations are excluded from corporate balance sheets, distorting financial ratios and complicating financial analysis for investors and lessor accounting raises many derecognition and revenue recognition issues. However, because lessor accounting appears to be a relative lower priority for investors and some Board members, the staff was suggesting that any project be targeted to lessee accounting only.

The staff recommendation would leave the classification of finance leases in IAS 17 unchanged. What were previously operating leases would then be reflected as the acquisition of an intangible asset: the right-of-use inherent in the lease, matched by the obligation to pay for that right. The current accounting treatment for contingent rentals would remain.

IASB members in particular were unhappy with leaving contingent rentals unchanged, especially given IFRS 3 (2008)'s requirements for contingent consideration. More generally, the Boards were uncomfortable to proceed without a proper idea of the scope of the project they were being asked to accept. However, on a poll, only one IASB and one FASB member were opposed to the project.

The IASB Chairman noted that discussion of the MOU recommendations would continue as time permitted, most likely on Tuesday.

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