Conceptual framework

As reported in the last edition of Inside Track, the IASB and the US Financial Accounting Standards Board (FASB) have a joint agenda project to revisit their conceptual frameworks for financial accounting and reporting. The goal of the project is to develop a common conceptual framework that both Boards can use in developing new and revised accounting standards. The Boards' discussions to date have focused on the objectives and qualitative characteristics of financial reporting.

The ASB is monitoring closely the project. The staff at the ASB has submitted some comments on the project to the IASB/FASB team, a copy of which can be accessed on the ASB website at http://www.frc.org.uk/images/uploaded/documents/FrameworksMemoLetter%20and%20Memo.pdf.

Draft Technical Correction 1

On 30 September the IASB issued its first draft technical correction, DTC1 'Proposed Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates - Net Investment in a Foreign Operation', for comment by 31 October.

The proposals in DTC1 would amend one aspect of IAS 21. This standard requires exchange differences arising on a company's net investment in a foreign operation to be reported in equity (and 'recycled' to profit and loss account on the subsequent disposal of that investment). The 'net investment' may include loans between the company and its foreign operation, provided certain conditions are met. Under the current requirements of IAS 21, a 'third currency' loan-that is a loan in a currency which is neither the functional currency of the parent nor of the foreign operationcannot be treated as part of the 'net investment', so exchange differences cannot be reported in equity, but must be included in the profit and loss account.

The proposals in DTC1 would change this, and require exchange differences on 'third currency loans' that otherwise meet the conditions for a 'net investment' to be reported in equity, and subsequently recycled. It would not be permitted to continue to report such exchange differences in the profit and loss account.

The requirements of IAS 21 are essentially the same as those of FRS 23, and the ASB has concluded that to avoid previously converged standards differing, it would make parallel amendments to FRS 23. On 3 October the ASB issued a Notice to Constituents (available at www.frc.org.uk/asb) drawing attention to DTC1 and proposing similar amendments to FRS 23. Comments were requested by 31 October. The IASB has indicated that it will consider responses to both the proposed Technical Corrections policy (see page 5) and DTC1 at its November meeting. If the IASB proceeds with the proposed amendment to IAS 21, the corresponding amendment to FRS 23 would then be made without further consultation.

Business Combinations

The comment period for responses to the Exposure Drafts arising from the second phase of the IASB project on Business Combinations closed on 28 October 2005. The EDs cover proposed amendments to IFRS 3 'Business Combinations', the consolidation standard IAS 27 and amendments to IAS 37 (Provisions) and IAS 19 (Employee Benefits). The ASB's response to the IASB can be accessed from the 'Spotlight' section of the ASB website at http://www.frc.org.uk/asb.

The ASB's response notes that the proposals rely on new fundamental principles, including:

• the application of the "entity approach". The ASB continues to believe that the "parent entity approach" provides a better focus for financial reporting than the entity approach;
• the requirement to measure the acquiree at fair value; and
• the proposed amendments to IAS 37 which seem to imply the principle that liabilities should be measured at fair value - and that this means settlement, or 'exit value'.

The ASB does not believe that proposals for new standards should be constrained by the existing Framework. But it takes the view that fundamental new principles should only be introduced if they clearly represent significant improvements in financial reporting and questions whether the improvements that the proposals would bring about are sufficient to justify their adoption. In any event, the ASB believes these principles should be fully debated with the joint IASB/FASB Conceptual Framework project.

The ASB also has significant reservations about the practical implications that arise from the Business Combinations project and proposals to amend IAS 37.

For these reasons, the ASB does not support the conversion of the Exposure Drafts into IFRS.

New items on the IASB's agenda

At its September meeting, the IASB added two new items to its agenda:

• fair value measurement; and
• emissions trading.

Fair value measurement
The aim of this project is to provide guidance to entities on how they should measure the fair value of assets and liabilities. This project will clarify how fair value should be determined when a standard requires fair value measurement. The IASB has agreed to issue a forthcoming FASB final Statement on fair value measurements as an IASB Exposure Draft with an Invitation to Comment.

Emissions trading
The IASB has agreed to take this project onto its agenda following the withdrawal of IFRIC 3 'Emission Rights' and the risk of diverse accounting practices being adopted for emissions trading scshemes. The output from this project is expected to be amendments to existing standards.