The International Accounting Standards Board met in Norwalk, Connecticut, US, on 17-20 September. In addition, the board met the US Financial Accounting Standards Board; no decisions were made at this meeting.Meeting with FASB Convergence
The two boards discussed strategies for achieving and maintaining consistency between their two sets of standards. They affirmed their commitment to achieving convergence, and expressed general support for a proposed short-term project to eliminate many of the existing differences. General support was expressed for coordinating technical agendas to avoid creating new differences.Financial performance
The boards discussed their respective projects. The discussion focused on the basis for making two primary classifications for the display of items (components) on the face of the statement of comprehensive income. Each board expressed support for further development of the definitions or descriptions for making those distinctions and the need to learn more about the ability to implement those distinctions (tentatively referred to as 'financing' and 'operating', and 'income flows' and 'valuation judgments'. Each board encouraged their staff to work on defining key terms and to continue cooperative efforts on the project.Business combinations - Phase 2
The boards discussed their progress and plans for their joint project on purchase method procedures/application. While they had reached consistent decisions on the fundamental working principle and other major issues, they had diverged on certain issues. The discussion focused on gaining a fuller understanding of the underlying reasons for those differences. They also discussed their next steps for the joint project, including plans for addressing remaining issues (such as matters related to non-controlling interests in an acquired entity) and timing for their exposure drafts.Revenue recognition
The boards considered pursuing their revenue recognition projects jointly. They discussed shortcomings of the existing conceptual criteria for revenue recognition. They also discussed examples illustrating the differences between a revenue recognition approach that focuses on changes in assets and liabilities (consistent with FASB Concepts Statement No 6, Elements of Financial Statements, and the definition of income in the IASB Framework for the Preparation and Presentation of Financial Statements) and an approach that focuses on an earnings process that overrides changes in assets and liabilities (consistent with FASB Concepts Statement No 5, Recognition and Measurement in Financial Statements of Business Enterprises, and the acknowledgement in the IASB Framework that being earned is an application of its recognition criteria). The boards directed staff to explore the use of an approach that was focused on changes in assets and liabilities.Technical session Business combinations - Phase 2
Measurement date for equity instruments as consideration. The IASB reconsidered the measurement date for equity instruments issued as consideration in a business combination and agreed that there were valid arguments for measuring them at the agreement date or the acquisition date. However, in the interests of convergence, the board agreed that the equity instruments should be measured at the instruments' fair value at the acquisition date, ie, the date on which control over the acquiree is transferred to the acquirer.
Comparison of IASB and FASB conclusions in Phases 1 and 2. The board noted that some of the issues on which convergence had yet to be achieved arise as a consequence of existing guidance on matters other than business combinations. These 'inherited' differences need to be considered by the IASB and the FASB in future projects that address directly the sources of the issues (eg, in a project on impairment). It was noted that some of these differences might be addressed in the convergence project.
Fair value measurement issues related to acquired assets and assumed liabilities in a business combination. The IASB considered the implications of the hierarcy for determining the fair value of inventory, which was agreed in June for determining the initial fair values to be recognised at the date of acquisition for identifiable assets acquired and liabilities assumed in a business combination. It was concluded that it was necessary for fair value to be determined for all identifiable assets by focusing on their place and condition and assessing the amounts for which they would be exchanged between willing buyers and sellers in the absence of a business combination, given those characteristics.
The role of credit risk. The board considered whether, to ensure proper application of the fair value hierarchy, application guidance should be provided in the IFRS to clarify explicitly that, on initial recognition, the fair value of a liability assumed in a business combination reflects the credit risk applicable to that liability. It was decided that the application guidance tentatively agreed at its July board meeting should be amended.Convergence
It was agreed to add to its active agenda a shortterm joint project with the FASB aimed at eliminating those differences between the IASB and FASB standards that might be capable of resolution in a short time because a high quality solution is available from existing international and national accounting standards. The IASB also resolved to work on a range of individual projects in the medium term that would reduce further those differences.
Short-term convergence project. It was agreed that if convergence in the short term on any particular matter proved to be too difficult, consideration of the topic would be deferred to a discrete project.
• Reduction of differences arising from proposals in the IASB improvements project (to be FASB-led, providing input to the IASB's redeliberation of the improvements project): classification of liabilities on refinancing; classification of liabilities on breach of borrowing agreement; asset exchanges; voluntary change in accounting policies; improvements to, Financial Instruments: Disclosure and Presentation, and , Financial Instruments: Recognition and Measurement; and transitional requirements.
• Reduction of differences between the FASB and IASB standards arising from relatively recently issued FASB statements: discontinued activities; accounting for costs associated with exit or disposal activities; and government grants.
• Reduction of other differences between FASB and IASB standards: inventories - idle capacity and spoilage; accounting policies, changes in accounting estimates and errors; depreciation on assets held for disposal or idle assets; income taxes - application of the temporary difference approach; construction contracts (this would provide interim guidance pending completion of the revenue project); hyperinflationary economies; joint ventures - definitions and proportionate consolidation method; and interim financial reporting.
Post-employment benefits. In determining the scope of the convergence project on this topic, the IASB confirmed that the following differences between, Employee Benefits, and the related FASB standards need not be considered by the IASB: measurement of plan assets for the calculation of the expected return on assets; the measurement date; recognition of vested past service cost; settlements and curtailments; and recognition of an additional minimum liability.
The IASB agreed to consider further including the following items in the project's scope:
• the split of the total return on plan assets between an expected return set at the beginning of the period and an unexpected element;
• whether the plan assets and plan liabilities should be reported gross rather than net in the entity's balance sheet;
• additional disclosure about the plan assets (depending on the outcome of the above matters).
The board 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. In measuring those rights, the following hierarchy should be followed:
• value the entity's rights to refunds and reductions in future contributions. If this is less than the surplus, then
• value the entity's rights to fund increased benefits to current and future employees. No value should be ascribed to the entity's right to fund increased benefits to past employees. If these two items together are less than the surplus, then
• value the entity's right not to fund future losses in the plan to the extent that the losses will be absorbed by the surplus.
, Employee Benefits. The IASB considered the differences between the guidance provided in and US FAS 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions, and decided that:
• to include in an appendix or implementation guidance toguidance on the identification of a substantive non-pension post-employment benefit plan similar to the guidance in FAS 106;
• to include in an appendix or implementation guidance toguidance on the selection of assumptions unique to health care post-employment benefit plans similar to the requirements and guidance in FAS 106, to the extent that the requirements and guidance in FAS 106 do not conflict with ;
• to amendto require the recognition of potential changes in state health care benefits where the state benefits have been ' substantively enacted' (rather than the present requirement for reliable prediction), similar to the requirements of , Income Taxes;
• to require an analysis of the sensitivity of health care post-employment benefit plans to changes in the assumed health care cost trend rates;
• to review whether the sensitivity of other post-employment benefits plans to key assumptions such as inflation should be disclosed in accordance with the proposals in(draft), Presentation of Financial Statements;
• to require the separate disclosure of postemployment-benefit plans where the plans are subject to materially different risks, instead of the present encouragement of such disclosures.Insurance contracts
The IASB discussed Phase 1 of the project (in May, it had been decided to split this project into two phases so that insurers would be able implement the first phase by 2005).
Phase 1 will include the following components:
• presentation and disclosure;
• elimination of a limited number of existing practices that are incompatible with the IASB Framework;
• a review of the implications for entities issuing insurance contracts of the hierarchy of pronouncements that an entity is required to consider in the absence of an IFRS that specifically applies to an item. (The IASB will consider exempting insurance contracts temporarily from this requirement, provided that phase 2 proceeds without delay.) All other IFRSs and the hierarchy will apply to entities that issue such contracts.
In addition, the board would consider how best to approach the application ofto some contracts issued by insurers that do not qualify as insurance contracts for accounting purposes. Some contracts contain features (such as renewal and cancellation options and participation features) that the board would need to address in the second phase because they are found in many insurance contracts. The board noted that these features were also found in some contracts issued by financial institutions that are not insurers.
The staff agreed to conform definitions and scope exemptions related to insurance contracts throughout IFRSs and will investigate whether it is also feasible to deal in phase 1 with the derecognition of insurance contracts.
It was agreed that accounting by policyholders for insurance contracts is not a high priority and should not be included in phase 1 unless time permits.Reporting performance
The IASB discussed implementation issues concerning the financing category of the statement of comprehensive income. It tentatively agreed that:
• The financing category should report all interest expenses/unwinding of discount rates on all liabilities. This follows from 'financing' being expenses arising from the passage of time when settlement is deferred. All liabilities provide finance to the entity because all involve deferred settlement of the entity's obligations.
• There would be no need to go beyond the requirements of existing standards in measuring financing expenses.
• The financing category of the statement of comprehensive income should not include interest income. This is because such income is available to liability and equity claimants. In reaching this decision, it was noted that an entity's treasury function generally manages assets as well as liabilities, but that the financing category will relate only to liabilities. A related concern arises from the close relation between pension assets and pension obligations. Therefore, the IASB decided that income arising on financial assets should be reported separately within the 'operating/business' section of the statement of comprehensive income.
• Because of the above decisions, there was no need for the concept of 'net debt'.Share-based payment
The IASB discussed various issues that arose during the drafting of the exposure draft. These included:
• The board confirmed an earlier tentative decision that, to calculate the deemed fair value per unit of employee service received during the vesting period, the fair value of the equity instruments granted should be divided by the number of units of service expected to be received, as at grant date. The IASB also discussed and rejected an alternative method based on allocating the amount of expected benefits at grant date, but agreed that respondents to the ED should be asked for comments on both methods. The board also agreed that the appendix to the ED should include illustrative examples of an option or share grant with performance conditions.
• The board confirmed its earlier tentative decision that all the tax effects of share-based payment transactions should be recognised in the income statement.
• It was tentatively agreed that entities applying the IFRS for the first time should be permitted to measure existing liabilities for vested share appreciation rights (and other similar liabilities) at intrinsic value rather than fair value.
• The board discussed and confirmed its earlier tentative decision that if a share or option grant is cancelled or repurchased during the vesting period (other than individual cancellations cause by the employees' departure), the entity should continue to account for services received during the vesting period, using the grant date, fair value measurement method.
• It was tentatively agreed that the ED's scope should include situations in which a shareholder transfers equity instruments direct to the employees (or other parties who have supplied goods or services to the entity).
• The board tentatively agreed that the scope should include all types of goods, including inventories, consumables, property, plant and equipment, intangible assets and other nonfinancial assets.
The IASB also discussed the ED's draft disclosures. It noted that before the IFRS is finalised, it would reconsider the required disclosure along with other proposals in the ED in the light of comments received from respondents to the ED.