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

Date recorded:

The Boards continued their discussion of recommendations of a working group 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. The first part of this discussion took place on 21 April 2008, and our notes are Posted on IAS Plus.


Financial Instruments

This was one of the two projects for which the working group was unable to make a recommendation at this time. In their opinion, there is no single solution that would have broad-based Board support. The use of fair value for all financial instruments was the most obvious answer, but it did not command sufficient support in either the FASB or IASB to be viable.

In the meantime, the IASB has a Discussion Paper and the FASB has an Invitation to Comment on Reducing Complexity in Reporting Financial Instruments. The FASB also has a forthcoming ED on hedging. The working group thought it premature to make a recommendation until the comments on both have been received, as those comments might inform the Boards' decisions. The working group will revert to the Boards in October 2008.


Liabilities and Equity

The staff noted that FASB members had some deeply-held views on the liabilities/equity split, and the FASB Preliminary Views paper issued in 2007 reflected those views. It was the recommendation of the working group that the IASB concentrate its deliberations on two of the models included in the FASB document: the pure ownership and the ownership-settlement models. The working group did not think that there was sufficient support for the reassessed expected outcomes approach to make it a viable alternative.

An IASB member noted that one of the problems for the IASB was its own Framework's discussion of liabilities. An easy fix would be to state that a liability could be settled (extinguished) by the delivery of assets or the entity's own equity. There were other problems - for example perpetual preferred shares - but these were not insurmountable.

Another IASB member thought that the current bifurcation of compound instruments required by IAS 32 reflected economic reality and provided useful information. Other IASB members were also content to leave puttable shares in equity, provided the put feature is at fair value.


Short-term convergence

Earnings per Share: The working group sought guidance from the Boards as to whether this topic should be subsumed into the Liabilities/Equity project or whether the work done by the IASB, which is nearly ready for release as an ED, should be allowed to continue. Some were strongly of the view that it should be wrapped into the Liabilities/Equity project, but a majority of the IASB were of the view that there was the opportunity to make significant improvements and simplifications to financial reporting by issuing the ED.

Joint Arrangements and Income Taxes: The Board noted that the IASB should complete its project to replace IAS 31 Joint Ventures by the end of 2008. With respect to Income Taxes, the forthcoming IASB ED would be exposed as a 'replacement' for FAS 109; however, the issue of the status of FIN 48 on uncertain tax positions was still open. An IASB member expressed concern that the IASB's conclusions on uncertain tax positions were operational.

Investment Property: The FASB chairman noted that the US real estate investment trust organisation has asked FASB to adopt IAS 40, but to make fair value mandatory. That would work in the US, but the IASB had the problem that deep and liquid markets for real estate, and the necessary professional infrastructure, are not present in many emerging economies.


Cross-cutting issues

The staff suggested that the most critical 'cross-cutting issue' facing the IASB is how to define, recognise, and measure liabilities - issues the Board is currently facing in its project to revise IAS 37. Staff noted that the IASB has suffered because it has no common understanding of the definition of a liability and consequently no agreement on recognition and measurement. A Board member commented that this assessment was cynical but realistic. However, it tended to obscure the fact that, even when the IASB had a common understanding on some issues within the Liabilities project, Board members still came to different conclusions. Another IASB member expressed frustration that each time they discussed liabilities, they were prone to reach different answers, depending on the context of the discussion: insurance, pensions, financial liabilities, or non-financial liabilities. Part of the tension is that the IASB needs to identify clearly the recognition and derecognition issues and to separate those from measurement.

Wayne Upton (IASB staff) volunteered to prepare a memorandum that would attempt to tie together the various issues that continually trouble the IASB. However, he noted that subsequent measurement would be challenging - even given general agreement on the initial measurement attribute. He noted that it was highly unlikely that the Board would agree that all liabilities should be (re)measured at fair value. Board members were concerned that there was no common understanding of what they mean when they say 'a liability is remeasured' - what the measurement attribute should be. Any substantive progress on that issue would be a significant step forward.

Next Steps

The Boards agreed the general strategy summarised in the Working Group's Memorandum (PDF 81k), with limited dissents. The next steps would be to revise and reissue the 2006 Memorandum of Understanding, and for the staff to prepare and present at the June 2008 IASB meeting (and a June FASB meeting) a revised project timetable.

IASB members queried the effect on non-MOU projects of the IASB's decision. The IASB Chairman assured IASB members that non-MOU projects, including SMEs and Insurance, would be unaffected. The staff resources being devoted to those projects would not be diverted to MOU projects.

The IASB and FASB Chairmen thanked the Boards, staff and other participants for their contributions and closed the meeting.

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