6-7 July 2006, London Thursday 6 July 2006

• Introduction, administrative matters, minutes of the May 2006 meeting
• Customer Loyalty Programmes - review of text of a Draft Interpretation
• IFRIC D17 - IFRS 2: Group and Treasury Share Transactions
• IFRIC D12-14: Service Concession Arrangements
• IAS 19 Post-employment Benefits - The effect of a minimum funding requirement on the asset ceiling – review of text of a Draft Interpretation
• IAS 18 Revenue – Guidance on identifying agency arrangements
• IAS 39 Financial Instruments: Recognition and Measurement – Securitisations: Derecognition of groups of financial assets
• Review of tentative agenda decisions published in previous IFRIC Update
  • IFRS 2 Share-based Payment – Fair value measurement of a post-vesting transfer restriction
  • IAS 17 Leases – Recognition of contingent rentals

Friday 7 July 2006

• IFRS 2 Share-based Payment – Employee benefit trusts in the individual or separate financial statements of the sponsor
• IAS 39 Financial Instruments: Recognition and Measurement – Criteria for identifying 'portions'
• Recommendations regarding requests for IFRIC agenda items
  • Valuation of electricity derivatives
  • IAS 32 Financial Instruments: Presentation – Puts and forwards held by minority interests
  • IFRS 3 Business Combinations Are puts or forwards received by minority interests in a business combination contingent consideration
  • IAS 11 Construction Contracts/IAS 18 Revenue – Allocation of profit in unsegmented contracts
  • SIC 12 Consolidation of Special Purpose Entities – Relinquishment of control
  • IAS 39 Financial Instruments: Recognition and Measurement: Definition of a derivative: – Indexation on own EBITDA or own revenue
  • IAS 32 Financial Instruments: Presentation – Foreign currency instruments exchangeable into equity instruments of the parent entity of the issuer
  • IAS 32 Financial Instruments: Presentation – Changes in the contractual terms of an existing equity instrument resulting in it being reclassified to financial liability
  • IAS 1 Presentation of Financial Statements – Whether the liability component of a convertible instrument should be classified as current or non-current
  • IFRS 2 Share-based Payment – Incremental fair value to employees as a result of unexpected capital restructurings
  • IAS 16 Property, Plant and Equipment – Revaluation of investment properties under construction

Public Portion of IASCF Meeting, 28 June 2006

The Chairman of the IASB updated the Trustees on IASB activities. He pointed out that the Board's work programme would reflect its three main objectives pursued:

• convergence with US GAAP,
• getting more countries to use IFRSs, and
• the SME project.

Convergence with US GAAP

The Chairman said that while the two Boards have a common base from which they are looking at the issues, they acknowledged the need to update and converge their conceptual frameworks – a project that the Boards are pursuing in stages. Due process steps will be taken on a chapter-by-chapter basis rather than for the entire framework. On each chapter the Board will first publish a Discussion Paper, then an Exposure Draft, and lastly a final version of the chapter. Of the eight chapters envisaged by the Board, the one on measurement seems to be the one that elicits most concerns from constituents. To address these, the Board plans to hold public round-tables early in 2007.

Convergence projects are classified as short-term (resolvable by the end of 2007) and medium- to longer-term (after 2007). The IASB has already issued two Exposure Drafts on short-term projects – segment reporting and borrowing costs. EDs on three more – income taxes, joint ventures, and impairment – are likely towards the end of the year.

Under the Memorandum of Understanding agreed between the IASB and the FASB in February, the Boards expect to have made progress on each of the longer-term projects by 2008. For some projects, this may mean simply an agenda decision, whilst for others some due process document or considerable progress is expected. The Chairman briefly described each of the longer-term projects and said that only two of them are likely to be finalised by the end of 2007 – business combinations and the fair value measurements. Regarding the latter, the Board has decided not to issue the forthcoming FASB statement on Fair Value Measurement as an Exposure Draft, but rather as a Discussion Paper. Comments received will be fed into an ED at a later stage.

Other convergence activities

In addition to seeking convergence with US GAAP, the Chairman reported that the Board had also launched convergence projects with its Chinese, Canadian, and Japanese counterparts. He remarked that he had received a further request from India to initiate a convergence project with the IASB.

Amendments to IFRSs

The Chairman said that at its June meeting the Board made two important decisions about the frequency of standard issuances or amendments:

• Any pronouncement to be published would foresee at least a one-year implementation period. This means that even a standard that is finished before year-end 2007 would not become effective before January 1, 2009.
• If the Board detects a flaw in its literature, that flaw will be put on a list of amendments that will be published as an 'omnibus amendments draft' on a yearly basis.

With those two decisions, the Board hopes to have adequately addressed the concerns expressed by preparers.

Use of IFRSs

As regards the second objective, the Chairman pointed out that there were some 100 countries that were using IFRSs already. He expressed the hope of increasing that number by another 50 in the next few years.

IFRS for Small and Medium-sized Entities (SMEs)

The Chairman reported that work towards an SME Exposure Draft was in its final stage and is planned for completion in September. He noted the following key decisions that the Board had made:

• the standard should cover all transactions usually expected to occur in an SME environment;
• the SME book should be self-contained;
• if a transaction occurring is not dealt with in the SME book, an SME should try to develop its accounting policy by using the principles in the SME book. Only when an SME could not derive a policy by following this path, it would be referred back to the full IFRSs;
• the Board will describe the type of entities for which the standard is intended to apply. However, it will be left to the discretion of the individual jurisdiction to decide which entities should/could apply the SME standard.
• All but three chapters of the SME draft standard are completed, the ones requiring further work being financial instruments, income taxes, and pensions. In response to a question from the Trustees, the Chairman said that an audit report would explicitly refer to the accounting regime used, that is, full IFRSs or IFRSs for SMEs.

Principles-based standards

The Chairman reiterated the Board's full support for principles-based accounting standards. He said that FASB and IASB had agreed to try to formulate 'overriding principles' that would leave no room for exceptions. From these, the individual accounting principles would be derived. If, for whatever reason, the FASB decided to add guidance in their version of the agreed-upon pronouncements, a mechanism would have to be installed to prevent these from flowing into the IFRSs.

The Chairman of the Trustees thanked the IASB Chairman for his report and asked for comments from the Trustees. The Trustees discussed the issues presented and had several follow-up questions for the Chairman. There was overall support for what the Chairman had presented. In response to a question whether he could see any problems or hindrances on the way to pursue the agenda presented, the IASB Chairman reminded the Trustees that out of the eleven major convergence projects, only two would have to be completed by the end of 2007. He acknowledged that the agenda is ambitious but feasible and not overburdening the resources at hand. The only concern he expressed is that the next SEC Chief Accountant may be someone who would not feel bound to what had been agreed with the former Chief Accountant. No decisions were taken.

Report of the Chairman of the Standards Advisory Council (SAC)

The SAC Chairman reported on the SAC meeting held on Monday and Tuesday, 26 and 27 June 2006. Among the points he noted:

• The SAC members had showed full support for the SME project.
• They had given their approval for pensions and leasing projects to be added to the agenda.
• They seemed to be less sympathetic to taking a related parties project on the agenda (see below).
• SAC members expressed some disappointment about the long timeframe envisaged for the big issues to be resolved, although the SAC members acknowledged that this was partly due to the restricted number of staff available.
• SAC discussed the IFRS brand, strategy, interpretation of IFRSs, and funding/staffing issues in closed session. With regard to strategy, a small working group will be formed to define 'effectiveness' (in terms of the Board's way to tackle its agenda) and to put forward ideas of how it could be measured.

Few questions were asked, and no decisions were taken.

IASB agenda proposals

The IASB Chairman said that three issues would be put forward for consideration, namely:

• amendment to IAS 24 Related Party Disclosures;
• Revision of IAS 19 Employee Benefits; and
• Revision of IAS 17 Leases.

The first of the three issues had been brought to the Board's attention by China and Japan. The basic question put forward had been how IAS 24 could be applied in a jurisdiction where most/many companies are state-owned and engage in transactions with each other. If all of those transactions must be disclosed – as the current IAS 24 requires – a huge amount of information of questionable benefit will be included in the notes to the financial statements. The Pensions and Leases projects are included in the MoU and would require an agenda decision. The Chairman pointed at the necessity to look at both issues, since the current literature allow entities to exclude substantial liabilities from the balance sheet.

The Trustees debated the issue for some time. A strong majority favoured moving Pensions and Leases to the active agenda, although not all Trustees saw the immediate need for a decision at this stage. With regard to the Related Party issue one Trustee remarked that it would be preferable to deal with the issue as well since it would support the Board in achieving its second major goal (namely to increase the number of countries using IFRSs).

The Chairman of the Trustees then asked the Vice Chair of the IASB to give a brief overview about the current stage of IFRIC's project on service concession arrangements. The Vice Chairman pointed out that despite considerable progress being made some 'noise' was expected as soon as the final interpretation would be published. One of the Trustees claimed that even the revised interpretation would be unacceptable in his jurisdiction, as 30 to 40 percent of all listed entities would be forced to go out of business if the draft Interpretations are issued unchanged.

Report from IFRIC Chairman

The Chairman of the IFRIC pointed out that most requests for interpretation were received on the subjects of financial instruments, leases, revenue recognition, and share-based payments. He said that IFRIC actually spends most of his time on issues that are not taken to the agenda, mostly because the submitter sought implementation guidance and not an interpretation. The IFRIC Chairman told the Trustees that the IFRIC will seek to enhance its process in a number of ways:

• All future IFRIC meetings will be webcast and stored on the IASB's website, starting with IFRIC's July 2006 meeting.
• IFRIC plans to keep its constituents informed as to the stage of due process for each issue submission. The Chairman of the IFRIC pointed out that all of IFRIC's decisions not to take an issue on the agenda were already available on the IASB's website by IAS/IFRS concerned, although the references would not be kept updated.

Although most Trustees seemed to agree with IFRIC's procedure in dealing with the issues, some concerns were raised with regard to the number of 'non-interpretations' issued, since other 'interpretive bodies' might fill the gap and issue guidance they believed to be correct. The Chairman acknowledged that this was a known issue.

This summary is based on notes taken by observers at the IASCF Trustees' meeting and should not be regarded as an official or final summary.

National regulation will still be important. Indeed, it will be more important than ever, in order to protect investors from the new opportunities for fraud, unethical trading practices, and market manipulation that truly international markets could create. But equally important will be cooperation among national regulators. If national regulators don't cooperate with one another, and update their own rules and practices, the combination of global exchanges could serve as a robust new means for the unscrupulous to circumvent laws and regulations and to hide illegal activities from surveillance....

There are still many areas of significant difference between our standards and those of other countries. For example, we have different accounting and auditing standards, and, importantly, different liability standards. But the key to success going forward is to recognize that harm to investors will be minimized if we agree to adhere to high quality securities regulation and there is a strong degree of cooperation and coordination among regulators.