The staff introduced the new consolidation draft highlighting the changes made to the previous draft. It noted that the term 'significant involvement' was dropped due to the similarity to 'significant influence' as used in IAS 28.

General comments

Some of the Board members expressed their concern over the emphasis that was put on beneficial interest which was mentioned before control. The Board reminded the staff that control is the underlying principle for consolidation and that the draft should reflect this. The staff agreed that the section on beneficial interest would be moved in part to the section on structured entities and elaborated on in the Appendix.

The Board also decided to replace the core principle paragraph on control with a paragraph from the section on control:

A reporting entity controls another entity when it has the power to direct the activities of that entity for its benefit.

Some Board members objected to the extended use of adjectives that blurred the core principles and made the text unnecessarily long. The staff agreed once the structure of the document was stabilised the wording would be cleaned up. It was also agreed to make clear where there are presumptions and when these presumptions are rebuttable.

The staff agreed with comments received from the Board that benefits in some paragraphs of the draft seemed to be positive only. This would be made clear. This would also avoid any interpretation that once an interest has not the ability to create profits anymore (just losses) that this would indicate a loss of control.

Control of an entity

The Board had some debate on this aspect of the draft. The issue of options was discussed. The draft indicated that options that could be exercised for little or no consideration would be included in the assessment of control. Some Board members disagreed, arguing that control means 'current control' whereas options require that further action must be taken. In their view, the control principle means present control rather than the ability to obtain control?

One Board member noted that he sees no merit in considering the purpose of the entity for the assessment of control.

Assessing control

The Board agreed that the principle in assessing control was the controlling of the strategic operating and financing policies of an entity. Again, it was discussed whether this control must be actually exercised or whether the entity merely had the ability to exercise this control. Furthermore, the Board asked the staff to make clear what factors were indicative and which were presumptive. The staff was also directed to make consistent use of terms meaning the same thing throughout the document. It was also unclear to some Board members what was meant by 'performance of the entity', a term whose definition is proving difficult in the financial statement project.

Some Board members had difficulties with the guidance on de facto control. The underlying principle was that an entity must have more power than anyone else, but the words would need some redrafting.

Structured entities

Some Board members reemphasised their reservations about having a separate section on something that was not defined. This section will be redrafted incorporating some of the guidance on beneficial interests.

Next steps

The staff informed the Board that they will test the principle of this draft with the nine examples set out in the proposed US GAAP guidance and five of the staff's own examples. A new draft would be sent to the Board very shortly.

Disclosure or Off-Balance Sheet Risks

The Board then started deliberations on the off-balance sheet risk disclosures that are part of the Consolidation project.

Disclosure objective

The staff presented the Board with the proposals starting with the disclosures objective. The aim was to enable users to understand the risks arising as a consequence of its activities with structured entities. Staff acknowledged that 'structured entity' is an undefined term but is intended to be wider than 'special purpose entity'. It was noted that the proposals include a 'capture all'-clause that would require entities to provide additional disclosures if the minimum requirements in IFRS were not sufficient to meet the disclosure objective.

The Board agreed.

Disclosures about structured entities

The staff then turned to disclosures about structured entities that the reporting entity created or sponsored. Staff does not propose to define the term 'set up' or 'sponsor' in the standard, because these terms are frequently used and well understood in the banking community. Some Board members were concerned over the use of undefined terms that might mean different things to different people.

The required disclosures on fee income and assets held by the structured entity were aimed to enable users to understand the level of income and the level of activities from such relationships. The staff noted that the requirement to provide information for two comparative years was somewhat arbitrary, but staff believe that an extended period is necessary to allow a comprehensive risk assessment. Staff acknowledged that retrospective application in connection with such a requirement would be onerous for some entities as they possibly do not have the data readily available. Some Board members responded that there should be no 'undue cost or effort' exemption and that IAS 8 already provided an impracticability exemption. One Board member asked the staff whether it would be useful to require entities to provide more comparative information if this was considered necessary to get the full picture.

Others were concerned about the term 'retained interests' used throughout the document. The staff responded they would use a term like 'continuing interest', but will tidy up the wording in due course.

The Board also asked whether other (non-financial) entities could be subsumed under the 'structured entities' umbrella, for example, an R&D vehicle. The staff confirmed that this is the case and agreed to include such entities in the examples.

The staff confirmed that the disclosure to be made about the assets securitised in unconsolidated entities were the cumulative securitisations during the reporting period, not only at the reporting date. Also, it was acknowledged that fee income would have to be defined for the purpose of this disclosure as it was not clear what this would encompass. However, it was clear that this would include set up and ongoing fees.

Overall, the Board seemed to concur with the staff proposals.

Risks

The staff introduced its proposal on off-balance sheet disclosures for relationships that are within the scope of IFRS 7. The disclosures would aggregate carrying amounts of the relationships, maximum losses and assets held by the entity (at the reporting date). It noted that whenever disclosures about relationships scoped into IFRS 7 required the disclosure of amounts, these were current amounts. While the majority of the Board agreed, there was some concern about practicability to provide current information for entities the reporting entity did not control, due to different reporting dates and different accounting frameworks. One Board member responded that he wanted to have a red flag if an entity invoked the impracticability exemption as users should know when a reporting entity had relationships where it could not assess the risks properly. The staff agreed to include words reflecting this concern.

Furthermore, Board members expressed concerns that the disclosures about leverage (that is, exposures that were disproportionally higher than one would expect from the relationship) was not appropriate and not extensive enough.

The staff asked the Board whether it was necessary to use the word 'significant' for some disclosure requirements. The Board decided that it considered such a requirement not necessary, but decided to raise this question in the Invitation to Comment.

Generally, the Board seemed to agree with the direction.

Off-balance sheet relationships outside the scope of IFRS 7

The final relationships to be addressed were off-balance sheet relationships that were not captured by IFRS 7. The staff noted that reputational risk was hard to disclose without ending up in boilerplate notes. Many Board members agreed noting that reputational risk is a subset of general business risk. Again, the Board discussed certain aspects but seemed to agree with the majority of the staff proposal set out in the agenda paper.

The purpose of this session was to address the following three issues with regard to the staff draft proposals on amending the liquidity risk and fair value disclosures in IFRS 7:

• How and when to issue an ED;
• Comment period; and
• Transition.

The staff recommended to the Board to publish the ED within the next 2-3 weeks with a 120 day comment period. Although the need for changes is urgent, the staff highlighted that no final document will be published before year-end. Therefore, entities with an annual period beginning 1 January 2009 would not apply the amendments before 1 January 2010, and this would take some pressure from the proposals. Staff noted that, in the light of the public focus on these issues, the Basis for Conclusions in the exposure draft should include a proposed effective date of 1 January 2010.

Board members were mainly concerned about the usual 120 day comment period given the public attention on these issues. Most of the Board members tended towards a 60 day comment period, as the issues addressed were narrow and were not expected to create much resistance from constituents. One Board member asked the staff whether it would be possible to have an earlier effective date. The Chairman mentioned that the endorsement process of one of the significant constituents would need a certain amount of time, so an earlier effective date than proposed would not help.

One Board member noted that the disclosures for fair value might omit the information on hedging activities/relationships if they are not disclosed simultaneously. The staff agreed and confirmed that this was an issue already raised by the IASB's expert advisory panel. However, addressing this would go beyond the scope of this project. It was noted that entities wishing to provide information on hedging activities for which they use their derivatives would not be prohibited to do so.

In the end, the Board agreed with the staff proposal in general, but decided to have a 60 day comment period and propose an effective date of 1 July 2009. The Board also decided to include a question on the effective date in the invitation to comment.

The staff informed the Board that it will present separately, at a future Board meeting, additional issues in IFRS 7 that have been discovered during the discussions with constituents. Staff suggested that many of them could be addressed via the annual improvements process.