IASB exposure drafts and discussion papers  

Recently issued exposure drafts and discussion papers

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Reducing the complexity in reporting financial instruments

The IASB has published a Discussion Paper "Reducing the Complexity of Financial Instruments" as the first step in a project towards developing a less complex and principles-based standard that will replace IAS 39 ¡¥Financial Instruments: Recognition and Measurement'.

The Discussion Paper considers the main sources of complexity in reporting financial instruments. The authors suggest that a key source of complexity is the multiple methods currently used to measure financial instruments.

The Paper argues that the long-term solution to these problems is a move to full fair value, but then explains why this solution is not realistic in the near term. Accordingly, three possible ¡¥intermediate approaches' are explored.

The intermediate approaches suggested are:

	amending the current measurement requirements;
	replacing them with alternative requirements; and
	simplifying hedge accounting requirements.

Ways of amending the current measurement requirements include reducing the number of categories of financial assets by, for example, eliminating either the held-to-maturity or the available-for-sale-categories. Alternatively, some of the current measurement restrictions such as the tainting rules for the held-to-maturity category could be eliminated.

Under the second intermediate approach, the existing measurement requirements would be replaced with a fair value measurement principle. Fair value would become the default category for financial instruments but limited, optional exemptions would be made to allow some instruments to be measured at amortised cost. The nature of the exemptions would no doubt be of significant interest - one approach put forward is to base it on the extent of variability of an instrument's cash flows.

The third intermediate approach is to simplify hedge accounting requirements in some way. This might be accomplished by replacing the current models with a less complex fair value hedging model or simplifying the existing model by changing the requirements for assessing hedging effectiveness or the hedging of portions or partial term hedges.

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IASB takes first step to revising IAS 19

The IASB has issued a Discussion Paper "Preliminary Views on Amendments to IAS 19 Employee Benefits" which sets out the IASB's preliminary views on how the accounting for certain types of post-employment benefit, including pensions, could be improved, aiming to increase transparency in the accounting for post-employment benefits.

IAS 19 has been criticised in many quarters for permitting the inclusion of misleading figures in the statement of financial position (balance sheet). The criticisms stem largely from the so-called "corridor mechanism" which enables companies to defer the recognition of actuarial gains and losses on their defined benefit pension schemes.

The preliminary view expressed in the Discussion Paper is that the options for deferred recognition of gains and losses in defined benefit plans should be removed, thereby improving comparability between companies and reflecting the actual pension scheme exposure more accurately.

The Discussion Paper also proposes a new classification of what it refers to as "benefit promises" into "contribution-based promises" and "defined benefit promises". Some schemes that currently fail the IAS 19 definition of "defined contribution plans" would fall into the new contribution-based category. The Paper puts forward a new measurement attribute for contribution-based promises, which would involve a fair value approach assuming that the benefit promise does not change. This would not change the accounting for simple fixed contribution schemes but is intended to clarify and improve the accounting for plans that include a promised return on contributions linked to an asset or an index.

In this respect, the focus of the Discussion Paper is quite narrow: it is principally aimed at addressing the accounting for cash balance pension scheme plans or pension schemes which contain promises linked to contributions with a minimum guaranteed return. Using current terminology, these schemes have some of the characteristics of both defined benefit plans and defined contribution plans.

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Conceptual framework - views sought

The IASB and the US Financial Accounting Standards Board (FASB) have published two consultative documents relating to their joint project to develop an improved conceptual framework. The project is an important one as a solid foundation upon which future standards can be based is essential if the boards are to succeed in their aim of developing principles based standards which are consistent with one another.

The first document is an Exposure Draft which seeks views on an improved objective of financial reporting, the qualitative characteristics of information provided by financial reporting and constraints on the provision of that information. It proposes that the objective of financial reporting is to provide financial information that is useful to present and potential equity investors, lenders and other creditors in making decisions as capital providers.

The second document sets out the Boards' preliminary views on the reporting entity concept and related issues. Although the reporting entity concept determines some important aspects of financial reporting, the boards' existing frameworks do not address it specifically.

Views on the two documents are invited by 29 September 2008. There are eight phases to the overall project, so while the publications dealing with the first two phases are welcome, it will be some while before we see completion of the revised conceptual framework. 

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The International Financial Reporting Standard for Private Entities - a better name for the IFRS for SMEs project

The IASB has begun redeliberating the proposals in the Exposure Draft of a proposed IFRS for SMEs, which has led amongst other things to a change in name for the project.

Some commentators struggled to reconcile the use of the term "Small and Medium-sized Entity" with that project's scope (it addressed the accounting for all entities which do not have shares issued on a public stock market and which therefore could be any size, big or small). They will be pleased to learn that the IASB has decided to rename the project the "International Financial Reporting Standard for Private Entities" although its scope remains the same.

Other important decisions that were tentatively made by the IASB in its May and June meetings included a resolution that the final standard should be a stand-alone document and that all accounting policy options contained in the full text of IFRSs should be available to private entities. This would mean that topics such as share-based payment and lessor accounting for finance leases will now be addressed directly rather than by cross-reference to full IFRS.

The eventual standard will also reflect the requirements contained in the revised version of IAS 1 "Presentation of Financial Statements" published last year. Amongst other things, this will mean that the final version of the IFRS for Private Entities will use the new titles for financial statements contained in IAS 1 (e.g. Statement of Financial Position rather than Balance Sheet). As is the case for full IFRS, these titles will not be mandatory. Entities using the IFRS for Private Entities will also be required to present a "statement of comprehensive income".

The Board will continue to debate the proposals in future meetings before any final standard is developed.

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