IASB December 2008

The Board discussed three issues outstanding from the exposure draft of proposed Improvements to International Financial Reporting Standards, published in October 2007.

IAS 39 Financial Instruments: Recognition and Measurement – Treating loan prepayment penalties as closely related embedded derivatives

The Board considered comments received on the proposal to clarify paragraph AG30(g) of IAS 39. The proposal would clarify that if the exercise price of a prepayment option reimburses the lender for the present value of lost interest for the remaining term to maturity of the original contract, the option is closely related to the host debt contract.

The Board decided to proceed with the proposed amendment.

IAS 1 Presentation of Financial Statements – Current/non-current classification of convertible instruments
The Board considered comments received on the proposal to clarify that the potential settlement of a liability by issuing equity instruments is not relevant to the determination of the liability’s classification as current or non-current.

The Board decided to amend IAS 1.

IAS 17 Leases – Classification of land leases

The Board considered comments received on the proposal to address a perceived inconsistency in the classification guidance in IAS 17 for leases of land and buildings.

The Board reaffirmed its view that the proposed change would be an improvement.

The Board acknowledged that the active project on leases is scheduled to produce a standard in 2011. However, the Board decided to conclude this proposal separately now in case the lease project is delayed.

The Board agreed with the additional revisions that the staff recommended to finalise the amendment, including drafting changes and a modified retrospective transition, which would require an entity to reassess the classification of unexpired land leases at the date the amendment is adopted. A lease newly classified as a finance lease would be recognised at either:

• the fair value of the land component on the date of adoption; or
• the fair value of the land component reported in previously published financial statements, if available.

Finalising the amendments

The Board plans to issue the amendments related to these three issues, as revised, as part of the improvements to IFRSs resulting from the exposure draft of August 2008. The Board expects to publish those amendments in April 2009, with an effective date of 1 January 2010.

Annual improvements – 2009

The Board discussed four issues for possible inclusion in the next exposure draft, which it expects to publish in August 2009.

IAS 18 Revenue – Clarification of inconsistent guidance

The Board received a request in October 2008 to review consistency between the principles set out in IAS 18 and Example 17 of its Appendix, which deals with initiation, entrance and membership fees. The Board decided not to include this issue in this project.

IAS 40 Investment Property – Change from fair value model to cost model

IAS 40 deals inconsistently with decisions to develop or sell investment property previously measured using the fair value model: 

• an entity continues using the fair value model when a property is removed from active service while being renovated for continuing future use as an investment property.
• when there is ‘commencement of development with a view to sale’, an investment property is transferred to inventories and is within the scope of IAS 2 Inventories; 
• when criteria in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are met, the entity continues to use the fair value model.

The Board tentatively decided to remove the requirement to transfer investment property to inventories when it will be developed before sale, add a requirement for investment property held for sale to be displayed as a separate category in the statement of financial position, and require disclosures consistent with IFRS 5.

IFRS 3 Business Combinations – Customer-related intangible assets

The IFRIC received a request to provide guidance on a non-contractual customer relationship acquired in a business combination. At its meeting in November 2008 the IFRIC recommended that both the IASB and the FASB should:

• remove the distinction between the treatments of ‘contractual’ and ‘non-contractual’ customer-related intangible assets in a business combination and focus on the nature of the relationship rather than how it is established; and
• review the indicators that identify the existence of a customer relationship in paragraph IE28 of the guidance on implementing IFRS 3 and include them in the standard (IASB only).

The Board tentatively decided to consider a proposed amendment to IFRSs. The staff will liaise with the FASB to develop a project plan and prepare additional analysis for a future meeting.

IFRS 7 Financial Instruments: Disclosures

The Board discussed some application issues related to IFRS 7 Financial Instruments: Disclosures and tentatively decided to propose amendments to IFRS 7 that:

• state that the qualitative disclosures in paragraph 33 should support and enhance the quantitative disclosures in paragraphs 34-42 of the IFRS.
• remove the reference to materiality from paragraph 34(b).
• clarify that the disclosure requirement in paragraph 36(a) applies only to assets, and off balance sheet exposures, whose carrying amounts do not show the reporting entity’s maximum exposure to credit loss.
• require the disclosure of the financial effect of collateral held as security and other credit enhancements in paragraph 36(b). 
• remove the disclosure requirement in paragraph 36(d) related to financial instruments renegotiated to avoid becoming past due or impaired.
• remove the disclosure requirement in paragraph 37(c) related to collateral held as security or other credit enhancements.
• clarify that the disclosure requirement in paragraph 38 applies only to foreclosed collateral held at the reporting date.