Board Meeting Highlights
The International Accounting Standards Board met in London, UK, on 10-13 September 2001. Liaison standard setters were asked to comment on the potential elimination of the following choices in existing IFRS. A sub-committee of the Board has proposed that the Board eliminate those choices. Some liaison standard setters expressed concerns, in particular, about eliminating the choices in IAS 17, Leases, and IAS 23, Borrowing Costs, in the improvements project, arguing that those choices raise broader conceptual issues.
- Cost formulas (FIFO vs. LIFO) for inventories (IAS 2, Inventories);
- Treatment of fundamental errors and changes in accounting policy (IAS 8, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policy);
- Treatment of initial direct costs by lessors (IAS 17);
- Translation of goodwill and fair value adjustments resulting from an acquisition of a foreign entity (IAS 21, The Effect of Changes in Foreign Exchange Rates);
- Treatment of borrowing costs (IAS 23);
- Measurement of investments in subsidiaries and associates in the investor’s separate financial statements (IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries, and IAS 28, Accounting for Investments in Associates);
- Accounting for joint ventures (IAS 31, Financial Reporting of Interests in Joint Ventures).
The Board will further discuss all choices raised by the subcommittee together with other potential topics raised for the improvements project.
Share-Based Payment
The Board agreed to invite additional comments on the IASC Staff Discussion Paper, Accounting for Share-Based Payment, originally published by the IASC Staff and other members of the G4+1 group of standard setters in July 2000. The deadline for any additional comments is 15 December 2001.
The Board considered whether share-based payment transactions, involving the purchase of goods or services with payment made in shares or options, should be recognised in the financial statements, resulting in the recognition of an expense in the income statement when those goods or services are consumed (or when the attributed amount does not continue to form part of a recognisable asset). The Board tentatively agreed that, in principle, these transactions should be recognised in the financial statements, subject to the discussion of measurement and other issues.
The Board also discussed various issues relating to the measurement of share-based payment transactions. The Board tentatively agreed that, in principle, these transactions should be measured at the fair value of the shares or options issued. It also tentatively agreed that, where an observable market price does not exist, an option-pricing model should be used to estimate the fair value of share options, and that it was not necessary to specify which particular model should be used. The Board discussed how to adjust option-pricing models to incorporate features common to employee share options and options issued by unlisted companies, but no tentative conclusions were reached. It agreed to continue its discussions of these issues at future meetings.
Business Combinations
The Board continued its discussion of business combinations (not including goodwill – see below). The Board reached, or reaffirmed the following tentative conclusions:
- All business combinations should be accounted for using the purchase method
- Further guidance should be included clarifying certain aspects of combinations of entities under common control
- Separate entities brought together to form a «dual listed company» should be excluded from the scope of this standard
- An appendix illustrating a range of intangible assets that would satisfy the criteria for recognition separately from goodwill should be included in the standard
- Intangible assets with finite useful lives acquired in a business combination should be accounted for in accordance with IAS 38, Intangible Assets
- An intangible asset with an indefinite useful life should not be amortised but tested for impairment at least annually in accordance with IAS 36, Impairment of Assets
- Intangible assets with indefinite useful lives should be permitted to be remeasured in accordance with I AS 38
In-process research and development acquired in a business combination should be recognised as an asset separate from goodwill when it is separable or arises as a result of legal/contractual rights. IPR&D that does not qualify for recognition as a separate asset is included in the amount attributed to goodwill
Subsequent expenditure on IPR&D acquired in a business combination and recognised as an asset separate from goodwill would be accounted for in accordance with the requirements if IAS 38, paragraphs 42 and 45 – i.e., research expenditures would be expensed and development expenditure meeting the criteria for recognition as an asset would be so recognised.
Business Combinations – Goodwill
The Board discussed the nature of goodwill and reached a tentative conclusion that it should be described as an asset under the IASB Framework and recognised on the balance sheet on acquisition.
The Board discussed the subsequent treatment of goodwill, in particular the options of amortisation, non-amortisation with impairment testing or a mixed approach. The Board reached a tentative conclusion that if a workable impairment test could be devised, amortisation of goodwill should be prohibited.
The Board considered issues relating to the form of impairment test to be applied to goodwill and reached the following tentative conclusions:
- There should be an annual impairment test
- The test should be done at the smallest group of cash generating unit to which goodwill can be allocated on are reasonable and consistent basis. This level is the lowest level of the entity at which appropriate cash flow information is provided by existing management reporting systems
- The measurement objective should be the same as IAS 36, i.e., the higher of value in use and net selling price, pending further consideration of measurement in general
- Guidance on the cash flows projected, as in IAS 36, paragraphs 32-47, should be provided
- An impairment should be determined by comparing the recoverable amount of the cash generating unit(s) with the carrying value of the recognised net assets. However, a detailed calculation of recoverable amount need not be made if other existing information indicates that impairment is unlikely
- If an impairment is identified, it should be measured by comparing the carrying amount of goodwill with its implied fair value. Its implied fair value is the difference between the recoverable amount of the cash-generating unit(s) and the fair value of the net assets that would be identified and recognised if the unit(s) were acquired at the date of the impairment test.
- A subsequent cash flow test is required whenever an impairment test is based on projected future cash flows
- The necessary amendments should be made to IAS 36 rather than excluding goodwill from IAS 36
Insurance Contracts
The Board authorised the staff to carry out brief field visits to a number of insurers later this year. The field visits will assess the practical and conceptual issues that would arise in measuring insurance contracts at entity-specific value or fair value. In due course, the staff will present a proposal for a more comprehensive field test, to be carried out in 2002.
IASB Invites Additional Comment on Discussion Paper on Share-Based Payment
At its September 2001 meeting, the International Accounting Standards Board (IASB) decided to invite additional comments on the July 2000 Discussion Paper, Accounting for Share-based Payment.
Sir David Tweedie, IASB Chairman, said: «The wide-spread use of share options to pay employees, external advisors, and others; the calls from users of financial statements for improvements in accounting for these transactions; and the differing proposals emanating from national standard-setters demonstrate the importance of developing a high quality global accounting standard on share-based payment. There are, however, complex issues for the Board to consider – in particular, how we can measure the value of employee share options? The Board hopes that inviting additional comment on the Discussion Paper, published by our predecessor organisation, will provide the Board with further insight into these issues. We also expect that it will be useful to constituents as they focus on the accounting issues involved.»
Comments on the July 2000 IASC Discussion Paper, produced in collaboration with other leading national standard-setters, were received from constituents around the world during the original comment period, which ended 31 October 2000. Like the other standard-setters, the IASB deemed the Discussion Paper to be the first step in the Board’s due process in considering this topic. However, the IASB is concerned that some constituents might not have responded to the Discussion Paper, perhaps not realising the growing international importance of the issue, at that time. The Board’s desire to ensure that it receives comments on the Discussion Paper from all constituents who would wish their views to be considered has prompted it to re-open the comment period and invite additional comments.
Additional comments on the Discussion Paper are invited by 15 December 2001 to lASB’s e-mail address: commentletters@iasb.org.uk. Respondents should focus their attention on the questions for respondents set out in the Discussion Paper, in particular, the questions relating to measurement issues.
The current objective of the project is to develop an Exposure Draft (ED) of an International Financial Reporting Standard (IFRS), which the IASB hopes could be ready for publication by mid 2002. The IASB will invite comments on the ED, which will then be analysed and considered before the IFRS is finalised.