The purpose of this session was to discuss possible improvements to IFRSs for inclusion in the 2008 Annual Improvements Process. The staff presented three proposed items:

• IAS 7 Statement of Cash Flows - Classification of expenditures
• IAS 36 Impairment of Assets - Unit of account for goodwill impairment test
• IFRS 2 Share-based Payment - Scope of IFRS 2 and revised IFRS 3

IAS 7 Statement of Cash Flows - Classification of expenditures

This proposal has been recommended from IFRIC for resolution via the Annual Improvements Process. The issue that should be addressed is whether expenditures that do not result in the recognition of an asset can be classified as a cash flow from investing activities in accordance with IAS 7. This issue is most prevalent in extractive industries due to the accounting policy choice provided in IFRS 6 Exploration for and Evaluation of Mineral Resources as an asset or an expense, but could be easily extended to other scenarios.

The staff noted that the wording in IAS 7 is not definitive and that IFRIC considered two possible views of classifying such cash flows:

• View 1: all expenditure intended to enhance future cash flows or income may be presented as investing activities.
• View 2: expenditure that is immediately expensed should be recognised in the statement of cash flows as an operating activity.

The staff recommendation was that IAS 7 should be amended to state that only expenditure that results in asset recognition can be classified as 'investing' in the statement of cash flows. Specifically, the staff proposed the following:

• To address the issue in the annual improvements project;
• To amend IAS 7 to make an explicit statement that only expenditure that results in a recognised asset can be classified as a cash flow from investing activities;
• To make no consequential amendment to IFRS 6 that would clarify that the accounting policy choice provided by that Standard only covers recognition and measurement, but to make some statements in the Basis for Conclusions of IFRS 6;
• To require retrospective application and provide no relief for first-time adopters;
• To include this amendment in Part I of the Annual Improvements ED (that is, acknowledging that this amendment would result in an accounting change in some instances);
• To solicit comments as part of the invitation to comment.

One Board member expressed his consent with the staff recommendation and stated that an entity has other possibilities to make clear in its financial statements that it considers certain expenditures as investing activity although presented as 'operating' in the statement of cash flows.

Other Board members had drafting comments, but the Chairman proposed that these should be dealt with offline. The Chairman then took the vote on this issue. The staff proposals were agreed to unanimously.

IAS 36 Impairment of Assets - Unit of account for goodwill impairment test

The next issue presented by the staff was the need for a further clarification what was the largest possible unit for allocating goodwill when testing for impairment in accordance with IAS 36. IAS 36.80 states that goodwill arising from a business combination should be allocated to (groups of) cash-generating units for impairment testing. The level of this allocation should be the lowest level where management monitors goodwill. However, this unit may not be 'larger than an operating segment determined in accordance with IFRS 8'.

Practice has taken differing views regarding what is meant by 'operating segment' in this context - the operating segment as defined in IFRS 8.5 or the operating segment level determined after applying the voluntary aggregation criteria as permitted by IFRS 8.12.

The staff recommended referring to the definition of an operating segment in IFRS 8.5 for the purposes of determining the appropriate level of allocation when applying IAS 36.80. This should be done by amending IAS 36.80 to make this clear. The main argument for this is that the Board aimed to look at the lowest level where management monitors its goodwill for impairment testing purposes when it developed IAS 36 and that this view would also avoid masking impairment losses by offsetting effects possibly resulting from the aggregation of operating segments.

Furthermore, the staff recommended the following:

• To address this issue in the annual improvements project;
• To propose no consequential amendment to IFRS 8;
• To propose prospective application and no relief for first-time adopters:
• To include the proposed amendment in Part I of the Annual Improvements ED (that is, acknowledging that this amendment would result in an accounting change in some instances);
• To solicit comments as part of the ED's invitation to comment.

The Board agreed with the staff proposals.

IFRS 2 Share-based Payment - Scope of IFRS 2 and revised IFRS 3

The final issue for discussion at this session was the interaction between the IFRS 2 and revised IFRS 3 Business Combinations. The Board received a request if due to the changes to IFRS 3 formations of a joint venture would now be within the scope of IFRS 2. The staff also highlighted that this question could be extended to common control transactions and hence, included such transactions in the proposal.

IFRS 2 excludes from its scope transactions that meet the definition of a business combination in IFRS 3. However, the revision to IFRS 3 changed the definition of a business combination. The request noted that at least for the formation of a joint venture the definition of a business combination under IFRS 3 revised 2008 is not met. This could lead to the conclusion that such transactions are now within the scope of IFRS 2. The staff noted that it did not think that the Board intended to change the scope of IFRS 2 when revising IFRS 3 and consequently recommended that the Board should amend IFRS 2.5 to reaffirm that the transactions mentioned above are outside the scope of IFRS 2.

Additionally, the staff made the following recommendations:

• To include this issue in the annual improvement project;
• To propose no consequential amendments to other standards;
• To provide no relief for first-time adopters;
• To include the proposal in Part II of the ED (that is, it is considered to be an editorial change only with no changes to accounting);
• To solicit comments as part of the ED's invitation to comment.

The staff highlighted that there would only be a short implementation period between the publication of the amendment (expected April 2009) and the effective date of IFRS 3 revised, which is 1 July 2009. However, the staff considered this acceptable as the amendment would not change existing practice. The Board agreed with the staff proposals.