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This IASB Update is a staff summary of
the tentative decisions reached by the Board at a public
meeting. As a project progresses, the Board can, and sometimes
does, modify its earlier tentative decisions. Tentative
decisions do not change existing requirements until those
decisions are incorporated in a new or amended standard.
Financial crisis
Consolidation
The Board
continued its deliberations of the proposals in ED 10
Consolidated Financial Statements considering comments
and information received from respondents to the exposure
draft and from participants at the round table meetings held
in June 2009.
The Board decided tentatively:
- to clarify that 'the activities' in the control
definition are those activities of an entity that
significantly affect the returns.
- to retain a broad definition and description of returns,
similar to the description included in paragraphs 10 and 11
of ED10.
- to clarify the following regarding the returns element
of the control definition:
- a reporting entity must be exposed to variability of
returns in the future
- a reporting entity's returns can have the potential to
be wholly positive, wholly negative or either positive or
negative.
- to clarify the characteristics of power as follows:
- power refers to a reporting entity's current ability
to enforce its will in directing the activities of an
entity that significantly affect the returns
- power need not be exercised (this will be readdressed
when the Board discusses power with less than half of the
voting rights at a future Board meeting)
- power need not be absolute
- power is assessed on the basis of current facts and
circumstances.
- that the final standard should include guidance
discussing participating rights as follows:
- participating rights are rights that, if held by one
party, are sufficient to give that party the ability to
enforce its will in directing the activities of an entity
that significantly affect the returns. If their exercise
requires agreement by more than one party, participating
rights prevent other parties from controlling the entity
to which they relate.
- participating rights must be substantive.
- rights that are exercisable only when specified
circumstances arise or events happen are participating
rights in some circumstances and protective rights in
others. The final standard will explain those
circumstances.
- to retain the guidance on protective rights included in
paragraphs B1 and B2 of ED10.
- that when two or more parties have discrete, unilateral
decision-making authority over different activities of an
entity, the party that has the ability to direct the
activities that most significantly affect the returns meets
the power element of the control definition.
- to clarify that understanding the purpose and design of
an entity is an important factor to consider when assessing
control of that entity, but that involvement in the design
of an entity is not, in isolation, sufficient to conclude
that the reporting entity controls that entity.
- that a reporting entity be required to assess control
continuously and that the final standard should clarify the
application of that requirement.
Agency
relationships
The Board
discussed when a party that has been delegated decision-making
authority should be considered to be an agent. The Board did
not reach any decisions on agency relationships.
This
topic will be discussed further by the IASB and FASB at the
joint meeting being held on 26-28 October. In November 2009,
the Board will continue to deliberate the proposals in the
exposure draft.
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Credit risk in liability
measurement
The Board considered a summary of the
responses to the discussion paper (DP) Credit Risk in
Liability Measurement. The Board decided:
- to stop work on credit risk as a free-standing work
stream.
- not to reach a general conclusion on credit risk at this
time but instead to incorporate the topic in the conceptual
framework measurement project;
- not to change the role of credit/performance risk in the
definition of fair value as a result of the responses to the
DP. The Board has not yet reviewed responses to the exposure
draft Fair Value Measurement;
- to consider the application of the fair value definition
in every project involving measurements that would otherwise
be at fair value; and
- to consider the question of credit risk in every project
involving a current measurement of liabilities that is not
fair value.
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Derecognition
In March 2009
the Board published an exposure draft (ED) to replace the
derecognition requirements in IAS 39 Financial Instruments:
Recognition and Measurement and to improve the disclosure
requirements in IFRS 7 Financial Instruments: Disclosures
relating to the transfer of financial assets and
liabilities. At this meeting the Board began redeliberation of
the comments received on the ED. The Board discussed:
- whether the derecognition model should include a test of
bankruptcy remoteness ('legal isolation')
- whether sale and repurchase agreements ('repos') and
similar transactions should be treated as sales or lending
transactions
- how a transferor should treat (i) an interest that it
retains in a previously recognised financial asset or (ii)
an investment that it acquires in a transferee
vehicle
The Board also discussed two possible
approaches to replacing the current derecognition requirements
for financial assets in IAS 39. One approach was a modified
version of the current requirements in IAS 39, with the
other being the alternative approach in the ED.
The Board
tentively decided that a bankruptcy remoteness test should not
form part of the derecognition model.
The Board was
not convinced that all repos are sales. The Board therefore
directed the staff to ascertain whether some repos (on the
basis of the terms of those arrangements) are in substance
lending arrangements.
The Board tentatively decided to pursue
the alternative approach and directed the staff to further
develop that approach to account for a retained interest as
follows:
- If the retained interest is a disproportionate interest
in the asset previously recognised, the transferor should
treat it as a new asset and measure it initially at fair
value but subsequently using the classification and
measurement requirements in IAS 39. The transferor would
recognise any gain or loss resulting from the transfer in
profit or loss.
- If the retained interest is a proportionate interest in
the asset previously recognised, the transferor should treat
it as part of that asset. Therefore, the transferor would
recognise a gain or loss only on the part transferred. The
transferor would continue to measure the retained interest
using the measurement basis that it applied to the asset
recognised before the transfer.
The Board will
continue the redeliberation of other aspects of the ED at
future meetings
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Fair value measurement
The Board
discussed the comment letters received on the exposure draft
Fair Value Measurement. The comment deadline was 28
September 2009. The Board also discussed the preliminary
project plan. The next steps are to hold round table meetings
in the following locations:
- Norwalk: 2 November
- Tokyo: 27 November
- London: 11 December
In January 2010, the
Board will start re-deliberating the issues raised in the
comment letters and during the round-table discussions. The
Board plans to issue an IFRS on fair value measurement in the
third quarter of 2010.
The Board did not make any
technical decisions at this meeting.
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Financial
instruments
The Board continued to discuss responses
received to its exposure draft Financial Instruments:
Classification and Measurement (the ED), published in July
2009.
Classification and measurement - phase 1
Gains or losses related to Level 3 fair value
measurements
The Board discussed whether entities
should be required to present on the face of the statement of
comprehensive income total gains or losses on financial
instruments for the period for fair value measurements in
Level 3 of the fair value hierarchy. Such amounts are already
required to be disclosed IFRS 7, but not on the face of the
statement of comprehensive income. The Board tentatively
decided that the forthcoming IFRS on classification and
measurement should not include a requirement to disclosure
this information on the face of the statement of comprehensive
income. However, there was support to discuss this matter
again at the joint meeting with the FASB in the week beginning
26 October as part of the Financial Statement Presentation
project.
Scope of the IFRS
The Board
tentatively decided to exclude financial liabilities from the
scope of the forthcoming IFRS. In the short term, the
requirements of IAS 39 would continue to apply to financial
liabilities. The Board asked the staff to further consider the
accounting for financial liabilities and will address this
issue in the near future.
Effective date and
transition
The Board tentatively decided:
- that the effective date will be 1 January 2013 for the
finalised guidance on classification and measurement of
financial instruments.
- to permit early adoption of the final IFRS. In addition,
the Board tentatively decided to require transition
disclosures by all entities adopting the new IFRS, as
proposed in the ED.
- to clarify the guidance in the ED on the 'date of
initial application'.
- to permit, but not require, restatement of comparative
periods by entities that implement the standard in
2009 or 2010. Comparative information will be required
if an entity adopts the final guidance after 2010.
- to finalise the guidance on impracticability of
retrospective application, as proposed in the ED.
Accordingly, if it is impracticable for an entity to apply
retrospectively the effective interest method or the
impairment requirements for a financial instrument, the
entity shall determine the amortised cost of the financial
instrument, or any impairment on a financial asset, in each
period, determined by using its fair value at the end of
each comparative period.
- not to permit the continuation of separate accounting
(bifurcation) for those hybrid contracts embedded in
financial hosts that were bifurcated in accordance with the
existing IAS 39.
- to remove the specific transition provisions on hedge
accounting from the ED.
- that if an entity adopts the IFRS resulting from any
phase of this project before its effective date, the entity
(a) shall adopt all earlier phases before then, but (b) need
not adopt later phases before their effective date.
- to finalise all other transition provisions as proposed
in the ED.
Transitional insurance
issues
The Board noted that insurers may face
particular problems if they apply the new IFRS on
classification and measurement of financial instruments before
they apply the IFRS resulting from phase 2 of the project on
insurance contracts. The Board tentatively decided:
- not to create a temporary exception
permitting insurers to maintain the available-for-sale
category temporarily until the phase 2 IFRS is available.
- to consider, in developing the transitional requirements
for the phase 2 IFRS, whether to create a transitional
option for an insurer to revisit the classification of
financial assets when the insurer adopts the phase 2 IFRS.
The Board noted that it had included such an option in IFRS
4 Insurance Contracts for reasons that are likely
to be equally valid for phase 2.
- not to make any consequential amendments to IFRS 4
relating to shadow accounting for insurance contracts or for
financial instruments containing a discretionary
participation feature.
The Board expects to
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Financial statement
presentation
At the October meeting, the board continued
its deliberations on the proposals in the discussion paper
Preliminary Views on Financial Statement Presentation.
Specifically, the board considered:
- the classification of items of other comprehensive
income on the statement of comprehensive income (agenda
paper 5A);
- the allocation of income taxes on the statement of
comprehensive income and the presentation of income taxes on
the statement of financial position and the statement of
cash flows (agenda paper 5B); and
- the disaggregation of items of income and expense by
both function and nature on the statement of comprehensive
income (agenda paper 5C).
Classification of
items of other comprehensive income
The discussion
paper proposes that items of other comprehensive income should
be presented in a separate section that is displayed with
prominence equal to that of all the other sections. It further
states that for each item in other comprehensive income
(except a foreign currency translation adjustment on a
consolidated subsidiary and proportionately consolidated joint
ventures), an entity should identify and indicate in the
statement of comprehensive income whether the item relates to
(or will relate to) an operating activity, investing activity,
financing asset or financing liability. The Board tentatively
decided to retain that proposal in the exposure draft.
Allocation and presentation of income taxes
The discussion paper proposes that an entity should
apply existing requirements for allocating and presenting
income taxes in the statement of comprehensive income. This
may result in an entity presenting income tax expense or
benefit in the discontinued operations and other comprehensive
income sections of the statement of comprehensive income, in
addition to determining the income tax effect for continuing
operations. An entity should not allocate income taxes to
either the business or financing sections, or to categories
within those sections. The Board tentatively decided:
- to retain the proposal in the discussion paper that an
entity should apply existing requirements for allocating and
presenting income taxes in the statement of comprehensive
income, including the requirement that an entity must
present components of other comprehensive income either (i)
net of related tax effects or (ii) before related tax
effects.
- to retain the existing requirement that an entity must
disclose the amount of income tax allocated to each
component of other comprehensive income.
- to retain the proposal in the discussion paper that an
entity must present current and deferred income tax assets
and liabilities recognised in accordance with IFRSs or US
GAAP, and related cash flows, in an income tax section on
the statement of financial position and the statement of
cash flows.
Disaggregation by function and
nature
The discussion paper proposes that, within
each category on the statement of comprehensive income, an
entity must disaggregate its items of income and expense by
function. Function refers to the primary
activities in which an entity is engaged, such as selling
goods, providing services, manufacturing, advertising,
marketing, business development or administration. The
discussion paper also proposes that each of those functions be
further disaggregated by nature to the extent that
information enhances the usefulness of the SCI in predicting
an entity's future cash flows. If that by-nature presentation
is impractical on the face of the SCI, an entity should
present the information in the notes to financial statements.
Nature refers to the economic characteristics or attributes
that distinguish assets, liabilities, and income and expense
items that respond differently to similar economic events. In
an education session, the Board considered:
- whether to replace the discussion paper proposal with a
disaggregation principle that requires an entity to consider
disaggregation by-function, nature and measurement bases in
the financial statements as a whole.
- whether an entity that has only one reportable segment
should present its disaggregated information on the face of
its primary statements.
- whether an entity that has more than one reportable
segment should present its disaggregated information in its
segment note.
The Board did not make a decision
on the proposals for disaggregation at the October meeting.
The presentation of disaggregated information will be
reconsidered at the October joint meeting with the FASB.
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Insurance contractsThe
Board discussed:
- unbundling
- deposit floor
- presenting income and expense
Unbundling
Some insurance
contracts contain not just an insurance component, but also an
investment (or financial) component or a service component (or
both). The Board discussed whether an insurer should recognise
and measure the components of a contract as if they were
separate contracts (unbundling). The staff recommended an
approach that depends on whether the components of a contract
are interdependent. The Board directed the staff:
- to develop a more detailed explanation of the notion of
interdependence.
- to clarify how this notion relates to the notion of
contract segmentation being discussed in the project on
revenue recognition.
- to consider whether this notion is similar to the notion
that the fair value of a compound financial instrument may
not equal the sum of the fair values of its
components.
The Board will return to the topic of
unbundling at a future meeting.
Deposit
floor
In May 2009, the Board decided tentatively
that the measurement of insurance contracts should include the
expected (ie probability-weighted) cash flows resulting from
those contracts, including the expected value of those cash
flows whose amount or timing depends on whether policyholders
exercise options in existing contracts (policyholder
behaviour). The Board reconfirmed that decision. Applying that
decision at this meeting, the Board confirmed that no deposit
floor should apply in measuring insurance contracts. The staff
will develop more specific proposals for identifying the
boundary of an existing contract. Among other things, those
proposals will consider:
- contracts known in some countries as 'universal life
contracts'
- contracts that include an option for the policyholder to
buy future insurance coverage.
Presenting income and expense
The Board
also discussed how the performance statement (statement of
comprehensive income) should present income and expense
derived from insurance contracts. The main purpose of this
discussion was to consider when (if ever) an insurer should
recognise premium receipts as revenue and when (if ever) an
insurer should recognise them as deposit receipts. The purpose
of this discussion was educational and no decisions were
made.
Next steps
The Board will
continue its discussion of this project at the joint meeting
with the FASB on 28 October.
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Liabilities: amendments
to IAS 37The Board discussed whether to re-expose for
further comment its revised proposals for a new standard to
replace IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. It decided tentatively to:
- publish a limited-scope document, exposing for comment
its proposals to clarify the measurement requirements. The
proposed clarifications are set out in Section 4.1 of Agenda
Paper 7A;
- post on its website as early as possible in the comment
period a working draft of the new standard, highlighting all
other changes to the previous proposals; and
- in the published exposure document, alert constituents
to the existence of the working draft standard and the
nature of the other changes.
The Board aims to
publish the limited-scope re-exposure document in December
2009 and to post the working draft standard on its website in
January 2010.
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Other comprehensive incomeThe IASB
and FASB projects on financial instruments are likely to add
more items to other comprehensive income (OCI), making it
increasingly difficult to compare an income statement prepared
in accordance with the US GAAP with one prepared in accordance
with IFRS. The main difficulty is the choice entities have in
how and where they present components of OCI. Eliminating that
choice will make it easier to compare income statements
prepared in accordance with IFRS and will help identify points
of difference between IFRS and US GAAP.
The Board
therefore considered whether financial reporting would be
improved by removing some of the options and choices
available in IAS 1 Presentation of Financial
Statements to entities applying IFRS.
The
Board could foresee that if it supported the proposals to
amend IAS 1 it would be preferable for the IASB and FASB to
develop together exposure drafts to amend their respective
requirements. This would allow the boards to expose the
proposals at the same time and would provide potential
respondents with the opportunity to see how such a proposal
could help make it easier to compare IFRS and US GAAP
compliant financial statements.
The staff emphasised,
and the Board agreed, that nothing in the proposals would
change which items can or must be presented in OCI or whether
an item must be reclassified (ie recycled) upon derecognition.
The main aspects of the proposals are simply to remove
options.
The Board tentatively decided to eliminate the
option in paragraph 81 of IAS 1 that permits an entity to
present all items of income and expense recognised in a period
in two statements: a statement displaying components of profit
or loss (separate income statement) and a second statement
beginning with profit or loss and displaying components of
other comprehensive income (statement of comprehensive
income). On this basis, entities would be required to present
one statement of comprehensive income.
In making this
tentative decision, the Board reaffirmed the current
requirement in IAS 1 that the single statement of
comprehensive income must be displayed with two sections:
profit or loss and other comprehensive income. An entity would
be able to change the title of these sections (as long as the
meaning is clear) but the components of income displayed in
each section may not be changed.
The Board also decided
that:
- Components of OCI that will not be reclassified into
profit or loss in future periods be displayed together and
that components of OCI that might be reclassified into
profit or loss in future periods be displayed together.
- The choice available to entities to report components of
OCI either net or before income tax effects be retained.
However, if an entity reports components of OCI before tax
effects it must report the aggregate amount of income tax
for each of the aggregate of components of OCI that will not
be reclassified into profit or loss in future periods and
components of OCI that might be reclassified into profit or
loss.
Next steps
The Board will
discuss this topic with the FASB at its joint meeting 26-28
October.
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page
Post-employment
benefitsThe Board discussed the following possible
amendments to IFRIC 14 IAS 19 - The Limit on a Defined
Benefit Asset, Minimum Funding Requirements and their
Interaction and IAS 19 Employee Benefits:
- prepayments of a minimum funding requirement
- discount rate for employee benefits
- termination benefits
Prepayments of a
Minimum Funding Requirement
The Board
discussed responses to its exposure draft (ED) Prepayments
of a Minimum Funding Requirement (Amendments to IFRS 14),
published in May 2009, and tentatively:
- confirmed the scope of the project as proposed in the ED
- confirmed the definitions proposed in the ED. However,
the Board tentatively decided to propose clarifying that a
minimum funding requirement must be enforceable in the
forthcoming ED of proposed amendments to IAS 19.
- reinstated paragraph 22 of IFRIC 14.
- confirmed the transitional arrangements as proposed in
the ED.
- decided to require entities to apply the amendments for
annual periods beginning on or after 1 January 2011 with
early adoption permitted.
Discount Rate for
Employee Benefits
The Board discussed responses
to the exposure draft Discount Rate for Employee Benefits
(Amendments to IAS 19), published in August 2009. The
responses to the ED indicated that the proposed amendment
raised more complex issues than had been expected. The Board
therefore decided to adhere to its original plan to address
measurement issues only in the context of a fundamental
review. Thus, the Board decided not to proceed with the
amendment. This means that entities will still need to refer
to a government bond rate when there is no deep market in
high-quality corporate bonds.
Termination
Benefits
In June 2005, the Board published an
Exposure Draft of Amendments to IAS 19, dealing with the
accounting for termination benefits, together with proposed
amendments to IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. At this meeting, the Board tentatively:
- confirmed its previous decisions on termination
benefits.
- decided that entities should apply the amendments for
annual periods beginning on or after 1 January 2011 with
early adoption permitted.
- decided it would publish the amendments to IAS 19
relating to termination benefits together with the
amendments to IFRIC 14.
Next steps
The Board intends to publish final amendments to IFRIC
14 and IAS 19 in December 2009.
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Future Board meetings
The Board will meet in public session on the following
dates in 2009. Meetings take place in London, UK, unless
otherwise noted.26-28 October (Joint meeting with FASB,
Norwalk, US)
16-20 November
14-18 December
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