Management Commentary

The IASB published an ED on Management Commentary (MC, the international term for the Business Review/Operating and Financial Review, OFR) on 23 June 2009. The ED sets out a proposed non-mandatory framework to help entities prepare and present MC, building on the responses to the Discussion Paper issued in 2005 by an international project team (including ASB staff). The ED is open for comment until 1 March 2010.

The ASB has long believed that the publication of a narrative explanation of a company's development, performance, position and prospects should be regarded as an important element of best practice in corporate reporting. The ASB is finalising its response to the ED broadly supporting the flexible 'framework' approach in the ED, but highlighting its view that the desirable qualitative characteristics of MC are not all the same as those that apply to the financial statements. We agree that the qualitative characteristics of management commentary should be relevance, timeliness and understandability. We also agree that management commentary should be comparable, but only over time and not as between entities, given that the purpose of management commentary is explain management's view of the entity. But we have concerns that management commentary can possess the qualitative characteristics of faithful representation, in particular the requirement for information to be 'neutral'. We would prefer that management commentary should possess the characteristic of 'balance', as suggested in the October 2005 DP. We also have concerns that verifiability can be applied to management commentary and again we prefer the characteristic of 'supportability' suggested in the DP.

Financial Statement Presentation

The IASB continues to debate issues related to financial statement presentations in light of the responses to its Discussion Paper (DP). The DP, published in March 2009, was described in Inside Tracks 58 and 59.

Some of the tentative decisions made by the IASB in its joint October and December 2009 meetings with the FASB are to:

• Add an additional subcategory to the business section in the financial statements labelled 'financing arising from operating activities', which will include items such as the defined benefit pension liability. This category is in addition to the operating and investing subcategories in the business section already proposed in the DP;
• Specify that an entity must classify its cash balance at the reporting entity level, rather than at the reportable segment level as proposed in the DP. This means that cash will be presented in one category on the Statement of Financial Position (SFP) instead of multiple categories as was possible in the DP;
• Require presentation of bank overdrafts in the debt category of the financing section of the SFP;
• Replace the reconciliation schedule proposed in the DP with an analysis of the changes in balances of all significant asset and liability line items;
• Retain the DP proposal requiring preparation of a direct method cash flow statement, but supplemented by indirect method information in the notes; and
• Articulate an overall disaggregation principle that requires an entity to consider disaggregation by function, nature and measurement bases in the financial statements as a whole.

Leases

The IASB continues to debate issues related to accounting for leases in light of the responses received to its Leases Discussion Paper (DP).

The joint IASB/FASB November and December meetings included discussion of lessee and lessor accounting for optional lease terms, contingent rentals and the scope of a new standard on lease accounting. The following tentative decisions were reached:

• The recognised lease term would be the longest possible lease term that is more likely than not to occur;
• Both lessee's and lessor's would include contingent rentals in the lease obligation, measured using an expected outcome technique; and
• The scope of a new standard would exclude leases of intangible assets, biological assets and for exploration of natural resources such as oil and gas.

Insurance

2010 promises to be an important year for those interested in insurance accounting because the IASB is expecting to issue its long-awaited exposure draft of a comprehensive standard on Accounting for Insurance Contracts in Quarter2 2010. As the comment period will probably be at least our months, the ED will keep interested parties busy through the summer and into autumn. The current timetable envisages a final standard in mid-2011. The IASB is carrying out the project jointly with FASB, and the plan is that the two Boards will issue the same ED and put forward join proposals . There are currently significant differences in the tentative conclusions the two Boards have reached separately. Effort is now being put into reducing these. The shape and direction that the proposed standard will take is not yet clear, although it is likely that all insurance obligations should be measured using the following building blocks:

• the unbiased, probability-weighted average of future cash flows expected to arise as the insurer fulfils the obligation;
• the time value of money;
• a risk adjustment for the effects of uncertainty about the amount and timing of future cash flows; and
• an amount that eliminates any gain at inception of the contract.

The ASB is following the IASB's discussions closely, and it is envisaged that there will be a more detailed update on this project in the next edition of Inside Track.

Credit Risk in Liability Measurement

The IASB considered responses to the Invitation to Comment on a staff paper at its meeting in September 2009 (see Inside Track 61). At this meeting the IASB decided to consider the findings from this work in its replacement project on IAS 39 'Financial Instruments'.

IASB Project on Post Employment Benefits

The IASB has now issued its amendment to IFRIC 14 'IAS 19 - Prepayments of a Minimum Funding Requirement'. The amendment applies in the limited circumstances when an entity is subject to minimum funding requirements and makes an early prepayment of contributions to cover these requirements. The amendment permits such an entity to treat the benefit of such an early prepayment as an asset. The amendment applies from 1 January 2011 with early adoption permitted.

The IASB will continue its deliberations of its Discussion Paper (DP) issued in January 2008 that made proposals to address a number of urgent issues with the aim of significantly improving accounting for pensions by 2011. At its meeting in January 2010 the IASB will consider disclosure proposals for the forthcoming ED. It is anticipated that the ED will be published in the first quarter of 2010 and address recognition, presentation and disclosure.

Improvements to IFRSs

The International Financial Reporting Interpretatations Committee (IFRIC) is currently deliberating the comments received on the IASB exposure draft of Improvements to IFRS issued in August 2009.

The ASB issued its Improvements to FRS in December 2009 that incorporated the improvements made by the IASB in its Improvements to IFRS issued in April 2009.

Consolidation

The IASB is continuing to consider the comments received on its exposure draft issued in December 2008 ED 10 'Consolidated Financial Statements'. At its January 2010 meeting the IASB considered control through voting rights (including less than a majority of voting rights), options and convertible instruments, kick-out rights and agency relationships.

At the joint IASB and FASB meeting in October 2009 the IASB agreed to amend its project timetable to give both Boards the opportunity to deliberate the consolidation requirements, with the goal that the FASB would publish an exposure draft that is consistent with the consolidation standard issued by the IASB. The Boards think that this approach increases the likelihood that the FASB and the IASB consolidation requirements will result in a converged solution.