IASB Meeting

Compiled by Lesley Bolton based on information supplied by the IASB (www.iasb.org.uk)

The International Accounting Standards Board met in Hong Kong on 12-14 November 2002.

Business combinations - Phase 2 Issues related to minority interests

The IASB considered two threshold issues related to minority interests:

Recognition of goodwill in the acquisition of less than a 100% interest in an equity. It was agreed that the full goodwill method should be used to recognise goodwill in the acquisition of less than a 100% controlling interest in the acquired entity. Under the full goodwill method, all the acquired entity's goodwill is recognised. Goodwill is measured as the difference between the fair value of the acquired entity as a whole and the fair values of all of its identifiable assets acquired and liabilities assumed at the date control is obtained.

The IASB also agreed that whichever side of the transaction provides clearer evidence - the consideration paid to acquire the controlling interest (assuming the control premium can be measured reliably) or the acquired entity's fair value - should be used to measure the fair value of the acquired entity as a whole. The direct measurement of the fair value of the acquired entity as a whole could be performed using, for example, an appraisal or some other valuation technique. The approach based on inferring the fair value of an acquired entity as a whole from the price paid could be used only in those circumstances in which a control premium is clearly identifiable and measurable sufficiently reliably.

Staff would be asked to explore whether implementation guidance was necessary in circumstances in which the fair value of the acquired entity as a whole is measured directly.

Nature and classification of minority interests in a consolidated balance sheet. The IASB agreed that minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet within equity separately from the parent shareholders' equity. The decision affirms a tentative conclusion that was proposed and exposed for comment in the IASB's May 2002 exposure draft of proposed Improvements to International Accounting Standards (see Accountancy, June 2002, p 96). Further minority interest issues were tabled for consideration at future meetings.

Contingent assets that are financial instruments not within IAS 39's scope

In April 2002, the IASB considered the treatment of contingent assets acquired and contingent liabilities assumed in a business combination.

Its decision on the subsequent accounting for the acquiree's contingent assets acquired and contingent liabilities assumed covered an acquiree's contingent liabilities that are financial instruments explicitly excluded from the scope of

IAS 39, Financial Instruments: Recognition and Measurement. Under this decision, such contingent liabilities should be subsequently remeasured at fair value. However, at that time the IASB did not consider the subsequent accounting for the acquiree's contingent assets that are financial instruments explicity excluded from the scope of IAS 39.

The IASB considered the subsequent accounting for such contingent assets and it was agreed to require that they should be remeasured at fair value after the business combination.

Comparison of IASB and US FASB conclusions

The IASB considered a paper prepared in response to the two boards' request at their joint meeting in September 2002, relating to differences between their conclusions in the purchase method application project. The paper:

•   Illustrates the differences arising because the boards diverged in their conclusions in the joint project.

•   Identifies the broad areas that need to be comprehensively addressed outside of the business combinations project for 'inherited' differences and indicates which of those differences would be addressed in the joint short-term convergence project.

It was noted that the illustration would be updated on an ongoing basis throughout the remainder of the project to help the boards assess the implications of those conclusions on which the boards have tentatively diverged.

Convergence Joint short-term project with FASB: IAS 35

The IASB considered issues relating to the possible convergence of IAS 35, Discontinuing Operations, with the presentation requirements in FAS 144, Accounting for the Impairment or Disposal of Long-lived Assets. The IASB agreed that IAS 35's presentation requirements should be amended to follow FAS 144 as closely as possible. It was agreed that the resulting revision should take the form of a new IFRS, rather than an amendment to IAS 35.

Post-employment benefits

Consolidation and balance sheet presentation issues. The IASB discussed whether defined benefit plans should be consolidated, what assets and liabilities arise from an entity's participation in a defined benefit plan and how they should be presented in the balance sheet. It was agreed that the question of whether and when defined benefit plans should be consolidated was too big an issue for the limited convergence project and should instead be addressed in the consolidations project. In the meantime it was agreed that the objective of

IAS 19, Employment Benefits, should be the recognition and measurement of the asset or liability that arises from the entity's interest in the plan. Following from this objective, the entity should recognise an asset representing the entity's rights over the use of the surplus (being the net asset in the defined benefit plan subject to the asset ceiling) or a liability representing its obligation to fund the deficit (being the net liability in the defined benefit plan).

Possible guidance on the asset ceiling. At its September 2002 meeting, the IASB considered whether there should be a limit on the amount that can be recognised as an asset in respect of a surplus in a defined benefit plan. It agreed that the principle to be followed was that the entity should recognise as an asset the rights the entity has to benefit from the surplus. It set out a hierarchy to be followed in such circumstances.

The entity's rights to refunds and reductions in future contributions. The board agreed:

•   The entity should determine the expected value of rights to refunds and reductions in future contributions.

•   The expected value of the entity's rights to reductions in future contributions should be calculated as: (a) the present value of the liability expected to arise from future service by current and future plan members, less both: (b) the present value of future employee contributions that would be expected if there were no surplus and (c) the present value of the minimum contributions that the entity is required to make despite the existence of the surplus.

•   In measuring items (a) and (b):

(i) the actuarial assumptions should be the same as those used to measure the defined benefit obligation, ie the best estimate.

(ii) The benefits promised under the plan should be assumed to be the same as those reflected in the measurement of the defined benefit obligation.

(iii) The assumptions about the size and demographic nature of the workforce should be consistent with management's budgets/forecasts. Beyond the period covered by the budgets/ forecasts, the workforce should be assumed to be steady unless there is external evidence to support different assumptions.

(iv) In measuring item (c), where the measurement basis underlying a requirement for the entity to make contributions is legally prescribed, the required contributions to be deducted in arriving at the asset should be based on that legally prescribed measurement basis.

(v) In measuring (a), (b) and (c), the discount rate should be the same as that required by

IAS 19 for the defined benefit obligation, without any adjustment for the uncertainty relating to reductions in future contributions.

•   The entity's rights to fund increased benefits to current and future employees.

•   In determining the value of the entity's rights to fund increased benefits to current and future employees:


IAS 19 should note that plan trustees might require increases in benefits to past members as well as current members and/or additional contributions to be made to the plan to cover such increases. Such requirements would affect the amount of the surplus that the entity had the right to use to give benefits to current (and future) members.

(ii) No asset should be recognised in respect of the entity's ability to fund increases in benefits to past employees.

(iii) The assumptions about the future size of the workforce should be consistent with those recommended in determining the value of the reductions in future contributions.

Improvements to existing IFRSs

The IASB considered comments received on its exposure draft of proposed Improvements to International Accounting Standards. Over 150 submissions were received. The board considered the comments received on five of the 12 standards addressed in the ED:

IAS 1, Presentation of Financial Statements; IAS 16, Property, Plant and Equipment; IAS 17, Leases; IAS 27, Consolidated and Separate Financial Statements; and IAS 40, Investment Property. Insurance contracts

The IASB discussed the following aspects of phase 1 of the insurance contracts project:

Investment contracts

Many insurers (both direct insurers and reinsurers) issue investment contracts. Under

IAS 39, the issuer would measure investment contracts at either amortised cost, or, if the issuer designates them at inception, at fair value.

The IASB discussed whether it should add further application guidance to

IAS 39 to clarify how insurers should apply the requirements of IAS 39 to clarify how insurers should apply the requirements of IAS 39 to investment contracts. It was concluded that no such guidance was needed.

However, the board also noted that while the application of

IAS 39 to the investment contracts is clear, it would represent a change for many insurers. Staff highlighted some of the topics in implementation guidance published with the ED for phase 1.

Transaction costs for some long-term investment contracts are proportionately much larger than for most other financial instruments. In addition, the revised definition of transaction costs under the proposed ED of improvements to

IAS 39 excludes all internal costs, including transaction commissions paid to employees. The board will consider the implications of these matters when it reviews the comment letters on the proposed improvements to IAS 39.

Financial assets backing investment contracts and insurance contracts. The IASB agreed that it should not:

•   Create a new category of financial assets (financial assets held to back insurance liabilities) that could be held at amortised cost.

•   Create new exemptions in

IAS 39 that would permit an insurer to continue following national GAAP (or US GAAP) temporarily for some investment contracts.

•   Prohibit so-called 'shadow accounting' adjustments in phase 1 for insurance contracts as defined under IFRSs. US insurers make such adjustments to some insurance liabilities that are measured on a basis reflecting realised investment gains and losses (among other things). These adjustments modify the measurement to reflect recognised but unrealised investment gains and losses.

•   Introduce 'shadow accounting' for investment contracts under

IAS 39. Under IAS 39, the measurement of investment contract liabilities is independent of the asset measurement.

Unbundling. Some insurance contracts contain both insurance components and investment components. The IASB tentatively agreed that an insurer should:

•   Unbundle deposit-like components from insurance contracts if the cash flows from the insurance component do not affect the cash flows from deposit-like component.

•   Treat the insurance component as an insurance contract.

•   Treat the deposit-like component as a financial liability or financial asset under

IAS 39 or, if appropriate, as funds under management. Among other things, this implies that the insurer should not recognise premium receipts for the investment component as revenue.

The IASB noted that some of the life insurance contracts that are known in some countries as universal life may have deposit-like components or investment management components that could require unbundling under the above criteria.

It agreed tentatively that it would not create additional unbundling requirements for these contracts.

Embedded derivatives.

IAS 39 requires an entity to separate an embedded derivative from the host contract and account for it separately if the following conditions are met:

•   The economic characteristics and risks of the embedded derivative are not closely related to the host contract's economic characteristics and risks.

•   A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative.

•   The hybrid (combined) instrument is not measured at fair value with changes in fair value reported in profit or loss.

Discussion was focused on the phrase 'closely related' in the first condition and the related examples in

IAS 39. It agreed to make several modifications to the versions of those examples that are set out in the June 2002 ED of improvements to IAS 39. The board also noted the consequences of existing guidance in IAS 39.

IASB staff are to consider whether it would be useful for the phase 1 ED to include examples of embedded derivatives, indicating whether

IAS 39 requires separate accounting for those derivatives. Liabilities and equity

The IASB considered an FASB paper, Liabilities and Equity: Comparison of FASB and IASB Positions. The paper identifies potential convergence issues between a proposed FASB statement of financial accounting standards on liabilities and equity and the ED of proposed amendments to

IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39. The proposed FASB statement would complete phase 1 of the FASB's project on liabilities and equity. Revenue recognition

The IASB discussed the application of an assets and liabilities approach to revenue recognition against the specific cases involving multipleelement revenue arrangements discussed in the US Emerging Issues Task Force's draft abstract, Accounting for Revenue Arrangements with Multiple Deliverables (EITF Issue no 00-21). It explored the similarities and differences between an assets and liabilities approach and the EITF approach (which focuses on when revenue is earned and whether delivering an element in an arrangement represents a separate earning process from delivery of other elements).

The board tentatively agreed that the case studies examined indicate that, in many cases, similar outcomes will result from applying either approach. It noted that applying an assets and liabilities approach has the following advantages over the EITF's approach:

•   It is not dependent on whether the delivered item is sold separately by any vendor or the customer could resell the deliverable.

•   The existence of rights of return does not have the potential to preclude the recognition of revenue for delivered items. However, the board noted that rights of return might create liabilities not discussed in the example cases.

•   When a delivered asset in a multiple-element arrangement is inseparable from the undelivered items, an assets and liabilities approach avoids the need to recognise a 'deferred debit' as an asset when the asset sacrificed is derecognised.

•   It measures the value of undelivered items by direct reference to a measurement attribute (eg, fair value) rather than through an allocation process. This means there is a specific measurement objective for liabilities for undelivered items, which assists reliable measurement of those liabilities, particularly after their initial recognition. It also avoids assuming the same margin on each inseparable deliverable in a multiple-element arrangement.

However, the IASB also noted that both the assets and liabilities approach and the EITF approach are dependent on the availability of reliable information about the fair values of assets and liabilities.

Among other things, the IASB tentatively agreed that, on the basis of its analysis of the case studies, the assets and liabilities approach to revenue recognition provided an appropriate analytical model for proceeding with this project.

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