Conceptual Framework

As regular readers of Inside Track will recall, the IASB and FASB are developing a common conceptual framework that they can both use in preparing new and revised accounting standards. In recent months, the two Boards have been considering responses to a discussion paper, issued during 2006, on the objective of financial reporting and the qualitative characteristics of the ionformation contained therein.

Inside Track 52 highlighted the concerns expressed by many respondents to that discussion paper on specifying stewardship as an objective of financial reporting. Following those concerns, and the issue of the paper on stewardship issued under the Pro-active Accounting Activities in Europe (PAAinE) initiative, the IASB and FASB have reconsidered the issue and tentatively decided to incorporate stewardship into the objective of financial reporting at their recent meetings.

As reported in the September 2007 issue of IASB Update, the IASB Board members tentatively decided that the objective should be revised to read:

"The objective of general purpose external financial reporting is to provide financial information about the reporting entity that is useful to current and potential investors and creditors and others in making decisions in their capacity as capital providers. This objective will encompass information that is useful to owners acting in their capacity as owners as well as for investing and lending decisions."

The direction of this tentative decision by the IASB is encouraging, however, the wider impact of this decision can only be analysed once the detailed proposals are published in the Exposure Draft on the objective and qualitative characteristics, due out before the end of 2007.

The IASB is also due to publish an exposure draft on the reporting entity phase of this project before the end of 2007. The ASB will continue to monitor the progress on this project.

Annual Improvements

The IASB has recently issued its exposure draft of proposed amendments to a number of International Financial Reporting Standards arising from its annual improvements process.

The intention of the annual improvements process is to ease the burden of amending standards individually. Annual improvements are non-urgent amendments that focus on areas of inconsistency in standards or where clarification of wording is required. The premise behind the non-urgent, minor amendments process is to streamline the standard setting process. If a number of minor amendments are processed collectively, there will be benefits to constituents and the IASB.

The IASB's Exposure Draft of proposed amendments is open to comment until 11 January 2008. The ASB intends to issue a draft comment letter on its website shortly. It will publish a FRED of proposed amendments to UK standards once the IFRS has finalised its changes to IFRS.

Insurance

The Board has been discussing its response to the IASB's Discussion Paper (DP) on insurance contracts,
ahead of the mid-November submission deadline. The following areas have been attracting the Board's attention:

• whilst current measurement is supported, the DP's labelling of its approach as an exit price model is questioned; the best evidence of the value of insurance liabilities will usually be the transaction price and the entity's own estimates of cash flows, and these should not be discarded in preference for values based on purely hypothetical exit transactions where there is no existing market;
• the use of exit prices can give rise to gains and losses on inception that do not represent the provision of services to the policyholder but simply a difference between the premiums receivable and the value of the liability arising under the contract; these gains and losses would be based on highly subjective measurement;
• the concept of ‘service margin' set out in the DP as one element of the valuation model is not clearly understood, differing interpretations are emerging; this needs clarification
• the inclusion in the liability valuation model of future premiums that policyholders are not contractually obliged to pay raises concerns over inconsistencies with non-insurance financial reporting.
• further analysis of discretionary participating contracts (such as with-profits life assurance) may be required; the DP's proposal to base liability recognition on the guidance in the proposed amendment to IAS 37 may not be sufficient to provide consistent basis for determining constructive liabilities for these contracts, and the treatment of surpluses in life funds that are attributable in part to policyholders as equity also gives rise to concern;
• the importance of adopting principles that are consistent with other non-insurance financial reporting, or, where it is necessary to make an exception for insurance for pragmatic reasons, to make it clear that the general principles have not been followed. The Board expects to finalise its comment letter shortly and will make it available on the website at: http://www.frc.org.uk/asb/technical/projects/project0014.html.

Pensions

Work has continued on the drafting of a discussion paper that will take a fresh look at the principles that might be reflected in a future accounting standard on pensions. The project is being led by the ASB as part of the PAAinE initiative that is a partnership including EFRAG and European standard-setters.

In the last quarter, the ASB, EFRAG TEG and the project advisory groups have been reviewing draft sections of the discussion paper. We aim to publish the discussion paper by the end of 2007.

Leases

The IASB and FASB are continuing to develop the ‘right of use' model for accounting for leases. In October the boards considered how obligations of lessees such as maintenance obligations, costs of returning the leased item and obligations to return the leased item in a specified condition would be accounted for under the model. They also addressed variable lease payments such as rentals linked to inflation or current prices, contingent rentals based on turnover or similar factors, and rentals based on usage of the leased item. A discussion paper is planned for issue in the second half of 2008.

ED Amendments to FRS 26

In September 2007, the IASB issued an Exposure Draft ‘Proposed Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Exposures Qualifying for Hedge Accounting'. The proposed amendments are intended to clarify the IASB's original intentions regarding what can be designated as a hedged risk and when an entity may designate a portion of the cash flows of a financial instrument as a hedged item.

The ASB proposes to amend FRS 26 to maintain consistency with IAS 39, if the amendment is confirmed by the IASB. The ASB has issued an exposure draft in October requesting comments on the IASB's proposals and the ASB's proposals for implementing them in the UK.

Heritage assets

Since the last Inside Track update on heritage assets, in January 2007, the Board has considered the comment letters received in response to FRED 40 'Accounting for Heritage Assets'.  In doing so, the Board acknowledged respondents concerns with regard to the proposal to apply the valuation policy at the level of an individual collection. The Board did however reaffirm its view that:

• heritage assets are assets and should be reported as such in the balance sheet;
• acquisitions and disposals should not be reported in the profit and loss account, or equivalent statement, or in any manner that implies they are gains or losses; and
• enhanced disclosures should be provided, regardless of whether it is practicable to value heritage assets.

The Board has also considered further the different approaches for accounting for heritage assets and, having done so, remains of the view that the proposed standard should require the reporting of heritage assets in the balance sheet, subject to considerations of practicability. The Board has asked for a revised working of the proposals to be available for its consideration in the autumn.

Finally, the Board notes the research project that is being taken forward by a team from the Royal Institution of Chartered Surveyors (RICS), Kingston University and HM Treasury. The research team published a Discussion Paper in August 2007 'Valuing our Heritage' which can be found at http://www.rics.org/AboutRICS/RICSfaculties/RICSArtsandAntiquesFaculty/Valuing+our+Heritage.htm