International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASC Foundation or the IASB Some key accounting issues AOSSG Malaysia November 2009

Lessor accounting DP describes lessor issues –No preliminary views Discussed two models –Derecognition approach –Recognition of a performance obligation

Lessor accounting Derecognition approach Performance obligation approach Leased asset NoYes Receivable Yes Performance obligation NoYes Revenue At the start of the leaseOver the lease term Interest income Yes

Lessor accounting Way forward? –Different accounting for different business models? –Manufacturer/dealers –Finance companies –Rental companies –Investment properties Next steps –Further discussions on lessor model –Decide whether to include lessor accounting in ED

Consolidations: agency relationships Control – power criterion –Removal (“kick out”) rights –ED 10: the right to remove a party, without cause, is an indicator that the party acts as an agent –FASB –to be substantive must be held by one party (FAS 167) –IASB – can be substantive if held by more than one party

Consolidations: agency relationships Benefits/returns criterion –Remuneration –ED10: remuneration commensurate with the services performed by a party is an indicator the party acts as an agent –FASB – control if (a) fee is significant (in monetary terms) and absorbs significant variability of expected returns and/or (b) holds variable interest that absorbs significant variability of expected returns –IASB – control if receive or exposed to (a) majority of variable returns and/or (b) significantly more variable returns than any other party

Consolidations: defacto control ED 10: an entity with less than half the voting rights in another entity can have the power to direct the activities of that entity if it has more voting rights than any other party and those voting rights are sufficient to give it the ability to direct the activities of the entity. Is it necessary that there be active demonstration of power to direct activities?

8 Allowances Allowances received free of charge meet the asset definition how initially recognised and measured? does intended use of allowances matter (eg held to settle obligation vs held for trading) 1 Jan Company receives free of charge 100 allowances from administrator. MV at 1 Jan, €10 per allowance. Plans to emit 10 tonnes per month. ‘An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.’ [IASB Framework] 2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | Emission trading schemes

2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | ‘A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.’ [IASB Framework] cross cutting issues Obligation to repay allowances Contentious: Is there a present obligation on receiving allowances? When does repayment of allowances that is contingent on an entity’s future actions create a liability? –View 1: when emissions occur –View 2: upon receipt of allowances 9

View 1: when emissions occur 2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | no obligation arises until company emits. Until that point, company can avoid outflow by its future actions –estimated future repayment forms unit of account with related assets –measurement mismatch if allowances initially proponents argue View 1 is consistent with accounting for –decommissioning costs (IAS 37 Provisions, Contingent Liabilities and Contingent Assets) –future operating costs (IAS 37) –tax on future taxable profits (IAS 12 Income Taxes) 10

View 2: upon receipt of allowances obligation to repay allowances is unconditional. Only the ultimate amount is uncertain –estimated future repayment creates separate unit of account (ie liability) –how is liability initially measured of allowances received)? proponents argue View 2 is consistent with accounting for –contingent consideration (IFRS 3 Business Combinations) –contingent rents (Discussion Paper Leases) –regulatory liabilities (Exposure Draft Rate-regulated Activities) 2008 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 11

Tentative decisions of the boards IASB (March 2009) allowances received free of charge are recognised as assets (initially liability to repay allowances received free of charge (initially of allowances received) FASB (April 2009) FASB did not make any decisions staff were asked to perform additional analysis about the existence of liabilities in various fact patterns initial analysis was presented in a July 2009 FASB education session related to stand-ready obligations IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK |

Insurance: measurement approaches Selected approaches (tentatively) IASB: –Updated IAS 37 model, modified to exclude no day one gains –Pre-claims short-duration - unearned premium method FASB: –Current fulfilment value with a composite margin –[Unearned premium approach yet to be discussed by FASB] ED will probably explain both approaches © 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 13

Measurement approaches continued The updated IAS 37 model: What would an insurer rationally pay at reporting date to be relieved of an insurance obligation –No active market: estimated by the value of not having to fulfil the obligation (building block approach) Margins for insurance contracts: –Risk margin –Other services (if any) –Residual margin, to be released over the coverage period © 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 14

Measurement approaches continued Current Fulfilment Value: The expected present value of the costs of fulfilling the insurance obligation with the policyholder over time –Building block approach Margins for insurance contracts : –Composite margin, calibrated at inception to the premium [release of composite margin yet to be discussed by FASB] © 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 15

Measurement approaches continued © 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK Overview of Margins

© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.