EFRAG - TEG SEPTEMBER 2005 Summary of EFRAG CFSS and

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EFRAG - TEG
UPDATE
SEPTEMBER 2005
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Summary of EFRAG CFSS and TEG meeting September 2005
EFRAG’s Technical Expert Group (TEG) met on Monday 5 th September with the European
National Standard Setters in EFRAG’s Consultative Forum of Standard Setters (CFSS) and
discussed the following topics:
o European developments – Pro-active accounting activities in Europe
o IASB work programme
o Exposure Drafts on Business Combinations Phase II
o Conceptual Framework
o IASB technical correction policy
On Tuesday 6th and Wednesday 7th September EFRAG held its monthly TEG meeting and
discussed the following topics:
o IFRS 7 Financial Instruments: Disclosures
o Amendment to IAS 39 and IFRS 4: Financial Guarantee Contracts
o IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and
Electronic Equipment
o Amendments to IFRS 6 and IFRS 1
o Revenue Recognition
o Equity – Liabilities
o IASB work programme
o Consolidation
o EFRAG meeting dates 2006
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CFSS Meeting
In the meeting with National Standard Setters (NSS) EFRAG discussed European
developments – Pro-active Accounting Activities in Europe and potential agenda items for
the pro-active accounting work that Europe will be carrying out to improve Europe's contribution
to the global debate on international standards. The work will be organised by EFRAG and NSS
in Europe jointly so as to use the resources currently allocated by EFRAG and the NSS to proactive work more efficiently and effectively. In a co-ordination meeting it had been tentatively
agreed to start work on the following key projects:
 Equity – Liabilities (lead by staff of the German GASB)
 Pensions (lead by staff of the UK ASB)
 Conceptual Framework (lead by staff of the French CNC)
Consideration was still being given to the possibility of staff of the Spanish ICAC and EFRAG
leading a project on performance reporting.
The next step is to agree on project plans for the projects, and a key element of those plans will
be the arrangements to be made to ensure that there is an appropriate European dimension to
the work. Consideration would then be given to taking on additional projects.
Participants supported the decisions taken and a number of NSS indicated their interest in
participating actively in the work.
Regular updates will be provided in future meetings.
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EFRAG - TEG
UPDATE
SEPTEMBER 2005
The IASB Work Programme was discussed. It was noted that the programme focuses on the
priorities for achieving convergence between IFRS and US GAAP and EFRAG had been asked
by the Commission for their views on whether the priorities are right from a European
perspective. Participants broadly agreed with the projects on the agenda, although they believed:
 a project on Service Concessions should be added as proposed by EFRAG at an earlier
stage;
 there remained a need for a Bus Coms 3 project to address some of the issues not yet
satisfactorily addressed in Bus Coms 1 and 2; and
 some were not convinced that a sufficiently strong case had been made for the changes
that are being proposed in the Bus Coms 2 project.
Participants questioned some of the proposed priorities given to projects. It was thought that the
Conceptual Framework project (particularly the recognition and measurement aspects) should be
given a higher priority, as should the project on Pensions. It was also emphasised that the longterm projects on Insurance Contracts, Extractive Industries, SMEs were also a high priority for
Europe. At the same time it was noted that the IASB’s resources are limited and that the longterm projects were complex, so it would be difficult to bring forward their completion.
The IASB jointly with the FASB has issued Exposure Drafts on Business Combinations
including proposed amendments to IFRS 3 Business Combinations, IAS 27 Consolidated and
Separate Financial Statements, and IAS 37 Provisions, Contingent Liabilities and Contingent
Assets including IAS 19 Employee Benefits. EFRAG in early August issued a draft comment letter
for public comment and the NSS were invited to provide some first reactions to the draft. Overall
there was broad support for the general line taken by EFRAG with the following additional
suggestions:
 EFRAG might consider trying to alter the tone of the draft letter. For example, the letter
would be more valuable to the IASB if alternative suggestions would be added in areas
where EFRAG disagrees with the proposals made.
 It might be preferable if comments regarding process were gathered together and dealt
with separately from technical comments, because the messages were different.
 Some of the wording seemed to implicitly criticise the objective of converging accounting
in this area. As that was not the intention, the wording should be revisited.
 The wording regarding the move to an economic entities concept should be revisited.
It was stressed that this project is interrelated with a number of other projects—e.g. Conceptual
Framework and the project on control—and this needed to be taken into account by the IASB.
EFRAG welcomed the comments provided and encouraged standard setters to provide additional
written input to EFRAG as soon as possible for the finalisation of the letter. It was agreed to
consider preparing a supplementary draft comment letter to address the suggestions made.
EFRAG will finalise its views end of October.
In the CFSS meeting the latest tentative decisions taken by the IASB and FASB in their
Conceptual Framework project were discussed. A majority felt that stewardship and
accountability are an important objective of financial reporting, separate from the objective of
providing decision-useful information. It was also thought that a better explanation of the meaning
of ‘representational faithfulness’ would be helpful.
EFRAG will continue to monitor the developments in this project.
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EFRAG - TEG
UPDATE
SEPTEMBER 2005
The IASB Technical Correction Policy, which was published by the IASB for comment within a
30-day period, was discussed. Participants expressed concern about the short comment period
proposed for technical corrections, particularly bearing in mind the proposed definition of a
technical correction. It was suggested that a narrower definition should be used. Concerns were
also raised about the impact and scope of the labels used for several types of corrections, e.g.
editorial changes. Whilst there was support for a process and policy on corrections there was a
request for a clearer explanation of the policy’s limitations.
The next meeting of the CFSS will take place on 7 December 2005.
TEG Meeting
EFRAG discussed a draft endorsement letter on IFRS 7 Financial Instruments: Disclosures.
While noting certain imperfections in the new standard, overall EFRAG considered it an
improvement on the current IFRS disclosure requirements for financial instruments. It was
agreed that the draft letter should recommend endorsement.
EFRAG discussed whether endorsement in 2005 would be helpful and, if it would, how that might
be achieved. It was agreed that it would be helpful because some European companies wished
to apply the new standard in 2005. It was therefore agreed that the draft endorsement advice
should be subject to a shorter comment period so that EFRAG could provide the ARC with a final
advice for the upcoming meeting on 7 October.
It was agreed that the same procedure should be applied to the EFRAG consultation on the
separate draft endorsement letter on the related amendments to IAS 1 Presentation of
Financial Statements that are being made as part of the project. Those amendments relate to
the disclosure of information regarding externally-imposed capital requirements. The disclosures
were originally intended to be part of IFRS 7 but the IASB decided, in finalising the Standard, to
include the requirements in IAS 1. It was agreed that the draft letter should recommend
endorsement.
Both draft letters can be downloaded from the EFRAG website www.EFRAG.org.
In August the IASB issued amended requirements for financial guarantee contracts in the form of
limited amendments to IAS 39 Financial Instruments: Recognition and Measurement and
IFRS 4 Insurance Contracts. The amendments are intended to ensure that issuers of financial
guarantee contracts include the resulting liabilities in their balance sheet. Issuers must apply the
amendments for annual periods beginning on or after 1 January 2006, although earlier application
is encouraged. EFRAG discussed the amendments and agreed to issue for comment a draft
endorsement letter supporting endorsement. The draft can be downloaded from the EFRAG
website www.EFRAG.org.
EFRAG has finalised its preliminary views regarding endorsement of IFRS 6 Liabilities arising
from Participating in a Specific Market - Waste Electrical and Electronic Equipment. There
was broad support for the interpretation, which provides guidance on the accounting for liabilities
for waste management costs and in particular on when certain producers of electrical goods will
need to recognise a liability for the cost of waste management relating to the decommissioning of
waste electrical and electronic equipment (historical waste) supplied to private households.
EFRAG wishes to provide its endorsement advice to the European Commission early in October.
For that reason, it agreed that the comment period for EFRAG draft endorsement advice letter on
this interpretation should be shorter than the usual one month period and should run until 30
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EFRAG - TEG
UPDATE
SEPTEMBER 2005
September 2005. It was agreed that the draft letter should recommend endorsement. The draft
letter can be downloaded from www.EFRAG.org .
EFRAG finalised its endorsement advice on Amendments to IFRS 1 First-time Adoption of
IFRSs and IFRS 6 Exploration for and Evaluation of Mineral Resources based on the
comments received. EFRAG and commentators welcomed the amendment, which clarifies that a
first-time adopter applying IFRS 6 before 1 January 2006 would be exempted from providing
comparative disclosures and also the recognition and measurement requirements of IFRS 6 for
the comparative period. It was agreed that EFRAG’s advice to the Commission should be to
endorse the amendment.
EFRAG continued its discussions regarding Revenue Recognition. The EFRAG Revenue
Recognition working group has considered the comments received from TEG on the draft EFRAG
discussion paper and has prepared a critical issues paper addressing the risk and rewards
concept, rights of return, divisibility of performance obligations for different contract types,
treatment of creation contracts, construction contracts and multiple-element contracts. The paper
was discussed, and various suggestions made.
The working group will continue to develop certain areas of the draft discussion paper based on
the input received but it was agreed to speed up the process in order to finalise the draft paper in
the near future and make it ready for a public consultation in order to stimulate the debate.
EFRAG’s objective is to develop a useful and balanced discussion paper which should feed in the
IASB process to develop a new standard for revenue recognition.
EFRAG discussed the proposed joint IASB and FASB convergence project on the balance sheet
classification of Equity and Liability. The project will build on a long-term project that FASB has
been working on for some years. FASB completed Phase 1 of its project in 2003 with the
publication of SFAS 150 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. It has recently issued a Milestone Draft setting out the tentative
conclusions it has reached to date on Phase 2. That draft will be developed into a FASB
Preliminary Views document, which will also be issued by the IASB as a discussion paper. Joint
work will then commence. Although FASB’s Phase 1 work had been in the nature of a ‘quick fix’,
phase 2 was intended to involve a fundamental review of the whole issue, resulting if necessary
in amendments to the existing definitions (and therefore to the Framework). The key objective
was to develop criteria that result in consistent balance sheet classification for equity versus other
instruments and replace current literature on the issue in IFRS and US GAAP.
The Milestone Draft deals exclusively with what FASB calls ‘single component instruments’. The
definition and treatment of multiple-component instruments will be considered next. Under all
existing Frameworks, equity is defined as a residual interest; as any balance sheet credit that
does not contain an obligation that falls within the definition of a liability. In contrast, the
Milestone Draft reports that FASB’s tentative thinking now is that a so-called OwnershipSettlement Approach to classification is needed. In other words, the classification is determined
by whether that instrument has a settlement obligation (other than obligation to pay dividends or
interest) and is an ownership instrument.
EFRAG TEG members welcomed the project, but expressed some concerns about aspects of the
Milestone Draft, including the extent to which it appeared to rely on rule rather than principles. It
was seen as particularly important that FASB’s thinking is allowed to develop to address the
settlement obligation underlying interest and dividends before judging its merits. It was thought a
pity that the Draft did not contain an explanation of the reasoning behind the tentative conclusions
reached, which made it difficult to judge what FASB considered the objective of the classification
to be.
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EFRAG - TEG
UPDATE
SEPTEMBER 2005
EFRAG discussed the IASB Work Programme in the light of the comments made at the CFSS
meeting. TEG members shared the comments made by the NSS about the proposed content of
the programme, even though it involved almost every aspect of the financial statements—
although some members saw the pensions project as more about improving US GAAP and
converging it to IFRS than about changing IFRS.
TEG members expressed some concern about how the IASB proposed to deal with the links
between the various projects. For example, they believed it essential that there is a proper
debate about the various conceptual issues relating to measurement before the IASB proposes
any other significant changes to the measurement requirements in IFRS. Until that debate takes
place, commentators would continue to raise the same concerns each time the IASB proposes
the use of a fair value measure. For that reason, aspects of the Framework project needed to be
speeded up. It would also be nice, but probably unrealistic, if the completion of some of the other
long-term projects—such as extractive industries and insurance—could be brought forward,
because the existing standards were unsatisfactory.
TEG members expressed some concerns about the pace of change proposed by the IASB. It
has been asking a lot of European companies to keep up with all the material the IASB has been
issuing, and care needs to be taken to ensure that companies are not overloaded. It was noted
that the IASB was planning to issue only two big standards in 2006. In the past it has been the
relatively large number of minor amendments and short-term convergence amendments to
standards that has given the impression of continual change, and generally speaking preparers
have been very keen to have at least the minor amendments. EFRAG agreed that this was an
issue that needed to be kept under careful review.
EFRAG discussed the IASB project on Consolidation, which was started in June 2003. IAS 27
already adopts a control approach, but it has a number of weaknesses. One of those weaknesses
is that it has had to be supplemented by SIC-12 in order to ensure that SPEs are consolidated
where appropriate. The IASB is determined that any new standard it develops should apply both
to the consolidation of ‘normal’ subsidiaries and to the consolidation of SPEs. By November 2004,
the IASB had progressed sufficiently to ask staff to start developing a draft accounting standard.
At its July 2005 meeting, the Board considered papers that summarised the decisions taken to
date, some of the issues that would need to be addressed before an exposure draft would be
ready, and a draft project plan that envisaged an exposure draft being issued in Q2 2006 and a
final standard issued in summer 2007.
EFRAG considered the decisions taken to date by the IASB in order to formulate an early stage
view. Key issues discussed covered the new working definition of control. The elements of control
of an entity vs. control of an asset, the power criterion including options to access power and the
role of benefits flowing from the entity as part of the control definition were all discussed. It was
concluded that usefulness of the information should be the main objective and the SPE aspect is
key to an improved control concept. Concerns were expressed about some of the implications of
the suggestion that a minority shareholder could have control if the other shareholders are
dispersed and not organised.
The EFRAG TEG meeting dates for 2006 have been tentatively agreed. After final approval they
will be communicated on the EFRAG website www.EFRAG.org .
The next EFRAG TEG meeting will take place on 3 to 5 October 2005 in Brussels.
EFRAG - European Financial Reporting Advisory Group
Avenue des Arts 13-14
Tel. +32 (0)2 210 44 00
[email protected]
B-1210 Brussels
Fax. +32 (0)2 210 44 01
www.efrag.org
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