IASB Update

7/30/2019 IASB Update

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May 2005

The International Accounting Standards

Board met in London on 16 18 May,when it discussed:

Fair value option

Insurance contracts (phase II)

Measurement

Accounting Standards for Small andMedium-sized Entities

Performance reporting

Conceptual Framework

ED 7Financial Instruments:Disclosures

Amendments to IAS 37 Proposed IFRIC Interpretation

Waste Electrical and ElectronicEquipment

IFRIC D11Changes in Contributionsto Employee Share Purchase Plans(ESPP)

Clarification regarding IAS 12

Fair value opt ion

The Board discussed comments receivedfrom several insurers about the

comparative financial information anentity may provide when it first appliesthe amendments to the fair value optionin IAS 39Financial Instruments:Recognition and Measurement. TheBoard reaffirmed its previous decisionsin this area. The Board expects topublish the final amendments in midJune 2005.

Insurance contracts(phase II)

The Board discussed various approachesto accounting for non-life insurancecontracts. The Board decided to exploretwo approaches in parallel for the timebeing, until it determines the basis onwhich one should be selected. The twoapproaches:

are identical in their treatment of theclaims liability, in other words, theliability to pay valid claims forinsured events that havealreadyoccurred, including claims incurred

but not reported (IBNR). differ in their treatment of the stand-

ready obligation to pay valid claimsfor futureinsured events arisingunder existing contracts, in other

words, the obligation relating to the

unexpired portion of risk coverage. apply existing IFRSs (eg IAS 39) for

assets held by insurers.

Under both approaches, non-lifeinsurance claims liabilities would:

reflect current unbiased estimates offuture cash flows. The Boarddecided that the project should clarifythe measurement objective forinsurance liabilities and give highlevel guidance on techniques forestimating the number and amount of

claims arising under insurancecontracts, but should not givedetailed operational guidance.

reflect the time value of money. Inother words, discounting would berequired for all non-life claimsliabilities. There would be nospecific exemption for liabilities thatmeet particular criteria. Normalmateriality criteria would apply.

include adjustments to reflect risk.Further discussion will be required onmethods for determining these

adjustments.The two approaches differ in theirtreatment of the stand-ready obligation topay valid claims for future insured eventsarising under existing contracts:

Under one approach, that stand-readyobligation would be measured as theunearned portion of the premium,less deferred acquisition costs. TheBoard has not yet discussed whetherthe deferred acquisition costs wouldbe presented as an asset or as a

deduction from the liability. Theunearned premium (with relateddeferred acquisition costs) would besubject to a liability adequacy test.This test would involve discountingand include adjustments to reflectrisk.

The other approach is similar to anapproach the Board has explored inthe revenue project: the stand-readyobligation would be measured in thesame way as claims liabilities. Thisapproach reflects both downside

and upside adjustments, whereasthe first approach reflects onlydownside adjustments.

Next steps

The Insurance Working Group meetsnext on 26 and 27 July in London. Thatmeeting is likely to concentrate on lifeinsurance accounting topics, but mayalso include some discussion of non-lifetopics. In addition, the staff expects thatthe Board will begin educational sessionson life insurance soon, perhaps at theJuly meeting.

Measurement

The Board considered a Discussion

Paper, Measurement Bases for FinancialAccounting: Measurement on InitialRecognition, prepared by the staff of theCanadian Accounting Standards Board(AcSB) at the IASBs request. TheBoard was asked to decide whether:

the paper identifies and discusses theissues appropriately

the Invitation to Comment positionsthe paper appropriately

the questions in the Invitation toComment will provide the Boardwith feedback that will be useful forfuture standard-setting activities.

The Board decided to supportpublication of the paper, provided thatthe Summary/Introduction:

clarifies that the views in the paperare those of the AcSB staff. Becausethe Board has not yet deliberated theissues, it has not yet formed a viewon them

(continued)

Copyright IASB Update is publishedafter every IASB meeting by theInternational Account ing StandardsBoard, 30 Cannon Street, LondonEC4M 6XH, United KingdomEmail: [email protected]: www.iasb.org

All decisions reported in IASB Updateare tentative unless otherwiseindicated.

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ISSN 1474-2675
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Measurement (...continued) explains the context of the paper relative to the Boards

Conceptual Framework project

notes that the papers recommendations differ in somerespects from the tentative decisions made to date by theFASB in its project on fair value measurements, anddescribes how the IASB is using the FASBs ExposureDraftFair Value Measurements in its project activities.

Accounting Standards for Smal l andMedium-sized Entities

Definition of an SME

The Board has previously defined SMEs as entities that (a) donot have public accountability and (b) publish general purposefinancial statements for external users. Their definition willprovide a frame of reference in which the Board can makedecisions in this project.

Public accountabilityThe Board confirmed its previous decisions that an entity haspublic accountability if:

its securities are publicly traded

it holds assets in a fiduciary capacity (such as a bank)

it is a public utility, or

it is economically significant in its home country.

External users

The Board agreed that paragraph 9 of the IASB Framework isapplicable to defining the external users of SME generalpurpose financial statements (ie present and potential investors,employees, lenders, suppliers and other trade creditors,customers, governments and their agencies and the public).The Board asked the staff to to make clear that owner-managers, tax authorities, and non-securities governmentregulators are not included in the Framework definition ofexternal users. In an SME context, external users wouldnormally include owners who are not involved in managing thebusiness, existing and potential creditors (lenders andsuppliers), and credit rating agencies.

General purpose financial statements

IAS 1Presentation of Financial Statementsdefineds thesestatements: General purpose financial statements are thoseintended to meet the needs of users who are not in a position to

demand reports tailored to meet their particular informationneeds. The Board agreed that this definition is appropriate inan SME context.

Components of Financial Statements

The Board discussed various issues relating to components offinancial statements for SMEs and concluded that the plannedstaff questionnaire on presentation and disclosure should inviteviews on the following issues:

Whether a complete set of financial statements of an SMEshould include a cash flow statement. If so, whether thedirect or indirect method of presenting operating cash flowsbetter meets the needs of users of SME financial statements,

and what are the cost-benefit considerations of each format. Which format of the statement of changes in equity is most

appropriate for SMEs in light of the Boards current project

on Performance Reporting. The Board anticipates that anExposure Draft on the first phase of the PerformanceReporting project may be issued at about the same time asan Exposure Draft of SME Standards.

Whether an SME that is a controlled or jointly controlledentity should be required to be included in combinedfinancial statements with all other entities that are under thecommon control of the same individual.

Whether a parent or other entity that jointly controls anSME should be required to present consolidating financialstatements that show, in separate columns, financialinformation for each entity in the combined group, plus acolumn of eliminating entries (consolidation adjustments)and a consolidated total column.

Whether an SME that itself has subsidiaries should berequired to issue consolidated financial statements.

Whether the disclosures required by IAS 24Related PartyDisclosures should be augmented for SMEs, and whetherdisclosures about major dependencies (such as dependenceon a major customer or vendor) may need to be added for

SMEs.

Performance Report ing

The Board decided not to amend IAS 33Earnings per Shareinthe context of the single statement of earnings andcomprehensive income that is being proposed as part of theexposure draft for Segment A of the project. The Boardconfirmed that:

entities will be permitted, but not required, to disclosecomprehensive income per share in the notes as described inparagraph 73 of IAS 33.

earnings per share will continue to be presented on the faceof the statement of earnings and comprehensive income asrequired in paragraph 66 of IAS 33.

entities will disclose the weighted average number of sharesused as the denominator in calculating earnings per share inthe notes as described in paragraph 70 of IAS 33.

Conceptual Framework

The Board continued its deliberations on its joint IASB/FASBconceptual framework project. The Board discussed issuesrelating to some of the qualitative characteristics of accountinginformation. The Board reached the following conclusions:

Relevanceis an essential qualitative characteristic. To berelevant, information must be capable of making adifference in the economic decisions of users by helpingthem evaluate the effect of past and present events on futurenet cash inflows (predictive value) or confirm or correctprevious evaluations (confirmatory value). Also, theinformation must be available when the users need it(timeliness).

Accounting information haspredictive valueif users use it,or could use it, to make predictions. It is not intended initself as a prediction, nor as synonomous with statisticalpredictability or persistence.

Faithful representationof real-world economic phenomenais an essential qualitative characteristic, which includescapturing the substance of those economic phenomena.

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Faithful representation also includes the quality ofcompleteness. The common conceptual framework willneed to discuss thoroughly what this qualitativecharacteristic means, and what it does not mean.

Financial information needs to beneutral free from biasintended to influence a decision or outcome. To that end,the common conceptual framework should no longerinclude conservatism or prudence among the desirablequalitative characteristics of accounting information.

However, the framework should note the continuing need tobe careful in the face of uncertainty.

Financial information needs to beverifiableto provideassurance to users that the information faithfully representswhat it purports to represent, and that the information is freefrom material error, complete, and neutral. Descriptionsand measures that can be directly verified throughconsensus among observers are preferable to descriptions ormeasures that can only be indirectly verified.

Representations are faithful there is correspondence oragreement between the accounting measures or descriptionsin financial reports and the economic phenomena theypurport to represent when the measures and descriptionsare verifiable, and the measuring or describing is done in aneutral manner. Therefore, faithful representation requirescompleteness, not subordinating substance to form,verifiability and neutrality. Consequently, the commonframework should drop the widely misinterpreted termreliabilityfrom the qualitative characteristics, replacing itwith faithful representation.

Although empirical research may provide evidence useful instandard-settingdecisions, for example, in assessing trade-offs between desirable qualities, the conceptual frameworkproject should not seek to develop empirical measures offaithful representation or its component qualities.

The FASB will discuss these issues at its 25 May meeting. TheBoards plan to discuss other qualitative characteristics andtrade-offs and other interactions between qualitativecharacteristics at meetings in June and July.

ED 7 Financial Instruments:Disclosures

Amendments to IFRS 4 Insurance contracts

The Board decided:

to finalise IFRS 7 in two parts. The main part will bepublished in July 2005 as planned, and the amendments to

IFRS 4s implementation guidance is expected to bepublished later this year.

to extend the option in paragraph 45 of ED 7 so that insurersmay provide a sensitivity analysis based on a value-basedtechnique (such as embedded value) if the entitysmanagement prepares such a sensitivity analysis and uses itto manage financial risks.

to require entities to provide sensitivity analyses coveringthe whole of their business, but to permit them to providedifferent types of sensitivity analysis for different classes offinancial instruments. The Board noted that this decisionaffects all entities, not just insurers.

not to explore at this time alternative disclosures aboutliquidity risk.

to clarify in the implementation guidance to IFRS 4 that:

an entity that measures insurance liabilities usingassumptions imposed by a regulator (regardless ofwhether the related risk variables may vary with marketrisks) should comply with the requirement to provide asensitivity analysis by disclosing how a reasonablypossible change in the related risk variable would affectprofit or loss or equity if such a change were applied tothe regulator-set locked-in assumption. The Board alsodecided to require that if an entity did this, it should also

provide a narrative description that explains thelimitations of this analysis, including that the regulatormay not vary the locked-in assumptions in response tothe reasonably possible changes in market conditions.

if a reasonably possible change in the risk variablewould not trigger the liability adequacy test, there maybe no effect on profit or loss or equity to disclose in thesensitivity analysis relating to that risk variable.

if a reasonably possible change in the risk variablewould trigger the liability adequacy test, the entityshould disclose the effect on profit or loss or equity fromthe resulting change in the measurement of the liability.

the sensitivity analysis permits, but does not require,entities to explain either qualitatively or quantitatively,the potential effect of future management actions thatmay offset the effect of the disclosed changes in the riskvariable under consideration. Entities might provide aqualitative description of actions available to it.

Day 1 profit disc losures

The Board decided to confirm that it would require disclosuresabout day 1 profits. The Board also decided that it would notformally expose the disclosures for further public comment, butthat any comments will be considered by the staff if they arereceived before 1 June 2005.

Amendments to IAS 37

The Board considered some issues that arose during review of adraft of the exposure draft of proposed amendments to IAS 37Provisions, Contingent Liabilities and Contingent Assets.

Terminology

The Board decided to clarify that all non-financial liabilitiesthat are not within the scope of other Standards (for example,IAS 11Construction Contracts, IAS 12 Income Taxes, IAS 18Revenueand IAS 39) are within the scope of IAS 37.Accordingly, the Board decided not to use provision as adefined term in IAS 37 and instead use the term non-financial

liability. The Board noted that in some jurisdictions, someclasses of liabilities are referred to as provisions and entitiesmay continue to use that term in financial statements.

The Board also decided to eliminate the terms contingentasset and contingent liability. The Board had previouslydecided that assets arise only from non-contingent (orunconditional) rights and liabilities from non-contingentobligations. Therefore, something that is an asset or a liabilitycannot be described as being contingent. In many cases, itemscurrently described as contingent assets or contingent liabilitiessatisfy theFrameworkdefinition of an asset or a liability. Thisis because the right embodied in the asset or obligation in theliability is unconditional, even if the amount or timing of

economic benefits that will flow to or from the entity iscontingent (or conditional) on the occurrence or non-occurrenceof one or more uncertain future events. In the case of liabilities

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within the scope of IAS 37, the Board had previously decidedthat uncertainty about the future event is reflected in themeasurement of the liability.

As a result of eliminating these terms, the Board decided thatthe title of the revised Standard should be changed to Non-financial L iabilities.

Disclosure

The Board decided:

to eliminate the requirement to disclose contingent assetsand contingent liabilities. The Board noted that when anentity has a non-financial liability for which the amountrequired in settlement is contingent upon the occurrence ornon-occurrence of a future event, the disclosure required byIAS 37 for the non-financial liability would captureinformation presently disclosed about the contingentliability. The Board also noted that IAS 1Presentation ofFinancial Statementsrequires disclosure of key sources ofestimation uncertainty.

to require an entity to present:

(a) for each class of non-financial liability, the carryingamount of the liability at the period end together with a

description of the obligation, and(b) for any class of non-financial liability with estimation

uncertainty, the other disclosures required by theexisting version of IAS 37.

to eliminate the exemption in the existing version of IAS 37from presenting comparative information.

Transition

The Board decided that the revised IAS 37 should be appliedfrom the start of the first annual period beginning on or after 1January 2007. Comparative information would not be restated.The Board decided that this requirement would also apply tofirst-time adopters of IFRSs.

Illustrative examples

The Board decided to expand the illustrative examplesaccompanying IAS 37 to provide more measurement guidance,particularly for unconditional obligations (and hence aliability), for which the amount required to settle that obligationis contingent on the occurrence or non-occurrence of one ormore uncertain future events.

Proposed IFRIC Interpretation WasteElectr ical and Electronic Equipment

In November 2004, the IFRIC issued a draft Interpretation, D10Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment. At this meeting,the Board received a request from the IFRIC to approve forissue a final Interpretation prepared after a review of theresponses to D10.

The IFRIC Consensus remained essentially unchanged fromD10. Material had been added to clarify the distinctionsbetween the position at the dates of (i) manufacture or sale, (ii)market participation in the measurement period and (iii)incurrence of waste management expenditures. The Basis forConclusions included an encouragement to disclose expectedfuture obligations for waste management costs.

The Board concluded that even though the liability addressed inthe Concensus is highly specific, there are precedents forissuing guidance in such situations, and approval of the

Interpretation should not be withheld for that reason. It alsoconcluded that, ultimately, the Interpretation should besubsumed into the revision of IAS 37 (see earlier article).

The Board asked the IFRIC to relocate the material in the Basisfor Conclusions that describes background rather than therationale for the Consensus to the Interpretation. In particular,statements of what was not covered in the Interpretation neededto be in the main text. It also asked IFRIC to remove theencouragement to disclose future obligations. It is not the

Boards policy to include encouragement in its Standards andInterpretations. With these modifications, the Board approvedthe Interpretation for issue.

D11 Changes in Contributions toEmployee Share Purchase Plans(ESPP)In December 2004, the IFRIC published a draft InterpretationD11Changes in Contributions to Employee Share PurchasePlans. The IFRIC recently considered the comments receivedfrom respondents to D11, but was unable to reach a consensus

on the appropriate accounting treatment of a cessation ofcontributions to an ESPP.

In particular, the IFRIC did not reach a conclusion on whetherthe event should be:

accounted for as a cancellation, in which case the entitywould recognise immediately the amount that wouldotherwise be recognised over the remainder of the vestingperiod (the treatment proposed in D11), or

disregarded, in which case the entity would continue torecognise the services received from that employee over theremainder of the vesting period.

Therefore, the IFRIC referred the matter to the Board.

The Board concluded that a requirement to pay contributions toan ESPP is not a vesting condition under IFRS 2Share-basedPayment. It confirmed its agreement with the IFRIC that acessation of contributions is a failure to pay the exercise price,rather than a forfeiture.

The Board also confirmed that in developing IFRS 2 it did notintend that the requirements in IFRS 2 relating to cancellationswould apply only to cancellations by the entity.

The Board decided that an amendment should be proposed toIFRS 2 under which:

paragraph 28 of IFRS 2 would be amended as follows: theentity cancels or settles a grant of equity instruments is

cancelled or settled during the vesting period the definition of vesting conditions would be amended, as

follows:

(a) the first sentence of the definition to read, The serviceor performance conditions must be satisfied for thecounterparty to become entitled to receive cash, otherassets or equity instruments of the entity, under a share-based payment arrangement.

(b) the second sentence of the definition to read, Vestingconditions include comprise service conditions, whichrequire the other party to complete a specified period ofservice, and performance conditions, which require

specified performance targets to be met

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The Board observed that the IFRIC might wish to considerwhether the proposed amendment should be supported byadditional guidance to ensure its effective application.

Clarification

The April IASB Updatereported decisions concerning theamendment of IAS 12 to adopt the intraperiod tax allocationrequirements of SFAS 109. The amendments include the

deletion of paragraph 60 of IAS 12.

Meeting dates: 2005The Board will next meet in public session on the followingdates. Meetings take place in London, UK, unless otherwisenoted.

2024; 27 and 28

June

1822 July

1923 September

1721 October (joint with FASB), Norwalk, Connecticut, USA

10 and 11; 1418 November

1216 December

Includes a meeting with the Standards Advisory Council

Includes meetings with partner standard-setters

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IASB Update

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