International Accounting Standards Board Current issues of existing

International ® Accounting Standards Board Current issues of existing and planned IFRS Roundtable, Moscow, 8 June 2006 Prof. Dr. Hans-Georg Bruns, Liaison Board Member (Germany) International Accounting Standards Board, London

Outline I. III. IV. V. VIII. Overview Status of the SME project Business Combinations II Financial Statements Presentation Revenue Recognition Status of the project Extractive Industries Measurement Fair value approach of FASB ®

International ® Accounting Standards Board I. Overview

Projects on the agenda n n n n n Convergence FASB Conceptual Framework Revenue Recognition Financial Instruments Financial Statements Presentation Business Combinations Consolidation Insurance SMEs ®

Research – what the future holds n n n n n Measurement objectives Concessions Extractive industries Hyperinflation Intangible assets Investment entities Joint Ventures Leases Management commentary ®

SEC Roadmap n 2005 – 2007 Ø Application of IFRS Ø Investors gain knowledge Ø All share implementation experiences n 2007 – 2009 Ø Status of IFRS/GAAP convergence Ø SEC review additional filings Ø Evaluate significance of differences Ø Recommend elimination of reconciliation ®

Additions to agenda needed n Derecognition(x) n Fair Value measurement n Financial Instruments – Replacement Intangible assets (x) Leases (x) Pensions n n n (x) on Research agenda already ® (x)

International ® Accounting Standards Board II. Status of the SME project

Objective of the Project n IASB standards for SMEs should: Ø Reduce the burden on SMEs preparing financial statements Ø Meet needs of users of SME financial statements Ø Be based on full International Financial Reporting Standards (IFRSs), but simplified by reduced disclosures and maybe some changes to recognition and measurement principles ®

IASB’s Preliminary Views n IASB deliberated SME standards during second half of 2003 and early 2004: ØReached some preliminary views on the approach ØDiscussion Paper June 2004 Ø 120 responses ®

January 2005 Decisions n n ® Board discussed responses in late 2004 In Jan. 2005 made tentative decisions: 1. 2. 3. 4. Clear demand for IASB SME standards Focus on non-publicly accountable entities that publish general purpose financial statements for external users; no quantified “size test” Each jurisdiction should develop detailed guidelines on which entities are eligible to use Board will consider recognition and measurement simplifications – based on user needs and cost/benefit

January 2005 Decisions 5. 6. 7. ® “Mandatory fallback” to full IFRS if the SME standard does not address an issue – Yes “Optional fallback” to full IFRS if SME standard is different from full IFRS – No Clear disclosure that SME standards are being followed, rather than full IFRSs – Yes 8. Organise SME standards by topic, with crossreferences to the numbered IASs/IFRSs 9. Add preparers and users to Working Group 10. Conduct round tables with preparers and users

Recognition and Measurement Questionnaire n ® 1 April 2005: Ø Brief questionnaire was sent to all DP respondents, SAC, Working Group, and posted for public response Ø To identify recognition and measurement issues for discussion at round tables n 101 responses received

Recognition and Measurement Questionnaire n Recognition and measurement means: Ø Some items recognised as assets and liabilities under full IFRSs might not be recognised by SMEs. ¡ Example: Deferred taxes. Ø Some assets, liabilities, income, and expenses might be measured differently by SMEs than under full IFRSs. ¡ Example: Premium or discount amortised straight-line rather than effective interest method. ®

Recognition and Measurement Questionnaire n 28 June 2005: Ø Discussed responses with IASB’s Advisory Council and received views. n 29 -30 June 2005: Ø IASB SME Working Group met. Ø Discussed responses. Ø Recommendations to the Board. ®

Recognition and Measurement Questionnaire n 26 September Ø Discussion with World Standard Setters from over 40 countries. n 13 -14 October 2005: Ø Round-table discussions of possible recognition and measurement simplifications. Ø 43 groups participated. ®

Draft Exposure Draft (1) n January 2006 Ø IASB staff presented a draft ED to the Board. Preliminary discussion. Ø Working Group – 2 days discussion of draft ED. Views sent to Board. n n February 2006 Ø ED discussed by Board in detail. March 2006 Ø Discussion continues. ®

Draft Exposure Draft (2) n Comments about the draft ED: Ø Organised by topic. Ø 40 sections. Ø Each paragraph cross-referenced back to full IFRS. Ø Nearly all “black letter” paragraphs from IFRSs are included. ¡ Except where there is cross reference back to an IFRS. ®

Draft Exposure Draft (3) n Comments about the draft ED: Ø Pervasive principles up front – look to in absence of specific standard. Ø No “black-letter/grey letter” distinction. Ø Model financial statements. Ø 233 pages, but sections on financial instruments, taxes, several others to be added. ¡ Full IFRSs now 2, 400 pages. ®

Draft Exposure Draft (4) n Comments about the draft ED: Ø ED developed by considering needs of company with 50 employees and annual revenue of approximately € 10 million. Ø Which companies are required or permitted to use is up to each individual jurisdiction. ®

Draft Exposure Draft (5) n Comments about the draft ED: Ø Goals of: ¡ High quality standards. ¡ Meet SME user needs. ¡ Reduce preparer burden. ¡ Broadly consistent with full IFRSs. ¡ Global applicability. ®

Draft Exposure Draft – Section of Draft ED (1) IN 1 2 3 4 5 6 Introduction Concepts and Pervasive Principles Financial Report of an SME Balance Sheet Income Statement of Changes in Equity Cash Flow Statement 7 Notes to the Financial Statements Model Financial Statements 8 Consolidated Financial Statements ®

Draft Exposure Draft – Section of Draft ED (2) 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 ®

Draft Exposure Draft – Section of Draft ED (3) 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 ®

Draft Exposure Draft – Section of Draft ED (4) 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 ®

Draft Exposure Draft – Section of Draft ED (5) 34 Events After the Balance Sheet Date 35 Related Party Disclosures 36 37 38 39 40 Earnings Per Share Specialised Industries Discontinued Operations Interim Financial Reporting First-Time Adoption of IFRSs for SMEs ®

Next Steps Please understand that these dates are tentative: n Exposure Draft – by 30 June 2006 n Field tests? n Final Standard – by 30 June 2007 n Effective – 2008 ®

International ® Accounting Standards Board III. Business combinations II

Business Combinations II n n n ® Joint IASB – FASB project Proposed revised IFRS 3 and SFAS 141 R Objectives Ø Convergence Ø Improvement n Process Ø Comment period ended 28 October Ø Round-tables were held in London and Norwalk Ø The FASB and IASB received 287 comment letters on the core proposals n Redeliberation by the boards is about to commence

Significant proposed Amendments (1) n ® Goodwill Current treatment Proposed treatment Goodwill Cost Acquirer’s interest in the net fair value of recognised identifiable assets / liabilities* Full Goodwill Fair Value of the acquiree * including contingent liabilities recognised in accordance with paragraph 36 Net amount of the recognised identifiable assets and liabilities

Significant proposed Amendments (2) n ® Measuring fair value of the acquiree Ø Fair Value of the consideration given = fair value of the acquirer’s interest in the acquiree and should be used as basis for measuring the fair value of the acquiree Ø If the consideration does not provide the best basis for measuring the fair value of the acquiree, valuation techniques should be used n Transaction costs Ø Are not part of the fair value and should be recognised immediately as expense

Significant proposed Amendments (3) n Business Combinations achieved in stages Ø Acquirer shall remeasure its non-controlling equity investment in the acquiree at fair values as of the acquisition date Ø Acquirer shall recognise any unrealized gains or losses in profit or loss n Contingent Consideration Ø Is part of the consideration given and shall be measured at fair value at the acquisition date ®

Significant proposed Amendments (4) n Recognising and measuring the assets aquired and liabilities assumed Ø The acquirer shall recognise items acquired and obligations assumed that are part of the exchange and that meet the definition of assets and liabilities Ø Recognition at fair value with few exceptions (assets held for sale, deferred taxes, postemployment benefit obligations, operating leases, goodwill) ®

Significant proposed Amendments (5) n Treatment of Contingencies Ø ED clarifies that conditional rights and obligations are not recognized Ø But an asset that accompanies a contingent asset and that is identifiable and a liability that accompanies a contingent liability shall be recognised ®

Significant proposed Amendments (6) n Changes in ownership interest without loss of control Ø To be recognised directly in equity n Changes in ownership interest with loss of control Ø Any resulting gain or loss shall be recognised in profit or loss Ø Gain / loss is the difference between the proceeds plus the fair value of any remaining investment and the interest in the carrying amount of the former subsidiary ’s net asset ®

Significant proposed Amendments (7) n Attributing losses between controlling and minority interests Ø Allocate on the basis of respective ownership interests, even if losses exceed the minority interest’s investment in the subsidiary ®

International ® Accounting Standards Board IV. Financial Statements Presentation

Objective n n Define common financial reporting package Improve decision-relevance of information provided Ø Better relationship to market metrics Ø Better integration of information across statements ®

Background (1) n n ® Boards started their separate projects independently because of user demand for improvement Some progress made Ø Common conclusions on need to segregate financing Ø Some differences in direction in other areas

Background (2) n n ® Project restarted jointly with the FASB Divided into 2 segments Ø A – package of required financial statements (IASB only) Ø B – fundamental reconsideration of format and display

Segment A Decisions (IASB) n n ® Required financial statements agreed Will be exposed for comment as ED in Q 1 2006 Ø No changes to information already required to be presented Ø Change to where some information is presented ¡income and expenses must not be presented in the statement of changes in equity

Complete Set of Financial Statements -- 1 Year ® n n n Beginning and end of period statements of financial position Statement of recognised income and expense (1 or 2 statements) Statement of changes in equity Statement of cash flows Notes

Other Requirements n n n Each statement shown with equal prominence Comparative information for one year EPS required on face of Earnings Statement only for net income Ø All other per share amounts disclosed in notes ®

Statement of Recognised Income and Expense (1 statement) Sales xxxxx Cost of sales (xxxxx) Gross profit xxxxx Expenses (xxxxx) Profit before taxes xxxx Income taxes (xxxx) Profit or loss for the period xxxx Changes in AFS securities (xxxx) Change in FX translation xxxx Change in cash flow hedges (xxxx) Total recognised income and expense xxxx ®

Statement of Recognised Income and Expense (2 statements) Sales Cost of sales Gross profit Expenses Profit before taxes Income taxes xxxxx (xxxxx) xxxx (xxxx) Profit or loss for the period xxxx ®

Statement of Recognised Income and Expense (2 statements) Profit or loss for the period xxxx Changes in AFS securities (xxxx) Change in FX translation xxxx Change in cash flow hedges (xxxx) Total recognised income and expense xxxx ®

Segment B Activities n n n JIG formed and two meetings held to date Meetings have provided useful guidance to staff on next issues to pursue Objective is to develop concepts and issue Discussion Paper for comment in Q 4 2006 / early 2007 ®

International ® Accounting Standards Board V. Revenue Recognition

Overview n n Joint project with FASB Objectives: Ø Amend IASB Framework Ø New standard to replace IAS 18 Revenue n Discussion Paper in 2006 ®

Objectives n n n ® Convergence between IFRS and US GAAP Single conceptual model to apply to all industries and transaction types Additional guidance based on model, eg for: Ø multiple-component sales Ø measurement of obligations to customers

Conceptual model n Revenue arises from changes in assets and liabilities n Liabilities – performance obligations to customers n Every performance obligation has revenue associated with it, eg: Ø obligation to deliver goods Ø warranty obligation Ø obligation to accept returns n Amount of revenue recognised depends on measurement of remaining obligations ®

Measuring obligations (1) n First proposal - fair value Ø Fair value = price would have to pay another party to take over obligation to customer n Concerns! Ø fair value typically less than consideration from customer Ø so revenue recognised before any obligations discharged Ø fair value often difficult to measure reliably ®

Measuring obligations (2) Current proposal – ‘customer consideration amount’ n Total contract price allocated among performance obligations n Revenue recognised only when each obligation is discharged. n ®

Next steps n Further work on ‘customer consideration’ model n Definition of revenue n Discussion Paper in 2006 ®

International ® Accounting Standards Board VI. Status of the project Extractive Industries

Accounting for extractive activities (1) n The “comprehensive” project Ø to replace IFRS 6 Exploration for and Evaluation of Mineral Resources – the “interim” Standard n n Project currently in the research phase Scope of research: Ø financial reporting of reserves/resources (primary emphasis) Ø other extractive activity accounting issues (including those identified in 2000 Issues Paper) ®

Accounting for extractive activities (2) n n An international project team is progressing the research phase The project team comprises Ø Australia – leading Ø Canada Ø South Africa Ø Norway n Advisory Panel is assisting project team ®

Accounting for extractive activities (3) n Research Project deliverables: Ø Discussion Paper with IASB preliminary views ¡ timeframe – early-to-mid 2007 n Active Project deliverables: Ø Exposure Draft Ø International Financial Reporting Standard ¡ timeframe uncertain and is dependent on: § § outcomes of Discussion Paper IASB agenda ®

Financial reporting of reserves/resources Key issues… 1. How should reserves/resources be defined? 2. Can or should reserves/resources be recognised as assets at their fair values? 3. If not, should pre-development costs be capitalised or expensed? 4. Should reserves/resources information be disclosed? If so, what information? ®

1. Defining reserves/resources (1) n No single agreed definition of reserves/resources for the extractive industries as a whole. Ø oil & gas: SPE/WPC/AAPG Ø mining: JORC Code and equivalents, CRIRSCO Ø United Nations Framework Classification for Energy and Mineral Resources Ø US SEC also has separate definitions for mining and oil & gas ®

1. Defining reserves/resources (2) n Key issues… Ø Should existing definitions be used? If so, which definitions? Ø Or, should the IASB develop its own definitions (in conjunction with others)? Ø There are some significant differences between the major mining and oil & gas definitions. Would the use of different definitions for mining and oil & gas adversely affect comparability of financial reports? Any other risks? Ø What might be the effect on existing reserves/resources reporting requirements? ®

2. Applying fair value to reserves/resources (1) n n Do reserves/resources meet the definition of an ‘asset’? Is the asset capable of being recognised? That is: Ø are future economic benefits probable? Ø can the fair value of reserves/resources be measured reliably? n What would be the impact on comparability and verifiability of financial reports ®

2. Applying fair value to reserves/resources (2) n n n Which categories of reserves/resources can (should) be recognised and measured? When to first recognise reserves/resources as an asset How to initially and subsequently measure the asset How to treat changes in measured amounts Whether costs incurred prior to discovery of reserves/resources should be expensed or capitalised? ®

3. Applying historical cost to reserves/resources n Should pre-production costs be expensed or capitalised? Ø If expensed… ¡should those expenses be able to be reinstated? Ø If capitalised… ¡what is the cost centre? ¡how should those costs be subsequently measured and assessed for impairment? ®

4. Reserves/resources disclosures n n Whether different types of mineral reserves/resources should be disclosed separately? What categories of reserves/resources should be disclosed? Disclose quantities and/or values (e. g. standardised measure of proved reserves)? Other disclosures? ? ®

Tentative conclusions so far (1) For the definition of reserves/resources… n to consider developing an overarching/generic definition of “resources” to support the recognition and measurement of reserves/resources (which may be at historic cost or fair value) Ø intention is for the definition to be suitable for both mining and oil & gas n to use existing definitions as the basis for the disclosure of reserve/resource information ®

Tentative conclusions so far (2) n to approach the major setters of industry definitions – CRIRSCO (mining) and SPE (oil & gas) – to explore the feasibility of converging/refining elements of their definitions that may not need to be different between industries or with accounting principles Ø a CRIRSCO/SPE joint working group has been formed to undertake this review ®

Tentative conclusions so far (3) n to select a preferred set/s of reserves/resources definitions on the basis of which provides the most useful information to users Ø this will involve liaising with the SEC ®

Research underway n The project team are currently considering: Ø Application of the IASB Framework’s definition and recognition criteria to reserves/resources Ø Usefulness and reliability of reserve/resource volume and value estimates Ø Potential applicability of various historical cost models to reserves/resources ®

International ® Accounting Standards Board VII. Measurement

Why is measurement a hot topic? n n Trend to increased use of fair value in accounting standards Enron fallout Ø Perception that accounting requiring energy derivatives to be carried at fair value allowed manipulation of profit and over-statement of assets Ø Proposed Amendments to IFRS 3 Business Combinations ®

Fair Value is not a new idea (1) n Fair value measurement is already extensively used by many entities Ø Banks for trading books Ø Canadian Life insurance companies for all assets (market related values) Ø Pension plans and mutual funds for all assets, including real estate and venture capital investments ®

Fair Value is not a new idea (2) n Fair value measurement is already used in many situations Ø To allocate purchase price in business combinations and other basket purchases Ø To measure impairment in value of a variety of assets (FV less costs to complete and sell) ®

The big picture n n n Canada leading international research project as basis for improving frameworks “lack of an agreed, coherent set of measurement bases and supporting theory has seriously impeded progress on convergence” Discussion paper published in November 2005 FASB has limited Measurement project ®

Criteria for choosing a measurement basis n Consistent with framework Ø Objectives of financial reporting Ø Qualitative characteristics Ø Elements of financial statements n Cost/benefit constraint ®

Objectives of financial reporting n Decision usefulness to a wide range of users Ø For predictive purposes Ø Feedback value in relation to predictive purposes Ø Assess stewardship ®

Qualitative characteristics (1) n Understandability Ø Will users get it? n Relevance Ø Does it make a difference to the decision? n Comparability Ø Between entities and over time ®

Qualitative characteristics (2) n Reliability Ø Representational faithfulness Ø Neutrality Ø Verifiability • Knowledgeable, independent observers would agree on amount from applying basis within reasonable degree of precision ®

Elements n n n Assets and liabilities are fundamental building blocks Primary focus of financial accounting is amount, timing and uncertainty of future cash flows Relevant attribute for focus of measurement is cash-equivalent expectations ®

Measurement alternatives n n Historical cost Current cost Ø Reproduction cost Ø Replacement cost n n Net realizable value Value in use Fair value Deprival Value ®

What is fair value? The amount for which an asset or liability could be exchanged between knowledgeable, willing parties in an arm’s length transaction. ®

Fair Value measurement guidance ® Ø Observable market price for identical or similar assets/ Fair Value Alternatives 1 liabilities, if necessary reliable adjustment consistent with market expectations 2 Ø Estimation based on accepted model, all inputs based 3 4 on market data Ø Current cost (replacement cost, reproduction cost, historical cost) Ø Models that depend significantly on entity-specific expectations

International ® Accounting Standards Board VIII. Fair Value approach of FASB

Objective Define fair value used in US-GAAP ® Simplify and Establish a framework for fair value measurement codify existing Enhance disclosure about fair value GAAP

Definition (1) ® Fair value is the price that would be: received for an asset or paid to transfer a liability in a current transaction between marketplace participants in the reference market for the asset or liability.

Definition (2) n IASB Exit price objective Ø Distinguished from the entry price Ø Consistent with the definition of assets / liabilities Ø Transaction cost shall not be included n Current Transaction Ø Orderly transaction Ø Absence of a transaction: reference to a hypothetical transaction n Marketplace Participants Ø Independent Ø Knowledgeable Ø Able to transact Ø Willing to transact ®

Fair Value Hierarchy (1) Quoted prices Other Market Inputs Entity Inputs ® Level 1 Levels 2 – 4 Level 5

Fair Value Hierarchy (2) ® Ø Quoted prices for identical assets and liabilities in LEVEL II active markets the entity has the ability to access Ø Price is quoted in bid and asked prices: price within the bid-ask spread Ø Not adjusted by a blockage factor Ø Quoted prices not included within Level I Ø Restricted securities Ø Shall be adjusted as appropriate

Fair Value Hierarchy (3) ® Ø Inputs other then quoted prices that are directly LEVEL III LEVEL IV LEVEL V observable for the asset or liability Ø Examples: Interest rate, Yield curves, Volatilities, Default rates Ø Market inputs not directly observable but corroborated by other market data Ø Inputs derived through extrapolation or interpolation Ø Entity inputs Ø Should be developed within market parameters, eliminating specific entity factors

Identified discussion topics by IASB n IASB Exit price objective Ø Distinguished from the entry price Ø Consistent with the definition of assets / liabilities Ø Transaction cost shall not be included n Current Transaction Ø Orderly transaction Ø Absence of a transaction: reference to a hypothetical transaction n Marketplace Participants Ø Independent Ø Knowledgeable Ø Able to transact Ø Willing to transact ®