The Board published the exposure draft IFRS Practice Statement: Application of Materiality to Financial Statements in October 2015 (the ‘ED’) and the Board discussed some of the issues raised by respondents in its October 2016 meeting. The purpose of this session was to discuss the following topics raised by respondents and to consider what changes, if any, should be made to the final Practice Statement (‘PS’) in light of the comments received:

• (a) Errors - Agenda paper 11A
• (b) Covenants - Agenda paper 11B
• (c) Stewardship - Agenda paper 11C
• (d) Recognition and measurement - Agenda paper 11D
• (e) Entities applying the IFRS for SMEs Standard - Agenda paper 11E
• (f) Status and form of the guidance - Agenda paper 11F

Appendix A provided some background information on the Materiality project and Appendix B provided a summary of the tentative decisions that the Board has made to date.

Next steps

In the December 2016 Board meeting, the Staff intends to ask the Board to re-deliberate the application of materiality to prior period information. The Staff intends to complete all the technical deliberations at that meeting.

Disclosure Initiative: Materiality – Errors - Agenda paper 11A

Background

Some respondents asked for more practical guidance on assessing when errors are material to the financial statements. Specifically, several respondents asked for guidance on cases when the cumulative effect of previously immaterial errors becomes material in the current period - they asked whether an entity should correct those errors by restating prior period information. Some respondents also noted that the ED is inconsistent with IAS 8.41 where the former states that errors made intentionally to achieve a particular result are always material.

Staff analysis and recommendation

The Staff recommended the following:

1. Suggesting in the PS that entities apply the Materiality Process (see Agenda Paper 11D of the October 2016 meeting) in order to assess whether an error is material.
2. Clarifying that the assessment of the materiality of a cumulative error should be performed on the basis of the conditions existing at the time the financial statements for the current period are authorised for issue, and that the PS should not provide any guidance on how to correct a material cumulative error
3. • (a) Removing the wording implying that if management intentionally misstates information to achieve a particular result, such errors are always material.
   • (b) Including a reminder that IAS 8.41 requires an entity to correct all errors made intentionally to achieve a particular presentation, regardless of their materiality.
   • (c) (c) Explaining that an error made intentionally to achieve a particular presentation was one that led an entity to fail to comply with the neutrality of the presentation of its financial position, financial performance and cash flows.

Discussion

The Board approved recommendations 1, 2 and 3(a), but rejected 3(b) and 3(c).

In relation to recommendation 1 which also applied more broadly to the rest of the discussion, one Board member cautioned against adding more guidance in the PS as that might run the risk of creating more problems. She reasoned that given materiality was itself a sensitive issue, it was made even more so when applying materiality to error corrections. Accordingly, it was not surprising that respondents wanted more guidance, but there might be ways to address these requests (or other places to add guidance) other than by adding more material in the PS. Another Board member supported her in that the Board should focus on the scope of the project, and not to expand the PS to include interpretation or rationales for concepts already contained in extant Standards based on seemingly good requests from respondents.

In relation to recommendation 2, there was significant discussion on whether the PS should include guidance on how to correct a material cumulative error, i.e. should the error correction be reflected wholly in the current year or should prior periods be restated. Those who supported including more guidance noted that this was a real practical issue and remaining silent on this issue would not be helpful. They believed that there was a principle which could be made clear in the PS, in that prior year figures should be restated otherwise the current year figures would be materially misstated. In response, the Staff said that how to correct an error was outside the scope of the PS. The Staff also asked whether the PS was the best place to put this guidance given its non-authoritative status. A few other Board members agreed with the Staff and emphasised that the scope of the PS was limited to the application of materiality on presentation and disclosure. If the PS included guidance on how to correct an error then it would open the door for inclusion of other seemingly related topics. They also added that the principle of how to correct a material cumulative error should be properly consulted and that consultation should not hold up the publication of the PS.

In relation to recommendation 3, the Board expressed significant discomfort regarding the proposal in 3(c) and its inclusion in the PS for the following reasons:

• Including such a statement went beyond the norm of standard setting, in that none of the other Standards referred to the qualitative characteristics of useful financial information in case of non-compliance with that particular Standard.
• Including such a statement gave the appearance of softening the seriousness of intentionally misstating the financial statements, whether material or not, as it might be read as relegating an intentional error to the ranks of merely not meeting a qualitative characteristic of useful financial information.
• One member also noted that there was a circular interaction between neutrality and materiality. In his view, the determination of whether financial information was neutral would be based, to a certain extent, on whether the error was material. Yet the proposed statement said that any intention error would not result in neutral information, thus implying that the error was material even though on a separate assessment it would be considered to be immaterial. The Staff responded that they regarded the intention to mislead as a subset of neutrality. However, this was different from the deliberate use of practical expedients as the latter did not carry with it the intention to misstate financial information in order to achieve a particular presentation.

On that last point, a number of Board members said it would be crucial for the PS to distinguish between (i) practical expedients explicitly labelled as such in various standards, e.g. IFRS 15 and IFRS 16, (ii) other simplifications used when accounting for transactions e.g. using the monthly average exchange rate to translate foreign currency transactions, and (iii) deliberate attempts to misstate financial statements to mislead users. These Board members commented that the materiality concept should be applied to each of them separately due to their vastly different nature.

Disclosure Initiative: Materiality – Covenants - Agenda paper 11B

Background

Respondents asked for more guidance on what are the circumstances that would make information about a covenant or a breach of covenants material.

Staff analysis and recommendation

The Staff recommended that the PS include specific guidance on:

1. how to assess the materiality of information about the existence and the terms of a covenant, or a breach of covenant; and
2. how the existence of a covenant affects the materiality assessment of the factors triggering the covenant.

In making the above assessments, the Staff recommended that an entity consider:

• (a) the materiality of the consequences of the covenant breach on the entity’s financial position, financial performance and cash flows; and
• (b) the likelihood of the breach occurring.

Discussion

The Board approved recommendation 1 but rejected 2. In relation to recommendation 1, the Board also approved the factors that an entity might consider as proposed in (a) and (b) above.

The Board was concerned with how recommendation 2 would apply in practice specifically citing the example used in paragraph 17 of the agenda paper, where the existence of a covenant that required the debt:equity ratio to be below a specified number, might result in the entity’s having to ‘reduce the quantitative threshold against which materiality was assessed for both debt and equity to reflect the greater level of scrutiny that those amounts might attract’. The Board was concerned that materiality would become a moving target in that case subject to reassessment all the time which would be impractical. Having said that, one Board member thought that the materiality threshold should be dynamic and should reflect changes in the circumstances of a company; however, he didn’t believe that that should be translated into adjusting the materiality figure based on how close a covenant was to being breached. He also believed that the proposal would lead to a circular assessment of materiality as an entity would need to determine the materiality threshold before preparing its financial statements, yet the resulting gearing ratio would cause the entity to reassess materiality.

In addition, some Board members believed that a discussion of how the existence of a covenant affected the materiality assessment was outside the scope of the PS. They believed that the PS should distinguish between (a) assessing whether information about a covenant was material enough to warrant disclosure, and (b) how did the covenant affect the quantitative assessment of materiality. While (a) was within the scope of the PS as it related to the disclosure of information, (b) has arguably expanded beyond the scope and objective of the PS.

Disclosure Initiative: Materiality – Stewardship - Agenda paper 11C

Background

A few respondents asked the Board to clarify how the consideration of stewardship affects the materiality assessment.

Staff analysis and recommendation

The Staff recommended the following:

1. Including guidance in the PS to remind entities that information about how efficiently and effectively management discharges their responsibilities can be material.
2. Including an additional qualitative factor regarding stewardship in Step 2 of the Materiality Process (see Agenda Paper 11D of the October 2016 meeting).

Discussion

The Board approved the Staff’s recommendation, subject to redrafting the guidance to clarify that stewardship was one of the considerations in assessing whether information was useful, rather than presenting it as a separate independent qualitative characteristic of useful information. This would bring the guidance in the PS in line with that proposed in the revised Conceptual Framework.

One Board member was decidedly against the Staff’s recommendation because, in his view, it could be read as requiring disclosure on a broad range of things, some of which might be out of management’s control, as well as requiring the disclosure of piecemeal information on how management had managed the company.

In contrast, the other Board members agreed with the Staff. They commented that one of the main reasons for producing financial statements was to allow users to assess stewardship, therefore such information would be material. One Board member gave the following example: if advertising expense was regarded as an important expenditure in a particular industry, not disclosing it separately might fail to provide information that people needed to assess how well management had managed the company. Furthermore, another Board member stated that this issue was closely related to the corporate governance and internal controls of a company. He acknowledged that there were bound to be things that management could not control; but good corporate governance and internal control would require management to have implemented strategies to exploit the advantages and mitigate the disadvantages arising from these situations, and this was what stewardship was about. If there was a breach of these internal controls, that would be material information and should be disclosed in the financial statements. If management thought that they were not responsible for something, users would want to know about it.

Disclosure Initiative: Materiality – Recognition and measurement - Agenda paper 11D

Background

The ED contains a small section on the application of materiality in the context of the recognition and measurement of information. Respondents provided mixed feedback on the usefulness and appropriateness of including such a section in the PS. While some believed that more comprehensive guidance should be provided, others believed that this is not an area of pressing need or that the PS should focus exclusively on presentation and disclosure matters.

Staff analysis and recommendation

The Staff recommended the following:

1. Retaining the guidance on the application of materiality in the context of recognition and measurement but including the guidance throughout the PS, as opposed to in a separate section. The Staff believes that providing guidance on applying materiality in both a recognition and measurement context and a disclosure and presentation context on a topic by topic basis will be more helpful.
2. Including a description of the materiality practical expedients in the PS and describing the discipline that underlies the use of these practical expedients. That is, the entity should have a basis to reasonably expect that the effects on the financial statements of applying the expedients would not differ materially from not applying the expedients.

Discussion

The Board approved recommendation 1. With regard to the second recommendation, the Board agreed with including a description of the materiality practical expedients in the PS, albeit using a term other than ‘practical expedient’; however, there was no support for including a description of the discipline that underlay the use of these practical expedients similar to that included in the IFRS 15 and IFRS 16 practical expedients.

One Board member re-iterated his disagreement with the recommendations for the same reasons raised in the previous discussions.

There was not much discussion on the first issue.

With regard to the second issue, a few Board members suggested using another term to describe the ‘material practical expedients’ discussed in the PS. These Board members believed that the term ‘practical expedients’ should be reserved for cases that were described as such by the Board in various Standards. They believed that all practical expedients explicitly allowed by the Standards were granted after due deliberation by the Board and that the Board had specified what conditions must be satisfied before one could apply those practical expedients. These Board members believed that the distinction in vocabulary was necessary, firstly, to avoid the inadvertent association of these practical expedients with the assessment of materiality, and secondly, to prevent people from inappropriately analogising to the bases supporting the use of the practical expedients allowed in different Standards. The Staff agreed to amend the wording.

One Board member also requested the Staff to clarify the distinction, or the interrelationship, between materiality expedient and cost/benefit expedient as used in the examples in the agenda paper.

As regards describing the discipline that underlay the use of these practical expedients, the Staff emphasised their point that materiality should not be viewed as a short cut in deciding how to account for a transaction. It was a communication tool that had to be applied with a certain degree of discipline. IFRS 15 and IFRS 16 described the factors that an entity should consider when applying the practical expedients in those Standards. The Staff believed that those factors form the basis of the discipline which should apply equally to the more general guidance on materiality in the PS (i.e. there must be a reasonable basis on which one could conclude that applying the practical expedient would not result in a materially different answer than if the entity did not apply the practical expedient). The gist of the Staff’s argument was that any simplification to accounting on grounds on immateriality should be based on appropriate estimates and assumptions. However, the Board was concerned that the wording in the agenda paper did not reflect the intention of the Staff, and that the current wording suggested that entities could apply the practical expedients in IFRS 15 and IFRS 16 by analogy to other situations so long as the underlying bases for those practical expedients were met, without assessing whether something was material in accordance with the PS’s guidance.

Disclosure Initiative: Materiality – Entities applying the IFRS for SMEs Standard - Agenda paper 11E

Background

The ED is addressed only to entities applying full IFRS. This has led a few respondents to ask whether the PS should be made applicable to entities applying IFRS for SMEs.

Staff analysis and recommendation

The Staff recommended the following:

1. That the PS not be addressed to entities applying IFRS for SMEs. This is because the PS focuses on primary users of financial statements prepared using full IFRS. Their perspective may differ from the perspective of primary users of financial statements prepared using IFRS for SMEs.
2. Stating in the PS that some of the guidance in the PS might be useful in preparing financial statements in accordance with IFRS for SMEs.

Discussion

The Board unanimously agreed with recommendation 1 and disagreed with 2 on grounds that any reference to IFRS for SMEs would compel SMEs to read the whole PS to see what was useful for them and/or which sections might be applicable to them. This would be unduly burdensome for the SMEs.

Disclosure Initiative: Materiality – Status and form of the guidance - Agenda paper 11F

Background

The purpose of this paper was to ask the Board to confirm the publication of the guidance on materiality as a non-mandatory (as opposed to mandatory) guidance in the form of a practice statement (as opposed to other forms e.g. educational material).

Staff analysis and recommendation

The Staff recommended that the Board finalise the guidance in the form of a non-mandatory practice statement. This was in view of the feedback received and further analysis that indicates that a practice statement is the form that combines greater advantages and fewer disadvantages compared to other alternatives.

Discussion

The Board unanimously agreed with the Staff’s recommendation.

The IASB continued its discussion of the comments received on the Conceptual Framework exposure draft (the ‘CF ED’). The topics for this meeting were as follows:

• Liability definition and supporting concepts—the ‘no practical ability to avoid’ criterion (AP 10C);
• Liability definition and supporting concepts—reducing the risk of further changes (AP 10D);
• Liability definition and supporting concepts—other topics (AP 10E);
• Effects of the proposed changes to the Conceptual Framework on preparers (AP 10G);

In addition, the tentative decisions made to date were summarised in AP 10A. APs 10B and 10F (discussed in the October 2016 Board meeting and reproduced for reference only) provided background information to support APs 10C–10E.

The Staff intends to discuss the following topics in the December Board meeting: (a) derecognition; (b) measurement; (c) capital maintenance; (d) business activities and long-term investment; (e) the Exposure Draft Updating References to the Conceptual Framework; and (f) the review of potential inconsistencies between existing IFRS Standards and the revised Conceptual Framework.

Conceptual Framework - Liability definition and supporting concepts — the ‘no practical ability to avoid’ criterion - Agenda paper 10C

Background

The CF ED proposes that an entity has a present obligation to transfer an economic resource if (a) the entity has no practical ability to avoid the transfer; and (b) the obligation has arisen from past events. Many respondents broadly agreed with the proposal, except banks. Banks expressed concerns about the implications of the ‘no practical ability to avoid’ criterion in classifying financial instruments as liabilities or as equity. Furthermore, many respondents were concerned about the difficulties in interpreting the ‘no practical ability to avoid’ criterion as they believe this will involve substantial subjectivity. The respondents were also divided in their views as to whether, and to what extent, economic compulsion should be considered in assessing whether a present obligation exists. They cite that there could be particular difficulties in judging whether an action to avoid a transfer ‘would have economic consequences significantly more adverse than the transfer itself’—especially if the consequences were unpredictable and assessments were likely to change over time.

Staff analysis

With regard to the banks’ concerns, the Staff noted that the Board is addressing financial instrument classification in the financial instruments with characteristics of equity project (the ‘FICE project’) and that the Board has decided that the concepts in the revised CF will not necessarily limit the range of possibilities explored in that project.

As regards the difficulties in interpreting the ‘no practical ability to avoid’ criterion, the Staff noted that preparers would rarely be required to apply this criterion without further requirements and guidance. This is because the Board would apply this criterion when it is developing Standards for particular transactions, and it could provide additional guidance to reduce the subjectivity involved in identifying liabilities for those transactions.

As regards the economic compulsion issue, the Staff continued to believe that in some circumstances, the economic consequences of taking an action to avoid a transfer may be so adverse that an entity has no practical ability to take the avoiding action in those circumstances. However, the Staff agreed that assessing the economic consequences of avoiding actions may not always be an appropriate and workable basis for determining whether an entity has the practical ability to avoid a transfer. This is especially the case if the economic consequences of the transfer or the avoiding action (or both) are prone to price fluctuations. The Staff further noted that the factors used to assess whether an entity has the practical ability to avoid a particular transfer should depend on the type of transaction under consideration.

The Staff’s analysis indicated that there is no need to amend the CF ED for other issues raised by the respondents.

Staff recommendation

The Staff recommended refining the ‘no practical ability to avoid’ criterion to state that, in order to conclude that an entity has no practical ability to avoid a transfer:

• (a) the factors considered should depend on the type of transaction under consideration; and
• (b) it would not be sufficient that the management of the entity intends to make the transfer or that the transfer is probable.

Discussion

The Board approved all of the Staff’s recommendations.

There was overwhelming support from the Board for the Staff’s proposals. A few members said that the proposed hurdle of ‘if all avoiding actions would have economic consequences significantly more adverse than the transfer itself’ was just the right balance for the liability assessment. Even though two Board members raised specific questions, both of them reiterated that they could live with the Staff’s proposals.

One Board member believed that the term ‘no practical ability to avoid’ should be replaced with ‘no realistic alternative’. His concern centred on cases where there was no binding legal obligation to carry out an action, and cited a lease renewal option as an example, where the contractual terms and economic conditions were such that an entity might have no realistic alternative to renewing the contract (and thus meeting the definition of a liability), but it would have the practical ability to avoid renewing the contract because there was no obligation to renew in the first place. Accordingly, he believed that the term ‘no realistic alternative’ would better depict scenarios where the Board would have expected a liability to be recognised.

Another Board member was concerned that there might be tension between the ‘no practical ability to avoid’ criterion and the position the Board had tentatively reached in the FICE project. She believed that the application of the ‘no practical ability to avoid’ concept might result in an answer that was different from the FICE project. She pointed out further that the proposed CF did not give any concrete guidance to the Board for future standard setting when considering the ‘no practical ability to avoid’ criterion. She also asked whether this concept was applicable to obligations other than those that were legally enforceable. The Staff responded that the concept also covered the likes of constructive obligations, and that the gist of the proposal was to move away from the strict IFRIC 21 notion of when a liability should be recognised.

Conceptual Framework - Liability definition and supporting concepts — reducing the risk of further changes - Agenda paper 10D

Background

This paper considered refinements to the CF ED to reduce the risk of including concepts in the CF that may need to change as a result of future decisions on classifying financial instruments arising from the FICE project.

Staff analysis

The Staff identified the following paragraphs in the CF ED that relate to the classification of claims as a liability or equity:

• (a) Paragraph 4.33(b) states that if an entity prepares financial statements on a going concern basis, it has the practical ability to avoid a transfer that would be required only on the liquidation of the entity or on the cessation of trading. This statement implies that any present claim that would be settled only on liquidation is an equity claim, which is inconsistent with the approach being developed (Gamma) which classifies an obligation to transfer an amount only on liquidation of the entity as a liability if that amount is independent of the entity’s economic resources.
• (b) Paragraph 4.30 states that an obligation of an entity to transfer its own equity claims to another party is not an obligation to transfer an economic resource. That statement implies that an obligation for an entity to transfer its own equity instruments never constitutes a liability (even if the obligation requires the transfer of a variable number of equity instruments), which is inconsistent with existing IFRS requirements.
• (c) Paragraph 4.31 states that an entity has a present obligation to transfer an economic resource if (a) the entity has no practical ability to avoid the transfer; and (b) the obligation has arisen from past events. The Staff notes that the purpose of this paragraph is to help identify when any claim meeting the definition of a liability arises; however, the Staff is concerned that it could be interpreted to mean that any claim that meets these two criteria would be a liability, and could not be an equity claim.

Staff recommendation

The staff recommended amending the CF ED to remove the inconsistencies identified above. The proposed drafting was included in the appendix.

Discussion

All Board members were in favour of the Staff’s recommendation.

One Board member asked about the classification of a hypothetical instrument in the case envisaged by (a) above. This was fielded by another Board member who explained the approached currently under development (Gamma) in the FICE project and how that would apply to the query raised by the first Board member.

Conceptual Framework - Liability definition and supporting concepts — other topics - Agenda paper 10E

Background

This paper considered feedback on the following issues:

1. The interpretation of ‘as a result of past events’. Respondents noted difficulties in applying the concept that ‘the entity has received the economic benefits, or conducted the activities, that establish the extent of the obligation’ when assessing what is the event that constitutes the ‘past event’.
2. Is there a need for both ‘present’ and ‘as a result of past events’ in the asset and liability definitions? Respondents suggested omitting either ‘present’ or ‘as a result of past events’ from the definitions of an asset and a liability on grounds that it is redundant—a ‘present’ obligation (or economic resource) is one that is the result of past events.
3. Introducing the concept of a ‘present claim’ to the liability definition. The CF ED states that the objective of general purpose financial reporting is to provide ‘… information about the entity’s economic resources and the claims against the reporting entity.’ Some respondents are concerned that by merely referring to claims (as opposed to present claims), the proposed ‘no practical ability to avoid’ criterion of the liability definition might be interpreted as encompassing items that are not present claims, e.g. future asset maintenance costs, future salaries and future operating losses.
4. Correspondence between assets and liabilities. Some respondents questioned whether the concept in paragraphs 4.25 and 4.26 of the CF that if one party has a liability another party has an asset always holds true. They suggested removing this statement from the CF.
5. Introducing concepts for non-reciprocal transactions. A few respondents suggested that the CF should include concepts that specifically address non-reciprocal transactions such as donations and income taxes.
6. Concepts on existence uncertainty. Feedback indicates that there is difficulty in concluding whether a liability exists in certain circumstances, and if so, what is the nature of the liability.

Staff recommendation

Issue 1

The Staff recommended that, to clarify the meaning of ‘as a result of past events’ in the definition of a liability, the CF be revised to:

• (a) refer to an activity of the entity ‘that will or may oblige it to transfer an economic resource that it would not otherwise have had to transfer’, instead of the activity ‘that establishes the extent’ of the entity’s obligation (as was proposed in the ED).
• (b) clarify that the enactment of a law (or the introduction of some other enforcement mechanism, policy or practice, or the making of a statement) is not in itself sufficient to give an entity a present obligation. The entity must have conducted an activity to which a present law (or other present enforcement mechanism, policy, practice or statement) applies.

Issue 6

The Staff recommended splitting the discussion of existence uncertainty in the CF ED as follows:

• (a) the discussion of how existence uncertainty arises should be moved to the concepts on identifying assets and liabilities (Chapter 4);
• (b) the discussion of the consequences of existence uncertainty for recognition should remain in the concepts on recognition (Chapter 5).

The Staff recommended that no change be made for the other issues based on analyses performed, mostly on grounds that the issues have been considered before, only a few respondents raised the issues, or the respondents did not put forward new arguments to challenge the analyses already provided in the Basis for Conclusions.

Discussion

Issue 1

The Board approved the Staff’s recommendation, subject to redrafting paragraph 4.36 such that it would lay the foundation of principles to be applied to transactions rather than trying to address particular fact patterns.

One Board member questioned how the revised wording would apply to rate regulated activities. The Staff responded that that was to be addressed in a separate project.

Two other Board members were concerned that the redrafted words would still lead people to the conclusion that a liability existed now (as opposed to only arising at a future date). Both of them focused on the smoke filter example (agenda paper 10F Example 2.7). They said that the enactment of the law ‘may oblige the entity to transfer an economic resource’ (based on the proposed wording), and this coupled with having ‘no practical ability to avoid’ shutting down the factory would lead to there being a liability. They questioned what the ‘past event’ was – was it having the factory and operating it? Or was it the passing of the new legislation? The Staff responded that having the factory was not the past event. It was the enactment of the law coupled with operating after the specified future date that constituted the past event. At all times, there must be (i) a past event and (ii) no practical ability to avoid a transfer of economic resources for there to be a liability. In the smoke filter example, the Staff agreed that there was no practical ability to avoid either installing the filters or paying the fine, and that would lead to either an exchange or a transfer of economic resources; however, there was still 6 months before the law would take effect. There was no liability in this case, and the focus was on the proposed revised wording of having to transfer an economic resource that it would not otherwise have had to transfer. The entity had done nothing up to the year-end that would oblige it to transfer economic resources that it would not otherwise have had to transfer (be it installing the smoke filters or operating without the smoke filter post 30 June 20X1). The Staff contrasted this with a hypothetical case of where a tax was imposed to all electricity companies just for their being electricity companies without having to do anything else. A present obligation would exist in this case.

Issues 2-5

All Board members agreed with not making any changes in relation to these issues.

Nevertheless, for issue 5, one Board member disagreed with the Staff’s comment that the concepts developed in the CF project were equally suitable for reciprocal exchange transactions and non-reciprocal transactions. He suggested that the concept of non-reciprocal be explored further in the future in order for the Board to cover these transactions properly.

Issue 6

All Board members were in favour of the Staff’s recommendation.

Conceptual Framework - Effects of the proposed changes to the Conceptual Framework on preparers - Agenda paper 10G

Background

The Board published Exposure Draft Updating References to the Conceptual Framework in May 2015 which proposes to replace references to the current Framework in Standards with references to the Conceptual Framework (as revised by the proposed CF ED). As IAS 8.11 requires entities to develop accounting policies by reference to the Framework in certain circumstances, this paper analyses the significance of the changes, if any, that might be required to accounting policies developed by reference to IAS 8.11 as a result of the proposed replacement of references.

The Staff asked the Board for feedback on the analysis performed but did not ask them to make any decisions at this meeting.

Staff analysis

The Staff analysis indicatee that the proposed replacement of references in IAS 8 is likely to have a limited effect on preparers’ existing accounting policies because:

• (a) it is rare for preparers to develop accounting policies by reference to the Framework; and
• (b) in some areas the revised concepts will result in outcomes that are similar to the existing concepts.

Discussion

No decision was made at this meeting.

One Board member asked the Staff to emphasise in future outreach activities that the respondents should consider the definition of the elements as well as the principles of recognition and measurement together, as opposed to considering each of them in isolation, as the latter ran the risk of making comments out of context.

Another Board member asked whether, in terms of IAS 8.12, the proposed revised CF would still be considered as being similar to the one under US GAAP. Another Board member reasoned that (i) as the Board had concluded that the proposed CF had not been changed that much and (ii) the fact that the current Framework was considered basically in line with its US GAAP equivalent, one could conclude that the proposed revised CF would still be regarded as similar to the one under US GAAP.

One Board member suggested that, as a separate project, the Staff research further into the interaction between the scope exclusions in each Standard and IAS 8. She noted that if a Standard did not say that a particular type of transaction fell within its scope, it did not mean that that Standard did not apply to the transaction in question. However, from the feedback received, this appeared to be what some respondents were thinking when using IAS 8 to develop accounting policies.

Background

The purpose of this meeting was to provide the Board with a summary of the research work that the Staff has undertaken in relation to establishing the scope of a research project on the Primary Financial Statements (PFS). The work focused on gathering evidence about perceived problems with the presentation of the PFS (excluding the statement of changes in equity pending finalisation of the Financial Instruments with the Characteristics of Equity project) and to understand stakeholders’ views on the areas of the PFS that need improvement.

The Board was not asked to make any decisions at this meeting.

Summary of research results

The results of the Staff’s research and outreach activities were summarised in the following papers:

• (a) Agenda Paper 21A Analysis of financial statements presentation. This paper summarises the results of the Staff’s analysis on the presentation of the PFS of 25 entities. The purpose of this analysis is to help identify problems with the structure and content of the PFS.
• (b) Agenda Paper 21B Use of performance measures. This paper summarises the results of the Staff’s analysis of the performance measures used in communications with shareholders of 25 entities. The purpose of this analysis is to help understand the implications of the use of non-IFRS information in communications with shareholders.
• (c) Agenda Paper 21C Literature review. This paper summarises the information gathered by the Staff from a review of academic and non-academic studies that are relevant to the PFS project. The purpose of the review is to obtain evidence about existing problems and suggested solutions.
• (d) Agenda Paper 21D Result of outreach on scope of project. This paper summarises the feedback received during outreach conducted by the Staff to help the Board define the scope of the PFS project.
• (e) Agenda Paper 21E Ten possible approaches presented during outreach. This paper describes the possible approaches to improve the structure and content of the PFS that were presented during the Staff’s outreach activities.

Next steps

In the December 2016 Board meeting, the Staff intends to ask the Board to decide on the scope of the PFS research project. Furthermore, based on the results of the research performed, the Staff intends to ask the Board questions along the following lines in the next meeting:

Statement(s) of financial performance (SoCI)

(1) Should the Staff explore improvements to the structure of the SoCI? If so, should they explore the following:

• (a) requiring additional subtotal(s), e.g. earnings before interest and tax (EBIT), operating profit?
• (b) removing some of the options for presentation of income and expenses in existing Standards?
• (c) requiring separate presentation of non-recurring, unusual or infrequently occurring items?
• (d) incorporating commonly used performance measures into Standards?
• (e) providing additional guidance on the use of performance measures?
• (f) better ways to communicate information about other comprehensive income?

Statement of cash flows (SoCF)

(2) Should the Staff explore improvements to the SoCF? If so, should they explore the following:

• (a) eliminating the options currently available in IAS 7 for the classification of some cash flows (i.e. interest and dividend cash flows)?
• (b) more closely aligning operating cash flows in the SoCF and operating profit in the SoCI?
• (c) addressing the relevance of the SoCF for financial institutions?

Statement of financial position (SoFP)

(3) Should the Staff explore improvements to the SoFP? If so, should they explore aligning the structure of the SoFP with the other PFS?

Financial statements format

(4) Should the Staff explore creating templates or formats for the presentation of the PFS? If so, should they consider providing formats or templates for some industries (e.g. for non-financial, bank, insurance or real-estate companies)?

Segment reporting

(5) Should the Staff explore requiring more line items in the segment reporting note (e.g. introducing some minimum items or aligning segment reporting with a revised SoCI)?

Discussion of Agenda Paper 21A (Analysis of financial statements presentation)

There was significant discussion on the lack of disaggregation in the financial statements, and also whether the disaggregated information should be presented on the face of the PFS or in the notes. The Board raised the following points:

• IAS 1 required an entity to present additional line items when such presentation was relevant to an understanding of the entity’s financial performance and position. The Staff should investigate what went amiss in the communication between auditors, preparers and regulators that this explicit requirement in IAS 1 was not complied with.
• Feedback received indicated that there was a pressing need for the Board to clarify when and how it was going to address the issue of disaggregation in the financial statements. The Staff noted that they would explore this in the PFS project.
• The Staff should analyse the financial statements of entities prepared using IFRS taxonomy, and see whether their financial statements were more structured and comparable across entities than that shown in the Staff’s existing analyses.
• The Staff should understand why entities chose to disclose the way they did in considering what improvements were needed. A Board member referred to Entity E in paragraph 15 of the agenda paper and said that there could be a valid reason why that entity presented only two line items in arriving at operating profit.
• A few Board members cautioned against giving a list of line items that should be presented when addressing the level of disaggregation that was required. This was because different users from different industries wanted different things.
• A Board member noted that what an entity disclosed was largely influenced by what its peers were doing. This in turn was affected by how the users were reacting to the disclosures made by the peers, which in turn prompted regulators to question any differences in presentation and disclosure between the peers. This peers-users-regulator triangle indicated that the inconsistencies could stem from jurisdictional practices and/or requirements. The Staff confirmed this observation and said that they noted more consistency between entities within each jurisdiction. The Staff noted that jurisdictional-specific practices and guidance played a role in creating these differences. Another Board member said this should not be an excuse for inconsistency when the entities were all applying IFRS. It was suggested that the Staff work with international regulators on what was meant by IFRS compliant in relation to the structure and format of PFS.
• Somewhat related to disaggregation, some Board members noted that many users wanted consistency in what was included in a subtotal. This was because many users were not sophisticated analysts or investors and did not have the resources (time or expertise) to re-arrange the numbers to suit their needs.
• The Staff should research into whether it mattered to users whether the disaggregated information was presented on the face of the PFS or in the notes, and the reasons for why it mattered and how much it mattered to them.
• Segment reporting – as the Board had just finished the post-implementation review (PIR) of IFRS 8, the Staff should consider the feedback there and reassess what should be done in the PFS project. However, a Board member cautioned against doing too much on IFRS 8 in the PFS project unless it was absolutely necessary lest it should be viewed as trumping the decisions approved on the PIR.

Discussion of Agenda Paper 21B (Use of performance measures)

The Board made the following observations:

• The Staff should be cautious not to associate the presentation of alternative performance measures (APMs) with a deficiency of IFRS as a whole or that IFRS was lacking in relevance. This was because entities presented APMs as they often depicted a more favourable picture for the entity. Another reason could be a change in users’ appetite and information needs from when IAS 1 was first issued. The Staff was asked to look further into this.
• Even if the Standards were to prescribe more performance measures, it would not stop entities from presenting other APMs. Since the Board could not stop entities from doing that, a more important point that the Staff should focus on was how to make sure the APMs did not mislead users.
• A couple of Board members cautioned against specifying how to calculate the APMs citing EPS as an example. IAS 33 provided detailed calculation guidance but entities still presented ‘adjusted’ EPS numbers albeit with a reconciliation on how the adjusted numbers were derived. These Board members believed that entities would make adjustments as they saw fit to the defined elements of any prescribed calculation which would defeat the purpose of providing guidance in the first place. Accordingly, they suggested that the Staff think of a more high-level approach to addressing the proliferation of APMs, e.g. providing guidelines on what should and should not be done, rather than trying to specify too much.

Discussion of Agenda Paper 21C (Literature review)

The session was mainly devoted to a staff member sharing her insights on the literature review. In addition, the Board made the following observations:

• The literature review indicated that allowing a choice in where to present interest expense and income in the SoCF hindered comparability. This seemed to contradict with why IAS 7 allowed this choice in the first place, which was to cater for the different circumstances of different entities, as requested by users. The Staff responded that the comment was made in the context of entities not providing enough disclosures on where they have included interest expense/income and thus the users could not make the necessary adjustments to suit their needs.
• In assessing the costs of implementing any proposed changes, the Staff should be careful not to assume automatically that a change in presentation would be expensive. For example, mandating interest expense to be presented as, say, operating activities would impose no additional costs on preparers; in contrast, mandating the direct method of presenting the cash flows from operations might impose significant costs on entities to make potential system changes. The Staff should assess costs/benefits on a case-by-case basis.
• The Staff should research further into why non-GAAP measures were considered more relevant than GAAP measures. Was it because users needed a performance matrix that was more granular than net profit after tax? Why was this the case?
• Why did investors no use OCI?

Discussion of Agenda Paper 21D (Result of outreach on scope of project)

The Board shared the feedback received from the outreach meetings they attended and made the following observations:

• In order to strike a balance between giving preparers the flexibility to ‘tell their own story’ and the desire for comparability across different entities, one Board member suggested exploring the idea of allowing entities to tell their stories on the face of the PFS, and supplementing that with a standardised note disclosing various items prescribed by the Board. Nevertheless, the Chairman warned against giving too much flexibility in the PFS.
• One Board member suggested that one could bring more of a management view into the PFS by the use of subtotals. This would also improve confidence in, and credibility of, management. However, it was noted that some other constituents were sceptical about including more subtotals. If the Board wanted to go that route, it had to be clear on what should be included and excluded from a each subtotal.
• Another Board member noted that even though investors had their own methodology of analysing the financial statements already, providing a standardised template might still be helpful.
• Many respondents did not find OCI useful because they thought it a black box and were not sure of what it represented. It was suggested that the Staff look at revising the name of ‘other comprehensive income’ and what should be recognised in it.
• Respondents had mixed views regarding the recurring v. non-recurring item distinction on the SoCI. Although it sounded good in theory, they were concerned that management might not have correctly classified whether something was recurring or non-recurring, thus defeating the purpose of the disclosure.
• One Board member advocated that the PFS project should focus on performance reporting, i.e. whether more, and if so what, line items were needed, disaggregation, and how to integrate APMs into the FS. He disagreed with the seemingly endless increase in scope of the project to discuss items that had been discussed previously and frankly thought that it was a waste of time.

The purpose of this session was to discuss the following:

• IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures—Long-term interests - Due process steps: Agenda paper 12A
• Property, Plant and Equipment: Proceeds before Intended Use - Due process steps: Agenda paper 12B

IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures — Long-term interests — Due process steps — Agenda Paper 12A

Background

At its October 2016 meeting, Board tentatively decided to include the proposed amendments to IAS 28 in the Exposure Draft Annual Improvements to IFRS Standards 2015–2017 Cycle (the ‘ED’). The proposed amendments clarify that an entity applies IFRS 9, in addition to IAS 28, to long-term interests in an associate or joint venture that, in substance, form part of the net investment in the associate or joint venture, but to which the equity method is not applied (see AP 12B to the October 2016 meeting).

The purpose of this session was to seek the Board’s permission to prepare the ED for balloting. Expected timetable:

• Balloting of the ED - November 2016;
• Publication of the ED - December 2016 / January 2017.

Staff recommendation

The Staff recommended that the Board grant permission to ballot the ED, with a proposed comment period of not less than 90 days.

Discussion

The Board approved the Staff’s recommendation.

One Board member reiterated his disagreement with the proposed amendment as he believed that the Board had not yet resolved the perceived double-counting issue in the proposed amendment. He believed that respondents to the ED would likely raise this issue in their comment letters. Furthermore, he was of the opinion that if IFRS 9 worked well, then IAS 28 was redundant (and should enjoy a happy retirement) since it was invented many years ago when financial instruments accounting standards were not well developed.

Property, Plant and Equipment: Proceeds before Intended Use — Due process steps — Agenda Paper 12B

Background

At its meeting in October 2016, the Board tentatively decided to propose a narrow scope amendment to IAS 16 to prohibit deducting the proceeds from selling items produced while making an item of PPE available for use from the cost of that PPE (see AP 12C to that meeting).

The purpose of this session was to seek the Board’s permission to prepare the ED for balloting.

Staff recommendation

The Staff recommends that the Board grant permission to ballot the ED, with a proposed comment period of not less than 120 days.

Discussion

The Board approved the Staff’s recommendation.

One Board member disagreed with the proposed amendments as he believed that it blurred the distinction between revenue and costs relating to the (i) production stage and (ii) pre-production stage. Furthermore, he believed that it was inappropriate to recognise revenue from selling items produced while making an item of PPE available for use without recognising the associated costs (depreciation). He believed that this would allow for more structuring opportunities.

The purpose of this session was to continue discussions on the Financial Instruments with Characteristics of Equity (FICE) project. The staff presented the following agenda papers:

• a. Summary of discussions to date — Agenda paper 5A
• b. Exception in Paragraphs 16A–16D of IAS 32 — Agenda paper 5B

The Board was asked to comment on the staff analysis and their recommendations.

Financial Instruments with Characteristics of Equity research project — Summary of discussions to date — Agenda paper 5A

Recap

The research phase of this project involved evaluating potential ways to improve the classification of liabilities and equity, and the related presentation and disclosure requirements. 

The Board explored the features to distinguish liabilities and equity: (i) the type of economic resources required to settle the claim; (ii) the timing of the transfer; (iii) the amount required to be transferred; and (iv) the priority of the claim relative to other claims. 

The Board had been developing an approach (labelled Gamma, see discussion in February 2016), which distinguished claims based on a combination of these features and would lead to outcomes broadly aligned with IAS 32. In October 2016, the Board tentatively decided that economic incentives that might influence the issuer's decision to exercise its rights should not be considered when classifying a claim as either a liability or equity.

Appendix A summarised three approaches and Appendix B summarised classification outcomes for some simple instruments under the proposed approaches.

Financial Instruments with Characteristics of Equity research project — Exception in Paragraphs 16A–16D of IAS 32 — Agenda paper 5B

Background

This paper considered whether the exceptions set out in IAS 32.16A and 16B (as well as 16C and 16D) (the ‘Puttables Exception’) should be retained given the classification and presentation requirements of the Gamma approach.

Staff analysis

Alternative 1 – Removing the Puttables Exception

Under the Gamma approach, a claim would be classified as a liability if (i) it required an entity to transfer economic resources at particular points in time other than at liquidation, (ii) for an amount that was not solely dependent on the residual amount. Accordingly, puttable instruments covered by IAS 32.16A and 16B would meet the definition of a liability under the Gamma approach because they could be put back to the issuing entity for economic resources at any time before liquidation. Furthermore, such instruments might not qualify for separate presentation under Gamma because IAS 32.16A(e) only required the settlement amount of such instruments to have a substantial dependency on the key drivers of residual amount, whereas Gamma required sole dependence on the residual amount for separate presentation.

The Staff further noted that the Gamma approach would address only some, but not all, of the concerns that led to the Puttables Exception in the first place.

The above analysis would apply equally to instruments covered by IAS 32.16C and 16D.

Alternative 2 — Retaining the Puttables Exception

Retaining the Puttables Exception would arguably address the concerns that led to their development in the first place. In addition, the Staff suggested keeping the related disclosure requirements in IAS 1.136A which addressed some of the shortcomings of the Puttables Exception, as well as to extend the IAS 1 disclosure requirements to instruments covered by IAS 32.16C and 16D.

Staff recommendation

The Staff intended to ask the Board whether it had any preference for retaining or removing the Puttables Exception. The Staff further recommended that the planned Discussion Paper (DP) ask the stakeholders about the prevalence of the application of the Puttables Exception in practice.

Discussion

The Board tentatively agreed not to remove the Puttables Exception subject to consultation to be put forth in the DP.

The Board started off with mixed views on whether the exception should be retained and whether consultation on the matter was needed. The discussion went along the following lines.

Given the tentative decision to date that Gamma was the preferred proposed approach to the liability/equity classification, the DP should fully expose its upsides and downsides, by noting that although Gamma might solve a number of problems that the Board had identified in the past, it did not solve all, with the issues that led to the Puttables Exception being one of them. Accordingly, constituents should be consulted on whether an exception was warranted in this case to achieve the desired outcome. Against that, it was submitted that any (good) new model should minimise the number of exceptions; however, a number of Board members noted that the aim of the FICE project was not to revamp the fundamentals of IAS 32 but rather to reinforce the underlying rationale of liability/equity classification that already existed in IAS 32 and to deal with practice issues. Removing the Puttables Exception would be inconsistent with either of those objectives. Furthermore, given that it was known that the Puttables Exception had pervasive application in certain jurisdictions (Germany), a number of Board members believed that it would be ineffective and inefficient to re-consult on this issue when constitutuents had already spent so much resource on it not so long ago and the Board expected that any tentative suggestion of removing the Puttables Exception would likely be met with fierce opposition and would lead to unnecessary unease and uproar for those affected. As the Puttables Exception was a ready-made solution to the identified issues, it was suggested that it should be retained.

Background

There were eight agenda papers prepared for the November Board meeting where the draft of IFRS 17 Insurance Contracts (draft IFRS 17) was discussed.

Papers 2A and 2B set out respectively the methodology used and the findings from the external testing of the draft IFRS 17. These papers were provided for information and the Board is not asked for decisions. They are not considered further in these summaries.

Paper 2C considered a possible response to the feedback received on the level of aggregation in the external review of the draft IFRS 17. Agenda paper 2D considered whether the requirements of the draft IFRS 17 on changes in the carrying amount of the contractual service margin (CSM) for experience adjustments should be amended. Agenda paper 2E considered a possible response to the issues relating to transition that have been identified in the external review and testing of the draft IFRS 17. Paper 2F discussed feedback from test participants about the requirements relating to accounting for the effects of financial risk when an entity applies the variable fee approach (VFA) and mitigates that risk with a derivative. Paper 2G summarised other 21 sweep issues that have arisen in the drafting process and external testing. Agenda paper 2H asked the Board to specify the mandatory effective date for IFRS 17, assuming that this is issued in the first half of 2017.

Insurance Contracts — Level of aggregation — Agenda paper 2C

The Staff recommended that (a) the definition of portfolio, i.e. a group of contracts subject to similar risks and managed together as a single pool, should be retained, (b) onerous contracts should be identified at initial recognition and be grouped separately from contracts that are not onerous at initial recognition, (c) insurance contracts that are not onerous at initial recognition should be measured by dividing them in each portfolio into at least two groups, the first is a group of contracts that have no significant risk of becoming onerous and the second is a group of other profitable contracts, (d) only contracts issued within the same year should be included within the same group, (e) the CSM for a group of contracts would be required to be allocated over the current period and expected remaining coverage to be provided, on the basis of the passage of time, reflecting the expected duration and size of the contracts in the group, and (f) a weighted-average discount rate should be permitted for the accretion of interest, with an averaging period of as much as one year.

Discussion

There was general support for the Staff proposals, which were considered to be realistic and workable, and were a good compromise between achieving the primary objectives in respect of onerous contracts, and contracts that are less resilient to changes in assumptions, which still will provide key information even though some granularity had been lost. It was suggested that some further guidance was needed on how mutualisation should be applied. Board members enquired if there could be circumstances which could effectively produce only one group, as for example in a jurisdiction where it is illegal to write loss making contracts. Other Board members observed that the risk of having an onerous group from those created out of highly profitable contracts was an appropriate way to focus the principles of the standard on the segment of the insurance contracts issued that would be more at risk. It was suggested that the drafting needs to make it clear that it is not intended that onerous contracts should be individually identified if the insurer has other ways to identify onerous contracts that can be applied (for example through the analysis of pricing parameters). It was noted that the requirements could be applied at a more granular level if more details were available from risk management processes. One Board member questioned why one year cohorts were required if the contracts had similar risks and profitability, but other Board members considered this necessary in order to ensure that the CSM is released when each contract expires.

Tentative decisions

The Board approved the recommendation on the number of groups, with 10 votes in favour and one vote against. In addition, the Board unanimously approved the Staff recommendation on the calculation of the locked in discount rates for accretion of interest on CSM to be an average of the discount rates used during the initial recognition of contracts for the year.

Insurance Contracts — Experience adjustments — Agenda paper 2D

The Staff recommended that for contracts measured under the general model when an experience adjustment directly causes a change in the estimate of the present value of the cash flows, the combined effect of the experience adjustment and the change in the estimate of the present value of future cash flows should not adjust the CSM but should instead be recognised in profit or loss. An experience adjustment directly causes a change in the estimate of the present value of future cash flows only when it causes a change in the future rights and obligations for the group of contracts.

For contracts measured under the variable fee approach, experience adjustments arising from non-financial risk that do not affect the underlying items, and any directly caused changes in the estimates of the present value of future cash flows, should not adjust the CSM but should instead be recognised in profit or loss.

Discussion

The Staff noted that this was the one issue where there was a range of comments and views. There was general agreement with recognising experience adjustments in profit or loss. One Board member noted that although he had previously advocated including experience adjustments in the CSM he agreed with the recommendation as the field testing had identified the extent to which experience adjustments would have adjusted the CSM.

Tentative decisions

The Board unanimously approved the Staff recommendations.

Insurance Contracts — Transition issues — Agenda paper 2E

The need to demonstrate impracticability before using the simplified approach and the fair value approach. The first Staff recommendation was that the requirements of IFRS 17 should be applied retrospectively in accordance with IAS 8 to groups of insurance contracts, unless it is impracticable. The second recommendation was for insurance contracts for which an entity cannot identify a group retrospectively and for groups of insurance contracts for which retrospective valuation is impracticable. In these instances a choice should be permitted between adopting a modified retrospective approach or the fair value approach, unless a modified retrospective approach is also impracticable, in which case the fair value approach must be used.

Concerns with the simplified transition approaches. The first Staff recommendations was that the objective of a modified retrospective approach should be to achieve the closest outcome to retrospective application that is possible using reasonable and supportable assumptions. The second recommendation was that the use of specified modifications should be permitted, using the minimum modifications necessary to meet the objective of the modified retrospective approach. The third recommendation was that, in applying a modified retrospective approach, there should be the maximum use of information that would have been used to apply a fully retrospective approach, but only if such information is available without undue cost or effort.

The date for determining the CSM for contracts with direct participation features. The Staff recommendation was that the CSM should be determined using the permitted modifications for the VFA determined at the beginning of the earliest period presented.

Fair value approach. The Staff recommendation was that under the fair value approach assessments should be allowed about (a) whether a contract is eligible for the variable fee approach, (b) how to group contracts, and (c) how to determine the effect of discretion on estimated cash flows for contracts subject to the general model. An entity can determine the effect of discretion either as at the inception of a contract, based on reasonable and supportable evidence for what the entity would have determined given the terms of the contract and the market conditions at that time, or at the beginning of the earliest period presented.

Grouping of contracts written within the same year. The first Staff recommendation was that as part of a modified retrospective approach and a fair value approach, an entity is permitted (a) not to divide contracts into groups that were written within the same year, (b) for groups applying the general model, to accrete and adjust the resulting CSM after transition using the discount rate at the beginning of the earliest period presented, (c) if the entity makes an accounting policy choice to disaggregate insurance finance income or expenses between profit or loss and other comprehensive income, for non-participating contracts it is permitted to base finance income or expenses included in profit or loss using the discount rate at the beginning of the earliest period presented. The second Staff recommendation was that if an entity chooses to base finance income or expense included in profit or loss using the discount rate at the beginning of the earliest period presented, it should make separate disclosures for amounts relating to insurance finance income and expenses for insurance contracts that were in force at the beginning of the earliest period presented and insurance contracts issued after the beginning of the earliest period presented, and disclose a reconciliation from the opening to the closing balance of the cumulative amounts included in other comprehensive income for related financial assets measured at fair value through other comprehensive income.

Disclosure of transition amounts and methods. The first Staff recommendation was that all the disclosures required by IFRS 17 relating to the CSM, insurance contract revenue and insurance finance income or expenses should be provided separately for insurance contracts that existed at the beginning of the earliest period presented and insurance contracts written after the beginning of the earliest period presented. The second Staff recommendation was that for all periods there should be an explanation of how the measurement of insurance contracts at transition was determined in order for users to understand the nature and significance of the methods used and judgements applied.

Discussion

One Board member noted the need to ensure that users are provided sufficient information to understand how transition has been applied. The Staff stated that disclosures would be important given that a collection of options will now be available and these option are also dependent on the information that is available for the insurance contracts to be restated. However, the fundament IAS 8 principle that full retrospective application must be applied to the maximum extent possible remains unchanged. The proposed modifications should only be used to the extent that they are necessary to achieve the restated balance sheet at transition date. One Board member expressed reservations about the ability to use the fair value approach even if information was available that would permit the simplified approach to be used. He was also intrigued that, based on the Staff paper, the fair value approach resulted in a smaller CSM. The Staff agreed that more educational material was needed to ensure that the requirements were understood. Two Board members considered that additional guidance was needed on how the CSM at transition would be run-off. Finally one Board member stated that he considered the OCI reset to zero to be an extraordinarily generous concession.

Tentative decisions

The Board unanimously approved the Staff recommendations.

Insurance Contracts — Mitigating financial risks reflected in insurance contracts — Agenda paper 2F

The Staff recommends that where the VFA is applied and a derivative is used to mitigate financial risks arising from the insurance contract and the underlying items, the effect of those changes in the financial risk should be excluded from the CSM when specified criteria are met and the entity has made this election in its accounting policies.

Discussion

There was no discussion about this issue.

Tentative decisions

The Board unanimously approved the Staff recommendation.

Insurance Contracts — Other sweep issues — Agenda paper 2G

This paper summarises 21 issues that have arisen in the drafting process and external testing. It includes the most significant changes that the Staff has made to draft IFRS 17 in the light of comments from Board members, the topic-based testing, and external review, together with the Staff’s proposed response. In particular issue 12 clarifies the VFA classification to allow the interpretation of contractual terms as inclusive of substantive obligations from laws and regulations. Issue 10 clarifies that for VFA contracts and those with asset dependent cash flows for which there is mutualisation among policyholders the level of aggregation to determine groups has to take the mutualisation features into account.

Discussion

There was very limited discussion on this issue.

Tentative decisions

The Board unanimously approved the Staff recommendation.

Insurance Contracts — Mandatory effective date of IFRS 17 — Agenda paper 2H

The Staff recommends that an entity should apply IFRS 17 for annual periods beginning on or after 1 January 2021, assuming that IFRS17 is issued in the first half of 2017, and an entity may apply IFRS 17 before 1 January 2021, provided it also applies IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers at the same time.

Discussion

One Board member considered that a period of 5 years was preferable between the date of publication of IFRS 17 and the mandatory implementation date in order to permit all insurance companies, including small and medium sized companies and those in emerging countries to implement the new Standard at the same date. He considered that there would only be marginal benefits in implementing IFRS 17 at the date recommended, and that the marginal costs of this would be huge. Several Board members disagreed with this view for various reasons, including that the new Standard was a significant improvement over current accounting, projects that last for extensive periods are generally not very efficient, smaller companies generally have fewer products, approximately 3 years was considered sufficient by most respondents to the Exposure Draft issued in June 2013, and companies have had plenty of time to consider the proposals.

Tentative decisions

The Board approved the recommendation on the mandatory implementation date, with 10 votes in favour and one vote against.

The Board unanimously approved the Staff recommendation on the early adoption of IFRS 17.

Next steps

The Staff will continue with the drafting process to reflect the decisions made in the November 2016 meeting, and will ask selected external parties to perform a fatal flaw review of a revised draft of IFRS 17.

The Staff expects to issue IFRS 17 in the first half of 2017.