INSIGHT. Chairman and eight other Trustees appointed. January/February To order IASB publications, visit our Website at

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1 THE NEWSLETTER OF THE INTERNATIONAL ACCOUNTING STANDARDS BOARD INSIGHT January/February 2006 Chairman and eight other Trustees appointed INSIDE THIS ISSUE On 21 December Paul A Volcker, outgoing Chairman of the International Accounting Standards Committee (IASC) Foundation, announced a number of decisions with respect to the Trustees of the IASC Foundation: Tommaso Padoa-Schioppa, a founding member of the Executive Board of the European Central Bank, had accepted the Trustees invitation to chair the IASC Foundation, beginning on 1 January Reflecting the requirements of the revised IASC Foundation Constitution for 22 Trustees, seven new Trustees were being appointed for three-year renewable terms to replace four retiring members and fill three newly-created positions. These appointments also provide appropriate professional experience and geographical backgrounds. The appointments of the new Trustees received the support of the recently-created Trustee Appointments Advisory Group, consisting of leaders of official international and regional organisations. The other new Trustees are: Marvin Cheung, retired Chairman of KPMG Hong Kong, Hong Kong SAR, People s Republic of China Samuel DiPiazza, CEO, PricewaterhouseCoopers, United States Liu Zhongli, President, Chinese Institute of Certified Public Accountants; former Minister, Ministry of Finance, People s Republic of China William McDonough, former Chairman, US Public Company Accounting Oversight Board, United States; former President, Federal Reserve Bank of New York Sir Bryan Nicholson, outgoing Chairman, Financial Reporting Council, United Kingdom T V Mohandas Pai, Member of the Board and Chief Financial Officer, Infosys Technologies Limited; Chairman of the Board, Progeon Limited, India Junichi Ujiie, Chairman, Nomura Holdings Inc, Japan. The Trustees reappointed Max Dietrich Kley, a member of the Supervisory Board of BASF AG, for a three-year term. One Trustee position remained vacant. This was filled on 1 February by the appointment of: David L Shedlarz, Vice Chairman and member of the Executive Committee of Pfizer Inc. With the final position filled, there are eight Trustees from Europe, six from North America (four from the United States), six from the Asia/ Oceania region, and one each from Africa and South America. In making the announcement, Mr Volcker expressed his delight, and that of other Trustees, at Mr Padoa-Schioppa s willingness to assume the chairmanship: Mr Padoa-Schioppa has been a strong proponent of the need for international accounting standards. He brings broad and highly relevant experience to the work of the IASC Foundation, including serving as Chairman of both the Italian securities regulator and the Basel Committee on Banking Supervision. I know from long observation that he has earned the respect of financial officials and market participants not only in his home country of Italy and in Europe generally, but in the world at large, all further confirmed by the strong support of the Trustee Appointments Advisory Group. Phil Laskawy, chairman of the Trustee Selection Committee, added: My fellow Trustees look forward to working with Tommaso Padoa-Schioppa and our new colleagues in the months ahead. They join an organisation that is well placed to broaden the acceptance of international accounting standards. continued overleaf News 1 10 Project updates IFRIC 14 Reports Staff changes 20 Publications IASB INSIGHT / ISSN Editor: Michael Butcher The views expressed in IASB Insight are not necessarily shared by the IASC Foundation Trustees or the IASB. Articles are published without responsibility on the part of the publishers or the authors for loss occasioned by any person acting or refraining from acting as a result of any view expressed herein. Copyright 2006 International Accounting Standards Committee Foundation (IASCF). All rights reserved. No part of Insight may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the IASCF contact Gillian Bertol, Publications Director. IASB INSIGHT is published four times a year by the International Accounting Standards Committee Foundation, 30 Cannon Street, London EC4M 6XH, United Kingdom. Tel: +44 (0) Fax: +44 (0) iasb@iasb.org Web: To order IASB publications, visit our Website at

2 NEWS In large part, that is due to the leadership and work of Paul Volcker. Paul Volcker leaves the Trustees with an important legacy as its first Chairman, and we greatly appreciate his efforts on behalf of the organisation. For that reason, we are delighted with his willingness to continue to serve the organisation as Chairman of the Trustee Appointments Advisory Group, an idea strongly endorsed by the Advisory Group itself. Speaking after his appointment, Tommaso Padoa-Schioppa said: I am looking forward to working with my fellow Trustees and with David Tweedie with whom I have had constructive contact in the past. More than ever there is a compelling need to accept international accounting standards as the basis of financial reporting for the world s rapidly integrating capital markets. Under the leadership of Paul Volcker, the Trustees and the IASB, progress has been made towards that goal. There is more work to be done if the world s capital markets are to reap the full benefits of international standards, and I am dedicated to achieving that goal. I am delighted that Paul Volcker is willing to continue to assist us in that effort. Biography of Tommaso Padoa-Schioppa Tommaso Padoa-Schioppa is Senior Fellow of the Institute of International Affairs (Rome) and President of Notre Europe (Paris). He was a member of the Executive Board of the European Central Bank from 1998 until May Before joining the European Central Bank, Mr Padoa-Schioppa served as the Director-General for Economic and Financial Affairs at the Commission of the European Communities ( ), Deputy Director General of Banca d Italia ( ) and Chairman of Commissione Nazionale per le Società e la Borsa ( ). Tommaso Padoa-Schioppa He has served in a leadership capacity on various European and international committees, including as Joint Secretary to the Delors Committee for the study of European Economic and Monetary Union ( ); Chairman of the Banking Advisory Committee of the Commission of the European Communities ( ); of the Working Group on Payment Systems of the Central Banks of the European Community (European Monetary Institute) ( ); of the Basle Committee on Banking Supervision ( ); of the European Regional Committee of IOSCO ( ); of the FESCO (Forum of the European Securities Commissions) ( ); of the G10 Committee on Payments and Settlement Systems ( ). Mr Padoa-Schioppa has been a member of the Group of Thirty since He is President of the International Center for Monetary and Banking Studies (Geneva), member of the Advisory Board of the Institute for International Economics (IIE, Washington DC), and Senior Adviser and Advisory Board member of Promontory Financial Group, LLC. He graduated from the Luigi Bocconi University, Milan, Italy, in 1966 and received a Master of Science degree from the Massachusetts Institute of Technology. He holds five honorary degrees. He is the author of numerous books and articles. He is Cavaliere di Gran Croce della Republica Italiana. 2 IASB INSIGHT, January/February 2006

3 NEWS THE IASC FOUNDATION TRUSTEES AT 1 FEBRUARY 2006 North America Europe Asia-Pacific Other Samuel DiPiazza, US CEO, PricewaterhouseCoopers Bertrand Collomb, France Chairman, Lafarge Marvin Cheung, Hong Kong SAR, China Retired Chairman of KPMG Hong Kong Roy Andersen, South Africa Director, Murray and Roberts Holdings L Yves Fortier, Canada Chairman, Ogilvy Renault, Barristers and Solicitors; Former Ambassador of Canada to the United Nations Oscar Fanjul, Spain Vice Chairman, Omega Capital, and former Chairman Founder and CEO, Repsol, SA Tsuguoki Fujinuma, Japan Chairman and President, Japanese Institute of Certified Public Accountants Roberto Teixeira da Costa, Brazil First Chairman, Brazilian Securities and Exchange Commission Malcolm Knight, Canada/International Organisation General Manager, Bank for International Settlements Cornelius Herkströter, Netherlands Former President, Royal Dutch Petroleum and Chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group Richard Humphry, Australia Former Managing Director and Chief Executive Officer, Australian Stock Exchange Philip A Laskawy, USA Retired Chairman, Ernst & Young International Max Dietrich Kley, Germany Member of the Supervisory Board, BASF AG Liu Zhongli, China President, Chinese Institute of Certified Public Accountants; former Minister, Ministry of Finance William McDonough, US Vice Chairman, Merrill Lynch; retired Chairman, US Public Company Accounting Oversight Board, United States; former President, Federal Reserve Bank of New York Sir Bryan Nicholson, UK Former Chairman, Financial Reporting Council T V Mohandas Pai, India Member of the Board and Chief Financial Officer, Infosys Technologies Limited; Chairman of the Board, Progeon Limited David Shedlarz, US Vice Chairman, Pfizer Inc. Tommaso Padoa-Schioppa, Chairman, Italy Former Member of the Governing Board, European Central Bank Junichi Ujiie, Japan Chairman, Nomura Holdings Inc Jens Røder* Denmark Senior Partner, PricewaterhouseCoopers Antonio Vegezzi, Switzerland Vice- Chairman, Capital International SA * but see page 4 IASB INSIGHT, January/February

4 NEWS Jens Røder to retire as IASC Foundation Trustee The Trustees of the International Accounting Standards Committee (IASC) Foundation announced on 16 January that Jens Røder, a partner of PricewaterhouseCoopers Denmark, will retire as a Trustee after the Trustees meeting in March Upon his retirement, Mr Røder will become a senior adviser to the Trustees on matters related to the implementation and adoption of IFRSs in Europe and to the Audit Committee, which Mr Røder has chaired since the organisation was established. Mr Røder will continue to attend future Trustee meetings in his new capacity. Commenting on Mr Røder s retirement, Tommaso Padoa-Schioppa, Chairman of the IASC Foundation, said, My colleagues and I are sorry to see Jens Røder step down as a Trustee, but we greatly respect his desire to ensure that the Trustees benefit from a diversity of views within the accountancy profession following the recent appointment of his fellow PricewaterhouseCoopers partner, Sam DiPiazza. We are delighted that he will continue to serve as a senior adviser to the Trustees. Paul Volcker, recently retired Chairman of the Trustees, commented, Mr Røder has been a tireless advocate of international accounting standards. He has brought special skill and expertise to his Trustee responsibilities and unselfishly devoted his time and energy to his role as Chairman of the Audit Committee. The Trustees began a search for Mr Røder s successor immediately (see below). In appointing his replacement, the Trustees will consult the Trustee Appointments Advisory Group. The following advertisement has been placed in the press International Accounting Standards Committee Foundation Trustee IASC Foundation The International Accounting Standards Committee (IASC) Foundation is the private sector independent body responsible for the development and promulgation of a single set of high quality international accounting standards. The governance of the Foundation rests with 22 Trustees six from the Asia/Oceania region, six from Europe, six from North America and four from any region of the world. The Trustees oversee the Foundation and the International Accounting Standards Board (IASB). The IASB is the 14-member body responsible for the development of international accounting standards. The IASC Foundation seeks candidates to replace a Trustee who is to retire early. As the geographical requirements of the Constitution have been fulfilled, the Trustees will consider candidates from any region of the world. The successful candidate will serve a term that will expire on 31 December The term may be renewed for a further three years. Qualified candidates should have experience as a senior professional or executive in an organisation with an interest in accounting standard-setting. They should demonstrate a firm commitment to the IASC Foundation and the IASB as a high quality global standard-setter, be financially knowledgeable, and be able to meet the time commitment. Candidates should have an understanding of, and be sensitive to, the challenges associated with the adoption and application of high quality global accounting standards developed for use in the world s capital markets and by other users. Trustees responsibilities include ensuring financing for the organisation; appointments to the IASB, the Standards Advisory Council and the International Financial Reporting Interpretations Committee; and general oversight of the organisation, including consideration of the IASB s agenda and work programme. Please indicate interest by sending a covering letter and curriculum vitae by 28 February 2006 to Philip Laskawy, Chairman of the Trustee Selection Committee, IASC Foundation, 30 Cannon Street, London EC4M 6XH, United Kingdom or by to Tom Seidenstein, Director of Operations, at tseidenstein@iasb.org 4 IASB INSIGHT, January/February 2006

5 NEWS IASB appointments Sir David Tweedie reappointed as Chairman On 21 December Paul A Volcker, outgoing Chairman of the International Accounting Standards Committee (IASC) Foundation, announced that: the Trustees had reappointed Sir David Tweedie as Chairman of the IASB, thereby providing continuity in the effort that Sir David has led to achieve common accounting standards around the world. the Trustees had also initiated a process for considering the appointment or reappointment of members of the IASB. The Trustees would invite applications and nominations for four IASB positions for which terms will expire on 30 June 2006 (see advertisement right). In making these announcements, Mr Volcker said: The reappointment of Sir David Tweedie will assure continuity in the effort to achieve consistent and widely-applicable international accounting standards. Sir David has spearheaded that effort, which is at a crucial point of development now with a target date for the removal of the US GAAP reconciliation by no later than IASB selection and reappointments process Each of the members of the IASB with terms expiring in June 2006 is eligible for reappointment. However, one of those members, Professor Geoffrey Whittington, has indicated that he will not be seeking a second term when his term expires. Consistently with the processes contemplated as part of the recent Constitutional change, candidates will be invited to put their names forward for the four positions. While inviting new applications and nominations, the Trustees have indicated that the three current members of the IASB available for reappointment will be given particular consideration in the process. The qualifications of the three IASB members and other candidates will be considered on the basis of the criteria listed in the Annex of the IASC Foundation Constitution. In addressing the matter of IASB member selection and reappointments, Mr Volcker said: The Trustees have taken a number of steps as a result of the Constitution Review to improve the transparency of the IASC Foundation s processes. Our efforts on selection and reappointments of IASB members are another step in that direction. Hans-Georg Bruns, Warren McGregor and Tatsumi Yamada, along with Professor Whittington, have each made outstanding contributions during the IASB s first five years, which the Trustees will take into account during our consideration of reappointments and the vacancy left by Professor Whittington s retirement. The following advertisement has been placed in the press International Accounting Standards Board Board Member The International Accounting Standards Board (IASB) is the independent body that is responsible for the development and promulgation of a single set of high quality international accounting standards. Its 14 members are chosen on the basis of their accounting expertise, relevant experience, and ability to work in harmony towards the common objective. The IASB is appointed and overseen by 22 Trustees of the International Accounting Standards Committee (IASC) Foundation, chaired by Tommaso Padoa-Schioppa. The appointments of four IASB members will end on 30 June All are eligible for reappointment, but one member does not wish to serve a further term. The Trustees of the IASC Foundation therefore invite applications for full-time membership of the IASB. The Trustees have indicated that they will give particular consideration to the three IASB members who are available for reappointment. The qualifications of the three retiring IASB members and of other candidates will be considered on the basis of the criteria listed in the Annex of the IASC Foundation s Constitution. The main qualifications for membership of the IASB are professional competence and practical experience. The Trustees select members so that the IASB will comprise a group of people representing, within that group, the best available combination of technical expertise and diversity of international business and market experience in order to contribute to the development of high quality, global accounting standards. Candidates should possess a high level of integrity, a commitment to the IASB s mission, the IASB s conceptual framework and the public interest, and a willingness to handle a demanding and diverse workload. Successful new applicants will be asked to serve a five-year term and will be expected to reside in London, where the IASB is located. Please indicate interest by sending a cover letter and curriculum vitae by 28 February 2006 to Philip Laskawy, Chairman of the Nominating Committee, IASC Foundation, 30 Cannon Street, London EC4M 6XH or by to Tom Seidenstein, Director of Operations, at tseidenstein@iasb.org For more information on the Constitution, please refer to the IASC Foundation s Website at: IASB INSIGHT, January/February

6 NEWS IASB publishes proposals on segment reporting On 19 January 2006 the IASB published proposals to improve segment reporting. The proposals are set out in ED 8 Operating Segments. ED 8 would require an entity to adopt the management approach to reporting on the financial performance of its operating segments. Generally, the information to be reported would be what management uses internally for evaluating segment performance and deciding how to allocate resources to operating segments. Such information may be different from what is used to prepare the income statement and balance sheet. The proposals would therefore require explanations of the basis on which the segment information is prepared and reconciliations to the amounts recognised in the income statement and balance sheet. The IASB believes that adopting the management approach would improve financial reporting. First, it allows users of financial statements to review the operations through the eyes of management. Secondly, because the information is already used internally by management, there are few costs for preparers and the information is available on a timely basis. This means that interim reporting of segment information can be extended beyond the current requirements. ED 8 marks another step towards convergence of international and national standards in the joint short-term convergence project with the US Financial Accounting Standards Board (FASB) to reduce differences between IFRSs and US generally accepted accounting principles (GAAP). ED 8 results from the IASB s comparison of IAS 14 Segment Reporting with the US standard SFAS 131 Disclosures about Segments of an Enterprise and Related Information. The proposed IFRS would replace IAS 14 and align segment reporting with the requirements of SFAS 131. The IASB invites comments on the Exposure Draft by 19 May Main features of ED 8 The proposed IFRS set out in the Exposure Draft would require an entity to report financial and descriptive information about its reportable segments. Reportable segments would be operating segments or aggregations of operating segments that meet specified criteria. Operating segments would be components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information would be required to be reported on the basis that it is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. The proposed IFRS would: extend the scope of segment reporting to include entities that hold assets in a fiduciary capacity for a broad group of outsiders as well as entities whose equity or debt securities are publicly traded and entities that are in the process of issuing equity or debt securities in public securities markets. require identification of operating segments based on internal reports that are regularly reviewed by the entity s chief operating decision maker in order to allocate resources to the segment and assess its performance. This is because the requirements of the Exposure Draft are based on the information about the components of the entity that management uses to make decisions about operating matters. include a component of an entity that sells primarily or exclusively to other operating segments of the entity in the definition of an operating segment if the entity is managed that way. require the amount of each operating segment item reported to be the measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance. require reconciliations of total reportable segment revenues, total profit or loss, total assets, and other amounts disclosed for reportable segments to corresponding amounts in the entity s financial statements. require an explanation of how segment profit or loss and segment assets are measured for each reportable segment. require an entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions. require an entity to give descriptive information about the way that the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity s financial statements, and changes in the measurement of segment amounts from period to period. Proposed effective date The IASB envisages that the proposed IFRS would apply to the annual financial statements for periods beginning on or after 1 January 2007, with earlier application encouraged. 6 IASB INSIGHT, January/February 2006

7 NEWS IASB amends standard on foreign exchange rates On 15 December 2005 the IASB issued a limited amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates. The amendment clarifies the requirements of IAS 21 regarding an entity s investment in foreign operations and will therefore help the financial reporting of entities that invest in businesses operating in a currency different from that used by the entity. IAS 21 was amended by the IASB in 2003 as part of the project to improve many of the standards issued by its predecessor body but the amended standard became mandatory only in During 2005, companies and other interested parties expressed concern about problems in implementing IAS 21, notably that it gave rise to results that were counter-intuitive and was not clear about the accounting for a net investment in a foreign operation. In particular, IAS 21 required different accounting depending on the currency in which a monetary item was denominated, specifically where such an item was regarded as part of an entity s investment in a foreign operation. Secondly, IAS 21 was not clear on whether any member of a consolidated group could enter into the monetary transaction with the foreign operation. In response to these concerns, the IASB reviewed aspects of IAS 21. As regards a monetary item that forms part of an entity s investment in a foreign operation, the IASB concluded that the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item, nor on which entity within the group conducts a transaction with the foreign operation. With a view to enabling entities to take advantage of the improvement in financial reports for 2005 the IASB decided to develop an amendment on a fast-track basis. On 30 September it published its proposal to amend IAS 21. Having considered the comments subsequently received the IASB confirmed the amendment and decided that it should be made available for adoption with immediate effect when issued. The amendment will benefit those companies around the world that invest in operations outside their own jurisdictions. IASB updates Guidance on Implementing IFRS 4 On 15 December 2005 the IASB published revised Guidance on Implementing IFRS 4 Insurance Contracts. The revision reflects the changes made to IFRS 4 in August 2005 by IFRS 7 Financial Instruments: Disclosures. IFRS 7 amended and superseded the disclosures about risk that were previously required by IAS 32 Financial Instruments: Disclosure and Presentation. Those changes necessitated consequential amendments to IFRS 4, which previously required disclosure of the information about interest rate risk and credit risk that IAS 32 would require if the insurance contracts were within the scope of IAS 32. The changes affect only the disclosure section of the guidance. Nevertheless, the new version contains the entire revised text. IFRIC issues two Interpretations and publishes a draft of another The International Financial Reporting Interpretations Committee (IFRIC) has issued guidance on aspects of two standards IAS 29 Financial Reporting in Hyperinflationary Economies and IFRS 2 Share-based Payment. It has also released for public comment a draft Interpretation on the relationship between three standards. Guidance on restatements of financial reporting in hyperinflationary economies On 24 November 2005 the IFRIC issued IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies. The Interpretation clarifies the requirements under IAS 29 relating to two issues that interested parties had raised with the IFRIC: how comparative amounts in financial statements should be restated when an entity identifies the existence of hyperinflation in the economy of the currency in which its financial statements are measured (its functional currency ); and how deferred tax items in the opening balance sheet should be restated. Introducing IFRIC 7 Robert Garnett, IASB member and chairman of the IFRIC, said: Although hyperinflation has become less common in recent years, the IFRIC believed it should respond to queries on how the existing IASB Standard on adjusting for the effects of hyperinflation should be applied. This Interpretation should assist entities in economies now moving into hyperinflation, and entities facing that prospect in the future, by clarifying the information that will be needed to apply the Standard. IASB INSIGHT, January/February

8 NEWS About the Interpretation IAS 29 sets out the procedures for restating amounts in the financial statements of an entity whose functional currency is subject to hyperinflation. It also provides guidance on determining when an economy is hyperinflationary. The main requirements of the Interpretation are: In the period in which the economy of an entity s functional currency becomes hyperinflationary, the entity shall apply the requirements of IAS 29 as though the economy had always been hyperinflationary. The effect of this requirement is that restatements of non-monetary items carried at historical cost are made from the dates at which those items were first recognised; for other non-monetary items the restatements are made from the dates at which revised current values for those items were established. Deferred tax amounts in the opening balance sheet are determined in two stages: (a) Deferred tax items are remeasured in accordance with IAS 12 Income Taxes after restating the nominal carrying amounts of the non-monetary items in the opening balance sheet by applying the measuring unit at that date. (b) The deferred tax items remeasured in this way are restated for the change in the measuring unit from the date of the opening balance sheet to the date of the closing balance sheet. An illustrative example of the deferred tax restatements accompanies the Interpretation. Entities are required to apply the Interpretation for annual periods beginning on or after 1 March Earlier application is encouraged. Guidance on share-based payment On 12 January 2006 the IFRIC issued IFRIC 8 Scope of IFRS 2. The Interpretation clarifies that IFRS 2 Share-based Payment applies to arrangements where an entity makes share-based payments for apparently nil or inadequate consideration. IFRIC 8 explains that, if the identifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred, this situation typically indicates that other consideration has been or will be received. IFRS 2 therefore applies. Introducing IFRIC 8, Robert Garnett, IASB member and Chairman of IFRIC, said: This Interpretation should assist preparers in those parts of the world where, for public policy or other reasons, companies give their shares or rights to shares to individuals, organisations or groups that have not provided goods or services to the company. IFRIC 8 confirms that these arrangements fall within the scope of IFRS 2, as directors would not make such arrangements if they did not expect some benefit to accrue to the company. Entities are required to apply IFRIC 8 for annual periods beginning on or after 1 May Earlier application is encouraged. Proposed guidance on interim financial reporting and impairment On 12 January 2006 the IFRIC released for public comment a draft Interpretation, D18 Interim Financial Reporting and Impairment. The proposed Interpretation has been developed in response to requests for clarification of the interaction between IAS 34 Interim Financial Reporting and two other standards, IAS 36 Impairment of Assets and IAS 39 Financial Instruments: Recognition and Measurement, and the effect of that interaction on subsequent interim and annual financial statements. The proposed Interpretation clarifies that an entity cannot reverse an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. The proposals are open for public comment until 31 March IASB publishes proposed amendments on share-based payment On 2 February 2006 the IASB published for public comment an Exposure Draft of proposals to amend IFRS 2 Share-based Payment. The proposed amendment deals with two matters. It proposes that vesting conditions should be restricted to service conditions and performance conditions. Vesting conditions are the conditions that an individual or an organisation must satisfy to receive an entity s shares under a share-based payment arrangement. The amendment also proposes that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The proposals are the IASB s response to concerns raised by interested parties that IFRS 2 does not give guidance on two quite common aspects of share-based payment arrangements. The proposed amendments will, if confirmed, fill a gap in the standard. The IASB invites comments on the Exposure Draft by 2 June About the proposed amendments IFRS 2 Share-based Payment currently states that vesting conditions include service conditions and performance conditions. It is silent on whether other features of a 8 IASB INSIGHT, January/February 2006

9 NEWS share-based payment are vesting conditions. This amendment clarifies that vesting conditions are service conditions and performance conditions only. Under IFRS 2, a failure to meet a condition, other than a vesting condition, is a cancellation. IFRS 2 specifies the accounting treatment of cancellations by the entity but does not give guidance on the treatment of cancellations by parties other than the entity. This amendment proposes that cancellations by parties other than the entity should be accounted for in the same way as cancellations by the entity. Under IFRS 2, features of a share-based payment that are not vesting conditions should be included in the grant date fair value of the share-based payment (the fair value also includes market-related vesting conditions). The proposed amendments would apply for annual periods beginning on or after 1 January 2007, with earlier application encouraged. IASC Foundation Conference: IFRSs Implications of Convergence Michael Wells, Manager Education Projects for the IASC Foundation, describes this forthcoming event. The International Accounting Standards Committee (IASC) Foundation will host a two-day conference International Financial Reporting Standards Implications of Convergence at the Frankfurt Marriott on Thursday and Friday 6 and 7 April The conference has been arranged as part of the IASC Foundation s education initiative in order to give preparers, auditors, analysts and investors an opportunity to meet the standard-setters and regulators and their peers. The theme of the event is the nature and implications of the IASB s joint convergence programme with the US Financial Accounting Standards Board (FASB). The conference will also provide a forum for the standard-setters, regulators, analysts and preparers to hear about implementation issues or other concerns. Conference speakers Conference speakers will include: Sir David Tweedie Chairman of the IASB Charlie McCreevy European Commissioner for Internal Market & Services Robert Herz Chairman of the FASB John Tiner Chief Executive of the UK Financial Services Authority and Chairman of CESR-Fin Mike Crooch FASB member James Leisenring IASB member Patricia McConnell Senior Managing Director, Bear Stearns & Co Christian Dreyer Managing Partner Tertium datur AG Dr. A. Stefan Kirsten Chief Financial Officer, ThyssenKrupp AG. Background to the Convergence Conference In the Norwalk Agreement of September 2002, the FASB and the IASB agreed on a framework for working together to develop high quality, compatible accounting standards that could be used for cross-border financial reporting. In April 2005, Charlie McCreevy, EU Internal Market Commissioner, and William Donaldson, then Chairman of the US Securities and Exchange Commission (SEC), discussed a roadmap developed by SEC staff that highlights the steps needed to eliminate the US GAAP reconciliation requirement for international companies that use International Financial Reporting Standards (IFRSs) and file with the SEC. The roadmap establishes a goal of eliminating the reconciliation requirement as early as possible between now and 2009 at the latest. Achieving that goal would, among other things, depend on a detailed analysis of the faithfulness and consistency of the application and interpretation of IFRSs in financial statements across companies and jurisdictions, and continued progress on the FASB-IASB convergence activities. Content of the Convergence Conference The main aim of the conference is to give those attending a strategic and technical explanation of how the convergence process will affect their organisations, both in the immediate future and in the longer term. Furthermore, the conference is designed for senior financial executives and other interested parties: to meet senior members of organisations driving or regulating the convergence of global accounting standards, including the FASB, the IASB, the European Commission, CESR-Fin and the SEC staff to receive the views of leading international analysts to share the experiences of various multi-national preparers of IFRS financial statements to explore convergence and beyond in six interactive break-out sessions to share their views with the speakers at the formal Question & Answer sessions and more informally at the cocktail reception to make their views known to IASB members. The break-out sessions are to be led by Board members and staff of the IASB and the FASB. By attending, delegates will engage with the standard-setters on the most pressing convergence issues. The sessions will place a strong emphasis on learning and discussion and will be repeated to allow delegates to attend more than one. The six break-out IASB INSIGHT, January/February

10 PROJECT UPDATE sessions include five conducted by IASB and FASB members and staff: 1. The Framework 2. Business combinations, including related issues 3. Performance reporting 4. Revenue recognition 5. Financial instruments. The sixth session will consist of questions and answers with SEC staff. For more information on the convergence conference visit Insurance contracts (phase II) Towards a current value approach for life insurance contracts The July 2005 edition of Insight reviewed the IASB s tentative conclusions for non-life insurance contracts. After benefiting from several discussions with the IASB s Insurance Working Group, and from public educational sessions for the Board, the IASB has now begun to look at life insurance contracts. Senior project manager Peter Clark reports on the Board s initial conclusions. In December 2005, in preparation for more detailed discussion in future meetings, the staff gave the Board an overview of four possible generic families of accounting approaches for life insurance contracts (two cost-based approaches and two current value approaches). The Board decided to focus future discussion on the current value approaches. What is a current value approach? Current value approaches measure insurance liabilities using an unbiased current estimate of expected (ie probability-weighted) cash flows, plus an explicit margin. In contrast, cost approaches do not require explicit estimates of cash flows in each period: estimates are changed only if a liability adequacy test indicates a need to increase the measurement of the liability. Although most existing approaches contain some, and generally many, cost-based elements, the need to estimate future cash flows would not be completely new. Insurers already use estimates of future cash flows for some aspects of many existing accounting approaches and many insurers already use cash flow estimates as one factor in pricing decisions. Nevertheless, a current value approach places more demands on estimates of cash flows than do most cost-based approaches, particularly in longer duration contracts, because changes in estimated cash flows affect profit or loss immediately in a current value approach, but may do so only over time in most cost-based approaches. One other aspect of current value approaches is worth noting. Acquisition costs would not be recognised as a separate asset. To the extent the insurer regards them as recoverable from future cash flows, the measurement of the liability would reflect those recoveries. Why does the IASB prefer a current value approach? In the Board s view, a current value approach for insurance liabilities will provide several benefits to users of an insurer s financial statements: more relevant information about the amount, timing and uncertainty of future cash flows arising from existing insurance contracts. Given the uncertainty associated with insurance liabilities and the long duration of many insurance contracts, such information is particularly important. a more consistent approach to favourable changes in estimates. In cost-based approaches, some favourable changes are recognised implicitly by offset against other changes that are adverse. Thus, cost-based approaches recognise favourable changes arbitrarily, on the basis of whether other adverse changes occur at the same time and the size of implicit margins that existed at inception. a more coherent framework to resolve emerging issues without resorting to unprincipled distinctions and arbitrary new rules. consistency with other IFRSs that already require current estimates of future cash flows in measuring non-financial liabilities (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets) and financial liabilities (see IAS 39 Financial Instruments: Recognition and Measurement). less (and perhaps no) need to separate embedded derivatives. less (and perhaps no) need for anti-abuse rules to prevent selective recognition of previously unrecognised economic gains through reinsurance. less (and perhaps no) need for arbitrary criteria to distinguish amendments to an existing contract (with unchanged estimates and an unchanged discount rate, in a cost-based approach) from new contracts (with new estimates and a new discount rate). margins that are explicit rather than implicit. clearer reporting of economic mismatches between insurance liabilities and related assets. 10 IASB INSIGHT, January/February 2006

11 PROJECT UPDATE What are current estimates? Commentators sometimes object to proposals for current estimates on the grounds that it is not useful to require immediate adjustment of all estimates to be identical to the most recent actual experience. However, these objections are based on a misunderstanding. For example, suppose that mortality experience last year was 20 per cent worse than previous experience and previous expectations. A rational current estimate would not typically revise the mortality assumption immediately by as much as 20 per cent. Several factors could have caused the sudden change in experience, including: lasting changes in mortality changes in the characteristics of the insured population (eg changes in underwriting or distribution, or selective lapses by policyholders in unusually good or bad health) random fluctuations identifiable non-recurring causes. An insurer would typically investigate the reasons for the change in experience and develop new estimates that are a blend of the most recent experience, earlier experience and other information. The insurer would weight these different pieces of evidence to reflect the relative degree of confidence the insurer has in each source. Actuaries have developed various techniques for determining such weightings (or credibility ). In this example, if mortality continues to run significantly above previous estimates, the insurer would revise estimated mortality upwards as evidence accumulates. To dispel these misunderstandings, the staff intend to ask the Board at a future meeting to emphasise the following: Some estimates relate to observable market variables, such as interest rates. An entity should use these variables as direct inputs without adjustment. Other estimates relate to variables (such as mortality) that cannot, in general, be observed directly from market prices and transactions. These estimates should be reviewed every year and should be updated when evidence indicates that the previous assumptions are no longer appropriate and current. The objective is to ensure that estimates for these variables reflect all available current information about the conditions that exist at the reporting date. For estimates to form a coherent package, estimates for variables that are not observable in the market should not contradict observable market variables. For example, an assumption about future inflation rates should be within a range that is consistent with expectations implied by market interest rates. An updated estimate should faithfully represent conditions at the reporting date. However, in updating estimates, it is also important to consider whether changes in estimates faithfully represent changes in conditions during the period. For example, if estimates were at one end of a reasonable range at the beginning of the period and conditions have not changed, moving to the other end of the range would not faithfully represent what has happened during the period. What happens next? The Board expects to discuss further details of the current value approaches over the next few meetings. Unless there are unexpected delays, the staff estimate that the IASB will publish a discussion paper on insurance contracts towards the end of Income taxes Senior project manager Anne McGeachin reports. As reported in the October/November edition of Insight, the IASB and the US Financial Accounting Standards Board are making their final decisions in the short-term convergence project on income taxes. The objective of the project is to achieve convergence in application of the model that underlies both IAS 12 Income Taxes and the US standard SFAS 109 Accounting for Income Taxes the temporary difference approach. The boards aim has been to achieve convergence by eliminating exceptions to the temporary difference approach, resulting in a higher quality, more principled standard for both boards. The IASB and the FASB have discussed and reached decisions that converge on most issues in the project. The issues remaining to be resolved are: uncertain tax positions, special deductions, quasi tax-exempt entities, deferred tax on the initial recognition of goodwill, the treatment of assets and liabilities with a tax base different from cost on initial recognition, and transitional provisions. These issues will be discussed further over the next few months. The IASB and the FASB plan to publish a common exposure draft that will list the decisions made by the boards and the resulting proposed amendments to IAS 12 and SFAS 109. IAS 12 currently includes examples and explanation of the requirements. The IASB proposes that they should be removed from the standard and presented as implementation guidance or set out in the basis for conclusions. A new revised version of IAS 12 will therefore be included as an appendix to the exposure draft. The joint exposure draft is expected to be published in mid IASB INSIGHT, January/February

12 PROJECT UPDATE Performance reporting Project manager Patrina Buchanan reports. Background In 2004 the IASB and the US Financial Accounting Standards Board (FASB) launched a joint project on performance reporting. The objective of the project is to establish standards for the presentation of information in the financial statements that will improve the usefulness of that information for users in assessing the financial performance of an entity. The project focuses on the form and content, classification and aggregation, and display of specified items and summarised amounts on the face of the required financial statements. The IASB and the FASB had previously conducted separate projects on the topic. Those projects differed in important respects and the boards suspended them in 2003, in favour of continuing their efforts together. Past work by both boards on their respective projects is a useful resource, but the boards do not feel bound by it. The boards established an international working group (the Joint International Group or JIG) to provide advice to the boards in working towards the objective of the project. The JIG has met twice and is providing useful input. It is likely that the JIG will be used more actively to provide advice to the boards as the project progresses during The project The boards decided that the project would be conducted in segments: Segment A (IASB only) addresses the required primary financial statements and the number of years to be presented in comparative financial statements. Segment B includes the following topics: (a) the development of consistent principles for aggregating information in each of the primary financial statements. (b) the totals and subtotals that should be reported in each of the primary financial statements. (c) whether there is value in the notion of recycling items between subtotals and, if so, the basis for the types of transactions and events that should be recycled and when recycling should occur. (d) whether the direct method or the indirect method of presentation for the statement of cash flows provides more useful information. Segment C (FASB only) addresses interim financial statements. owners), together with a summary of non-owner changes in equity. Entities will be required to present all non-owner changes in equity (ie all recognised income and expenses as defined by the Framework) in either one statement or two statements. Entities will no longer be permitted to display particular income and expenses in the statement of changes in equity. The definition of a complete set of financial statements includes a statement of financial position (or balance sheet ) at the beginning of the reporting period. As a consequence, an entity presenting comparative information will be required to present three statements of financial position, including a statement at the beginning of the comparative period. In reaching its decisions, the IASB concluded that there is benefit for users of financial statements in splitting total changes in equity on the basis of shared characteristics. For example, it is useful to separate all owner changes in equity from other changes in equity (ie non-owner changes in equity). The IASB s view is that separate presentation of different types of change in equity is a significant improvement in financial reporting. Although preferring the presentation of all non-owner changes in equity (ie income and expenses) in a single statement, the IASB has responded to concerns raised by interested parties by permitting the presentation of recognised income and expenses in either one or two statements. The IASB also concluded that there is benefit for users in presenting a third statement of financial position, particularly in years when retrospective adjustments are made, eg when an entity changes its accounting policies or corrects errors. This statement is an integral part of the financial statements, the presentation of which does not increase costs for preparers. Towards a discussion paper Segment B The boards have begun work on Segment B of the project but have not yet reached substantive decisions. The initial output for Segment B will be a discussion document, incorporating the boards preliminary views on the issues that determine the direction of the project. It will not be a comprehensive discussion of all matters that might be included in a standard. The boards expect to publish such a discussion document early in Segment A The IASB plans to publish an exposure draft on Segment A in the first quarter of The main features of the proposals are: Entities will be required to present a statement of changes in equity that displays all owner changes in equity (ie transactions with owners in their capacity as 12 IASB INSIGHT, January/February 2006

13 PROJECT UPDATE Moving towards an SME exposure draft Director of Standards for SMEs Paul Pacter explains. At its meeting in January 2006, the IASB began its consideration of a preliminary draft of an Exposure Draft (ED) of an IFRS for Small and Medium-sized Entities (SMEs). Several sections of the draft were not yet complete, including those on financial instruments, income taxes, and first-time adoption of IFRSs for SMEs. The sections in the draft ED are organised topically (see sidebar). The IASB s discussions in January focused on: organisation and structure of the draft ED; the staff s approach to developing the draft ED, including which portions of IFRSs are included, which are not included, and what has been added; sections remaining to be drafted; and issues to consider in preparing for the IASB s discussion of content in February The IASB addressed: how the IASB Framework should be incorporated into the SME standards. The draft ED includes extracts from the Framework covering objectives, qualitative characteristics, and elements definitions. An alternative would be to include the full Framework or to cross-refer to the Framework but not include it. No decision was made. whether to retain or modify the pervasive principles that the staff included near the beginning of the ED. The staff intended them as a source of guidance for an SME in the absence of a specific standard. Board members were concerned that the principles in the draft were inconsistent with requirements elsewhere in the ED or with those in full IFRSs. If the pervasive principles were retained they should be modified. No decision was made. the need for plain English even if that means changing text that has been taken from IFRSs. benefits of moving all of the disclosures from the individual sections and putting them into a single Disclosures section, forming a type of disclosure checklist. Possibly this could be integrated with the Notes to the financial statements section. the need for a glossary, which would allow definitions to be removed from the standards sections. the need for a derivation table that identifies the source in IFRSs for the paragraphs in the draft. The IASB s discussion of the draft, section by section, will begin in February The IASB Working Group on Standards for SMEs met on 30 and 31 January. Most of the meeting was devoted to a detailed review of the preliminary draft ED. Seven members of the Board took part in the Working Group s meeting. The Group s recommendations will be considered by the IASB in its review of the draft ED. The sections of the preliminary draft ED are as follows: IN Introduction 1 Concepts and pervasive principles 2 Financial report of an SME 3 Balance sheet 4 Income statement 5 Statement of changes in equity 6 Cash flow statement 7 Notes to the financial statements Guidance on implementing Sections 4 7 Illustrative financial statement structure 8 Consolidated financial statements 9 Accounting policies, estimates and errors 10 Financial assets and financial liabilities 11 Inventories 12 Investments in associates 13 Investments in joint ventures 14 Investment property 15 Property, plant and equipment 16 Intangible assets other than goodwill 17 Business combinations and goodwill 18 Rights and obligations under leases 19 Assets held for sale 20 Provisions and contingencies 21 Equity 22 Revenue 23 Construction contracts 24 Government grants 25 Borrowing costs 26 Share-based payment 27 Impairment of assets 28 Employee benefits 29 Income taxes 30 Financial instruments additional issues 31 Financial reporting in hyperinflationary economies 32 Foreign currency translation 33 Segment reporting 34 Events after the balance sheet date 35 Related party disclosures 36 Earnings per share 37 Specialised industries 38 Discontinued operations 39 Interim financial reporting 40 First-time adoption of IFRSs for SMEs IASB INSIGHT, January/February

14 IFRIC IFRIC activities Allan Cook, IFRIC Co-ordinator, reports. Over the course of 2005 the International Financial Reporting Interpretations Committee (IFRIC) discussed 49 issues, passed three Interpretations to the Board for approval, published six draft Interpretations, and published with reasons 21 decisions not to take certain items onto its agenda. At the close of the period, there were a further seven tentative agenda decisions published and awaiting comments. Development of an IFRIC Due Process Handbook An IFRIC Due Process Handbook is being developed to draw together the various requirements and policies relating to the IFRIC that are currently spread over the IASC Foundation s Constitution and the Preface to International Financial Reporting Interpretations issued by the IASB. The work is being conducted in the light of comments received on the public consultation on IFRIC procedures, which took place in Particular aspects of its procedures that have been discussed by IFRIC when reviewing proposals for the Handbook have been: the criteria for agenda decisions the role of the Agenda Committee whether there should be a target for the number of Interpretations to be issued in a year. IFRIC members observed that it would be useful to add to the existing criteria for taking an issue onto the agenda an explicit statement that an issue would not be taken on if the IFRSs are clear, with the result that divergent interpretations are not expected in practice. On the role of the Agenda Committee, IFRIC members agreed that it should assist the staff in preparing their presentations of issues to the IFRIC so that the IFRIC can decide whether they should be taken onto the agenda. Some IFRIC members echoed views expressed by some public commentators that it would be desirable for the Agenda Committee to meet in public. Others, however, pointed out that all Agenda Committee recommendations were debated in public by the IFRIC itself, which alone was empowered to take decisions. On a possible target for the number of Interpretations per year, the view of IFRIC members was that it would be better to state that the IFRIC should aim for the minimum number necessary and stress that its role was to provide high level guidance rather than engage in detailed application guidance. Publications In addition to the Interpretation and draft Interpretation published in January (see pages 7 and 8), the IASB approved in January an Interpretation on Reassessment of Embedded Derivatives developed by the IFRIC after reviewing comments on D15. Publication is expected shortly. Customer Loyalty Programmes The IFRIC has begun to discuss the revenue recognition implications of customer loyalty programmes. The project examines the circumstances when sales transactions involving a commitment by the entity to provide further goods and services to the customer either itself or through another entity require the consideration received to be apportioned between that sale and the rights granted to the customer. In view of the ongoing joint project with the FASB on revenue recognition, there are likely to be limits on how far the IFRIC will feel able to go in addressing some of the issues that arise from customer loyalty programmes. Nevertheless, given the timescale of the joint project, the IFRIC believed that timely guidance in this restricted area could be useful to constituents. 14 IASB INSIGHT, January/February 2006

15 REPORT Standards Advisory Council meets IASB The IASB met the Standards Advisory Council in London, on 10 and 11 November Technical Associate Luis Medina reports. The Chairman of the Standards Advisory Council (SAC), Nelson Carvalho, welcomed SAC members to the inaugural meeting of the reconstituted SAC. The text of his opening address is at page 17. IASB/IFRIC operations IASB members presented an overview of the IASB and IFRIC operations, particularly for the benefit of those attending their first meeting of the reorganised SAC. IASB member Gilbert Gélard outlined the objectives of the IASB and explained the role of the IASC Foundation in appointing and providing oversight for the IASB, SAC and the IFRIC. Elizabeth Hickey, IASB Director of Technical Activities, described the staffing of the IASB. IASB member and IFRIC chairman Robert Garnett presented the IFRIC objectives and explained the criteria applied in assessing issues for consideration. SAC members express concern about the number of interpretations that the IFRIC produces annually. IASB convergence programme Sir David Tweedie and other IASB members reported on progress with the IASB s convergence programme. With more than 100 countries reporting under IFRSs, a major objective of the IASB was to achieve convergence with US GAAP. Wayne Upton, IASB Director of Research, gave an account of the convergence programme with the Chinese standard-setter. Other international developments included convergence of Canadian, Japanese, Korean and Mexican accounting standards with IFRSs. Chile expected to adopt IFRSs in Some SAC members noted that for companies that began reporting under IFRSs in 2005, introducing new IFRSs could potentially be counter-productive. As a result SAC members expressed a desire for a more measured and stable approach before modifying the existing standards. Update on Insurance and Financial Instruments projects and on education initiative IASB member Patricia O Malley reported on progress in the Insurance project, which was now in its second phase. A discussion paper was expected to be published in the second half of The FASB had expressed interest in participating in this project after the discussion paper stage. On financial instruments, project manager Gavin Francis pointed out that IFRS 7 Financial Instruments: Disclosures and an amendment to IAS 39 Financial Instruments: Recognition and Measurement had recently been issued. Future work would be based on explicit long-term objectives to improve and simplify the accountability of financial instruments. On behalf of the IASC Foundation, manager education projects Michael Wells explained that educational projects aimed to promote the consistent application of Gavin Francis, Project Manager (left) and Michael Wells, Manager Education Projects (right) IFRSs. To that end eifrss were now available in many languages, and a CD-ROM on the conceptual framework was available. An SAC member expressed concern that the CD-ROM was distributed as if it had been approved through the due process of the IASB. IASB staff emphasised that the product was a project of the IASC Foundation. Performance reporting Project manager Patrina Buchanan presented a summary of the project on performance reporting. Divided into two segments, A and B, it was a joint project with the FASB and was intended to establish standards for the presentation and display of information in the primary financial statements. Its objective was to enhance the usefulness of that information for users in assessing the financial performance and financial position of an entity. The SAC explored a crucial feature of Segment B, the categorisation of income and expenses. For this purpose, SAC members discussed the following questions in small groups: (a) whether a financing category would be useful in the statement of recognised income and expense. (b) which of four categorisation models would be most useful in providing information that helps users in understanding performance, predicting future performance, or for communicating with investors. SAC members were of the view that a financing category would be useful but that additional disclosures were needed. Factors that should be considered were simplicity, usefulness to users and companies current practice. There was support for two of the four categorisation models an operating/non-operating model and a cash accruals/market value/estimated value. The operating/ non-operating model was said to give valuable information on the sustainability of earnings and the cash accruals/ IASB INSIGHT, January/February

16 REPORT market value/estimated value model communicated information that was not apparent in current income statements. SAC members showed interest in combining those models as well as revising the matrix model proposed in the past. Business combinations Senior project manager Alan Teixeira described the project on business combinations, whose objective was for the IASB and the FASB to align accounting practices. Following the publication of exposure drafts of amendments to IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements, round-table discussions were held in the US and then the UK. The staff pointed out that a related project, involving the definition of control, was also under consideration. SAC members broke into three groups to discuss: (a) how to reconcile the requirement for an investor to have power over another entity when that second entity has been set on autopilot. (b) whether the nature of an autopilot was that the power had been exercised or that power was not relevant or material. It became clear that SAC members held wide-ranging views on which party might have control. Most agreed that the percentage of ownership was only one of the relevant factors. Some argued that control would flow from the ability to appoint the board. Others suggested that the investment had the characteristics of a joint venture. Several SAC members suggested that a model in which voting rights determine control provided a simpler and appropriate answer. On de facto control, some SAC members suggested that a way forward was to retain the requirement that one party must have a majority of the voting rights to be able to control another party. Other SAC members disagreed with this view and expressed concerns about the consequences of bright line tests. There was general agreement that developing principles for assessing de facto control would be difficult. One SAC member suggested that the questions set for the break-out sessions were restricting the debate. The member favoured allowing the SAC more freedom to choose which issues to discuss at its meetings. However, SAC members welcomed the opportunity that the break-out sessions had given them to explore issues with colleagues and IASB members. Members of the Standards Advisory Council with Sir David Tweedie, IASB Chairman, and Tom Jones, IASB Vice-Chairman 16 IASB INSIGHT, January/February 2006

17 REPORT Opening remarks of Professor L Nelson Carvalho, Chairman of the Standards Advisory Council (SAC), at the inaugural meeting of the restructured SAC in London on 10 November 2005 Good morning, Ladies and Gentlemen. First, let me warmly welcome you all to this meeting of the newly reformed Standards Advisory Council of the International Accounting Standards Board. I hope that my introductory remarks will help to give us all a sense of direction and a common purpose for our work within the guidelines set out in the IASB Constitution of July Let me begin by briefly revisiting the case for International Financial Reporting Standards themselves: Entrepreneurs are expected to exploit their abilities to build, to manufacture, to service, to distribute. And that needs proper funding. Margins that yield profits incentivise entrepreneurship. And in turn, profits incentivise investors and creditors. The challenge in this entire equation is to achieve the lowest cost of capital possible. Classical theory of finance teaches that, even more than fearing losses, investors and creditors fear the unknown risks tend to contaminate prices. Our very first task, indeed, the task of everyone involved in the standard-setting responsibilities in the business world, is therefore to reduce the unknown. The question is how to accomplish that; the answer, albeit tough to achieve, is easy to identify disclosure and transparency. Daylight is insuperable as a remedy for fear of the unknown. Recognition of the economic events that transform the magnitude and nature of equities, then measurement of those events in the appropriate way and communicating them adequately to stakeholders that is a summary of our mission in life. A great part of this task lies upon the shoulders of the Board. But as SAC members we too have an important responsibility. Our role is to advise the Board on the right things to do as we see them. Nelson Carvalho, SAC Chairman (left) and Sir David Tweedie, IASB Chairman (right) IASB INSIGHT, January/February

18 REPORT International accounting standard-setting is not a business of playing around with debits and credits, nor is it an exercise in switching charts of account. The Board s job, and ours, is to help entities to tell economic events the way they really are. One might ask: what for? There is a clear answer: to help forecast cash flows and support sound economic decisions. In other words, to permit good business enterprises to attract properly priced capital so that entrepreneurs can create enterprises and, consequently, jobs. Good companies that show investors and creditors how good they are become able to attract capital which means that they become able to grow more and more. I invite you to see the work we are doing here as an effort towards increasing employment, creating jobs, and ultimately contributing to economic development. This is the special way that the accounting profession and its stakeholders can contribute to the reduction of poverty and to wealth creation. * * * * * And how shall we, as members of the Standards Advisory Council, accomplish our part of this task? The answer is in one simple word: Speak. Speak your thoughts. Share your views. Talk. This Council is not supposed to vote. The Board is here to listen. Its members will become frustrated if you don t speak. Do not feel intimidated by the apparent complexity of the technical details. If technicalities trouble you, don t feel embarrassed. Details serve a useful purpose only when they lead to solutions. Details always hide both a problem and a suggested solution. Our job is to look for both and tell the Board what we found. We shall look for the problem, we shall look for a solution, and we will either agree with the Board s views or tell them we see it differently. Do not feel embarrassed if English is not your mother tongue. There are over 20 nationalities represented here in this Council, and native English speakers are not the majority by a long way nor are they expected to be. Playing in the international field is a painful exercise. Native English speakers may raise their eyebrows when they hear their language being spoken with grammatical mistakes and strange accents, but those of us who were not born English speakers, when lost in the intricacies of a foreign language, may feel the equal discomfort of being unable to express our thoughts as articulately as we could in our own tongue. So do not think of the world as divided between English and foreign languages, and remember that English is a foreign language to many. Do not be afraid of making mistakes when speaking English, or embarrassed if you do most of those who listen to you aren t able to commit mistakes in any other languages but their own. Speak. Share views. We are more interested in the quality of your opinions than in the correctness of your grammar. * * * * * The terms of reference of this Council call us to: provide input on IASB s agenda also on project timetables and to provide advice on projects, regarding practical implementation and application. I must warn you that we shall experience some moments of frustration. First, we certainly don t expect that all these wise, expert and important people around this table share exactly the same views on every issue raised for our consideration otherwise we would have no reason to exist. Second, we certainly are not allowed to think that life began today. We have inherited commitments, agenda, appointments, compromises. These will have to be faced and managed as we meet them in the coming months and years. The world is not out there waiting for us to tell it how it should be run. We are finding a work in progress already started our job is to finish it as adequately as we can. We have a second role: that of Ambassadors to IFRSs. If we have disagreements within ourselves or with Board, there are appropriate routes to cross to overcome such disagreements. In any case our goal is to support the answers given by the IFRSs as the best possible ones. * * * * * Another issue that occurred to me to alert you to is the time it takes to produce an IFRS. From inception, and that means when a subject is added to the agenda for development of a statement or standard, through to the time of issue in final form, we are talking about two to three years on average. If that seems slow to you, I might mention that in one country a particularly difficult issue was added to its standards board s agenda in 1986 and the output came in 2000 fourteen years later. The development of a standard can therefore be discouraging, because it is time-consuming, but it is necessary. The research supporting the draft and the due process in terms of exposing drafts for discussion may take a long time and we must accept the facts of life in this respect. In practical terms, what that means is that we shall not be debating what will come out in the next few months but rather what may come out in the next five to ten years. If we understand those time frames, we will reduce our frustration. On education, you will be hearing about some initiatives. However, it should be stressed that the IASB and the IASC Foundation are not engaged in the business of education. It is neither their mission nor their mandate. But they well understand that education is far too important an issue to ignore and they will contribute towards that goal without getting committed to providing the education that other stakeholders may be in a better position to provide. 18 IASB INSIGHT, January/February 2006

19 REPORT Out of the six stages of the standard-setting process, no less than four deserve or require our participation as a Council. These are: setting the Board s agenda, commenting on the discussion papers and exposure drafts it publishes, and debating issues of implementation or clarification of an IFRS. Broadly speaking, we are particularly well qualified to perform that role we encompass preparers, analysts, auditors, academics, regulators, industry specialists and standard-setters. No other group has such strength of multi-disciplinary elements to exchange views and offer suggestions. * * * * * We have to avoid a few traps. First, we should not fall into the temptation of supporting adaptation instead of adoption of IFRSs. The UN covers about 195 countries if adaptation is the route chosen by any fraction of that total it will spell failure for the ideal of establishing and implementing a sound, robust set of technically superior accounting standards. A second trap to be avoided is the dominance of Board s views. We are not to behave as a group of school boys and girls being lectured. We are to receive the Board s input on issues, but we are required to develop our own views and more to share them with the Board. We must limit ourselves to strategic issues details are not our business, and the placing of commas is not our preoccupation. We are not the standard-setters the Board is. We are here to alert the Board on whether, in our view, the standards it is setting are relevant and its approach is correct as each of us see it. There is no way that the Board or I will be able to respond to each and every suggestion or comment any of you will make. The right and best place to look for answers to anyone s comments is the basis for conclusions published with each standard. But much before that, please do respond to the discussion papers and exposure drafts published for comment. Please do have your constituents, if you have them, replying to those requests for comment. Taking these steps will enable your views to be taken into consideration. Also, do participate in round-tables and workshops these are an efficient way of exchanging views and testing ideas. I am assigned the task of liaising between you and the Board, and between you and the Trustees. Please do not hesitate to contact me whenever you deem it necessary to bring matters to their attention. Let s prove that the wonderful group of people the Trustees have appointed as Council members are absolutely up to their mission to provide valuable and sound advice to the Board. Thank you. IASB INSIGHT, January/February

20 STAFF CHANGES Staff changes The technical staff has been increased by eight new arrivals. In December three project managers joined. Sarah Broad. After qualifying as a chartered accountant with PricewaterhouseCoopers in the UK she worked for the firm in the UK and then Australia. Before joining the IASB, she worked in Melbourne as Corporate Accounting Manager in the global headquarters of Computershare Limited. Sarah is working on non-financial liabilities the proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Simon Peerless, a project director at the UK Accounting Standards Board, joined on a part-time secondment to work on the Leasing project. He has worked at the ASB for a total of six years, rejoining two years ago after several years working in the group reporting department of NatWest and Royal Bank of Scotland. Jeff Singleton, a chartered accountant from Australia, was previously employed by Australia Post, where he was managing its transition to IFRSs. Before then he was a director with Deloitte, and served in both Australia and the UK. His first assignment with the IASB is a project to amend IAS 33 Earnings per Share. In January five more members of the technical staff arrived. Michael Buschhueter joined as a project manager to work on the Business Combinations (phase II) project. A German Wirtschaftspruefer and US Certified Public Accountant, he was a national partner in the Transaction Services Group of RSM Haarmann Hemmelrath s Frankfurt office. Before joining the German-based accounting firm he spent several years in Boston, US. Candy Fong, a practice fellow, arrived on secondment from Deloitte & Touche, where she has been working for the technical department in Hong Kong. For some years she has conducted technical reviews of listed entities financial statements prepared under IFRSs or Hong Kong Financial Reporting Standards (HKFRSs), and delivered both internal and external training on implementing IFRSs and HKFRSs. Rachel Knubley joined the IASB as a project manager to work on leases and financial instruments. A chartered accountant from the UK, she worked in the audit practice of PricewaterhouseCoopers before joining the UK accounting technical department in 1999, where she advised on leasing and financial instruments. Li Li Lian joined as an assistant project manager. Li Li started her career in KPMG Malaysia before joining the International Public Sector Accounting Standards Board of the International Federation of Accountants. She previously worked as a technical manager on the programme of convergence with IFRSs and the service concessions project. She will be involved in the IASB-FASB joint project on the conceptual framework. Zhang Xiangzhi joined as a visiting fellow on secondment from the Ministry of Finance, People s Republic of China. Xiangzhi has been involved in Chinese standard-setting for several years and while at the IASB he will be contributing to several projects, including Fair Value Measurement and Insurance Contracts. * * * * * The IASC Foundation Publications team has been strengthened by three recent appointments. In November Kenneth Creighton, from the US, joined as Senior Manager Publications and Electronic Materials. Ken worked for Ernst & Young in London, Madrid and Washington, DC. His most recent role was senior manager leading the UK-based Ernst & Young Online team covering Europe, the Middle East and Africa. Previously he worked in finance and politics in Washington, DC. In January, David Ramsey, from the UK, joined as Sigmalink (CMS) Application Manager. After some eight years with Xerox as a developer and architect focusing on linguistic tools and translation technology, he joined International Masters Publishing as head of development, focusing on XML driven products, and was most recently technical project manager and application architect with Gamesys Ltd. Also in January, Dana Smiley, from New Zealand, joined as customer service team leader. She had previously held a similar position with Giant Group Ltd since 2003, and before then worked for Inland Revenue New Zealand. * * * * * In January Rudi Marx joined as IT Assistant. He came to the UK from South Africa about six years ago and since then has been employed in various IT roles in the public sector. He filled the vacancy left by the departure in November of Olafur Eliasson, who returned to his native Iceland. 20 IASB INSIGHT, January/February 2006

21 Financial Instruments Reporting and Accounting A user s guide through the official text of IAS 32, IAS 39 and IFRS 7 Financial Instruments Reporting and Accounting A user s guide through the official text of IAS 32, IAS 39 and IFRS 7 is the only complete and up-to-date text, with extensive cross-references, of the Standards on financial instruments issued by the International Accounting Standards Board: IAS 32 Financial Instruments: Presentation IAS 39 Financial Instruments: Recognition and Measurement IFRS 7 Financial Instruments: Disclosures. ISBN The volume also contains introductory material and a summary of IFRS 1 that will be of particular interest to first-time adopters of IFRSs. This volume offers a unique single reference point for all those who need to have a detailed knowledge of reporting and accounting for financial instruments in accordance with IFRSs. Copies cost 38 each International Accounting Standards Committee Foundation TO FIND OUT MORE VISIT THE BOOKSHOP AT

22 P2P IFRS From principle to practice The e-learning solution for IFRS from PricewaterhouseCoopers What is it? P2P IFRS is a comprehensive, easy to use electronic learning solution designed by our experts to improve technical understanding of International Financial Reporting Standards (IFRS). The training is highly interactive and covers all the key aspects of IFRS in a business context. It can be used to explore the part of IFRS you need, whenever and wherever you need it via a CD-ROM, the web or a corporate intranet. It is cost-effective, providing 19 hours of interactive learning at the touch of a button. Who is it for? P2P IFRS was designed for reporting teams, company executives and accounting professionals. It can be used as a standalone introduction, as a foundation to classroom training, or as a refresher or reference tool. The target audience includes: analysts and anyone making business decisions based on IFRS financial statements; executives involved in preparing information for IFRS financial statements; board members and managers preparing for IFRS transition; and accounting professionals preparing to use IFRS for their company s financial reporting and management accounts. P2P IFRS CD-ROM costs 302 UPDATED AND REFRESHED for the 2005 stable platform of International Financial Reporting Standards International Accounting Standards Committee Foundation What are the benefits? Up-to-date the training reflects the stable platform of standards for Interactive each learning module includes structured learning points that engage the user by setting them in a real business context and testing the users understanding throughout the program. Innovative an easy to use electronic learning solution for IFRS that is available on a CD-ROM, via the web or through a corporate intranet. Invaluable users will be able to put their knowledge into practice both during and after conversion of a company s financial reporting to IFRS. Demonstrate competence users can test their knowledge in the assessment section after each group of modules and print out a certificate to demonstrate their competence. Just in time unlike traditional lecture courses, users can explore the part of IFRS they need, at a pace to suit them, whenever and wherever they need it. FOR MORE INFORMATION AND TO PLACE AN ORDER VISIT THE IASCF BOOKSHOP AT

23 COMPREHENSIVE SUBSCRIBERS ACCESS YOUR ONLINE SERVICE AT REMEMBER that your subscription to the Comprehensive Package also gives you access to a range of services and features on the IASB Website including: eifrss - The electronic (HTML) format for IFRSs Coming soon - A powerful Search Standards function that offers fully hyper-linked standards and allows searching of eifrs by issue date and effective date and more A Comprehensive Subscription Service area that organises files by topic Adobe Acrobat (pdf) versions of all International Financial Reporting Standards, International Accounting Standards and all SIC and IFRIC Interpretations dating back to 1 April 2001 Adobe Acrobat (pdf) versions of the Bound Volume in German, French, Spanish, Italian, Greek and Russian. These online services are INCLUDED in your current Comprehensive Subscription package so make sure that you activate your access today. The process is very simple, just log on to Online Services and follow these three steps: 1 Note your unique subscription number. This number was given to you in a letter when you took out your subscription. 2 Go to and click the activate your subscription link. 3 Enter your address and a password of your choice. International Accounting Standards Committee Foundation If you do not know your unique subscription number, you may request it by ing publications@iasb.org. You must include both your customer number and the phrase online services subscriber in the subject line. After verification, your subscription number will be ed to you. EXPERIENCE ONLINE SERVICES - VISIT TODAY!

24 Coming soon International Financial Reporting Standards Bound Volume The only official and complete printed edition of the authoritative pronouncements issued by the IASB This complete text consolidates all International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), IFRIC and SIC Interpretations and IASB-issued supporting documents application guidance, illustrative examples, implementation guidance, bases for conclusions and dissenting opinions approved at 1 January The new 2006 Bound Volume includes: IFRS 7 Financial Instruments: Disclosures; Amendments to IAS 1 - Capital Disclosures; Amendments to IAS 39 Financial Instruments: Recognition and Measurement - Cash Flow Hedge Accounting of Forecast Intragroup Transactions; The Fair Value Option and Financial Guarantee Contracts; IFRS 4 Insurance Contracts Revised Implementation Guidance; Amendments to IAS 21 - Net Investment in a Foreign Operation; new Interpretations - IFRICs 6, 7 and 8. The volume also includes the IASB Framework for the Preparation and Presentation of Financial Statements, the Preface to International Financial Reporting Standards, an updated Glossary of Terms, and a comprehensive Index. Copies cost 60 each ISBN This new 2006 Bound Volume will be published mid-march To find out how to order your copy visit the bookshop at International Accounting Standards Committee Foundation TO FIND OUT MORE VISIT THE BOOKSHOP AT