SUMMARY OF BOARD DECISIONS

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue an Accounting Standards Update.

November 18, 2009 FASB/IASB Joint Board Meeting

Emissions trading schemes. The Boards discussed the accounting for emissions cap and trade schemes. The meeting focused on schemes with voluntary participation (voluntary schemes), which involve contracts between knowledgeable and willing parties.

The Boards discussed the application the definitions of an asset and a liability in the FASB Concept Statements and in the IASB Framework to a voluntary scheme. The Boards focussed their discussion on two views on when liabilities arise in such a scheme:

  • View 1 is that an entity’s actual emissions are the obligating event in a voluntary scheme. An entity does not incur a present obligation, and hence a liability, until it has emitted. Until emissions have occurred, the entity can take action that enables it to avoid delivering allowances.
  • View 2 is that entering into the membership contract is the event that creates a liability (the obligating event). By signing the membership contract, the obligation to pay allowances is unconditional.
The staff did not ask the Boards to make any decisions at this meeting, but did seek advice as to which view had the stronger initial support. Both Boards indicated a preference for view 2.

Next steps

The Boards will discuss accounting models for emissions trading schemes (both voluntary and statutory) in the first quarter of 2010.


Insurance contracts.

Participating insurance contracts

The Boards discussed participating features in insurance contracts. Staff presented two views on how to deal with such contracts:

  • View 1: The cash flows that arise from a participating feature are integral to measurement of the liability like any other contractual cash flow and should be included in the measurement of the liability on an expected present value basis. The participating feature is not considered separately for recognition, classification and measurement. This view is consistent with the Boards’ tentative decision that the measurement of an insurance contract includes all contractual expected (that is, probability-weighted) cash flows.
  • View 2: A participating feature should be considered for recognition, classification and measurement separately.
The IASB tentatively decided to explore view 1. The FASB tentatively decided to explore view 2.

Next steps

The Boards will continue their discussion of this project at the joint Board meeting in December.


Leases.

Lessee accounting

The Boards discussed:

  • Initial and subsequent measurement of the lessee's obligation to pay rentals and right-of-use asset
  • Leases with options.
The Boards tentatively decided to specify the required accounting for a lessee's obligation to pay rentals and right-of-use asset as follows:

  • Initial measurement of the lessee's obligation to pay rentals would be at the present value of the lease payments discounted using the lessee's incremental borrowing rate. The Boards noted that the interest rate implicit in the lease will often equal the incremental borrowing rate. Consequently, they tentatively decided that the interest rate implicit in the lease can be used if it can be readily determinable. The staff will develop a definition of the interest rate implicit in the lease that would be consistent with a right-of-use model.
  • Subsequent measurement of the lessee's obligation to pay rentals would be at amortized cost using the effective interest method; the obligation arising in a simple lease would not be revised for any changes in the lessee's incremental borrowing rate. The Boards will consider, at a future meeting, whether the incremental borrowing rate would be reassessed when there are changes in the expected lease term. Subsequent measurement of the obligation at fair value is not permitted.
  • Initial measurement of the lessee's right-of-use asset would be at cost, where cost is the present value of the lease payments plus any initial direct costs incurred by the lessee. The staff will assess whether the definition of initial direct costs is consistent between U.S. GAAP and IFRSs.
  • Subsequent measurement of the lessee's right-of-use asset would be at amortized cost and would be described as amortization rather than as rental expense.
  • The lessee's right-of-use asset would be considered for impairment by referring to existing applicable standards for impairment. A lessee preparing financial statements in accordance with IFRS would follow IAS 36, Impairment of Assets. A lessee applying U.S. GAAP would follow Topic 350, Intangibles - Goodwill and Other of the FASB Accounting Standards CodificationTM.
  • IFRS preparers would be permitted to revalue their right-of-use assets using the revaluation model in IAS 38, Intangible Assets; U.S. GAAP preparers would not be permitted to revalue their right-of-use assets unless required to do so to recognize an impairment loss.
The Boards discussed how the lessee would account for lease contracts that grant the lessee the right to extend or terminate the lease. The Boards tentatively decided that:

  • Uncertainty about the lease term would be addressed through recognition - that is, one of the possible lease terms is selected and the accounting is based on that term.
  • The recognized lease term would be the longest possible lease term that is more likely than not to occur.
  • In determining the lease term, the lessee would consider all relevant factors.
  • Options to renew a lease that are priced at market value at the date of renewal would be considered when determining the lease term.
  • The lease term would be reassessed at each reporting date. Detailed examination of every lease would not be required unless there is a change in facts or circumstances that indicate that the lease term may need to be revised.
  • Any change to the obligation to pay rentals resulting from a reassessment of the lease term would be recorded as an adjustment to the right-of-use asset.
Lessor accounting

The Boards discussed:

  • Initial and subsequent measurement of the lessor's receivable and performance obligation
  • Leases with options.
The Boards tentatively decided to specify the required accounting for a lessor's receivable and performance obligation as follows:

  • Initial measurement of the lessor's receivable would be at the present value of the lease payments discounted using the interest rate implicit in the lease plus any initial direct costs incurred by the lessor.
  • Subsequent measurement of the lessor's receivable would be at amortized cost using the effective interest method.
  • Initial measurement of the lessor's performance obligation would be at the transaction price (that is, the customer consideration, which will be measured at the present value of the lease payments discounted using the interest rate implicit in the lease).
  • Subsequent measurement of the lessor's performance obligation would reflect decreases in the obligation to permit the lessee to use the leased item over the lease term.
The Boards discussed how the lessor should account for lease contracts that grant the lessee the right to extend or terminate the lease. The Boards tentatively decided that:

  • The accounting by lessors for those options would be symmetrical with the accounting by lessees for those options; however, the Boards noted that the objective of symmetry might not result in the same measurement of lease payments by the lessee and the lessor.
  • A lessor's receivable and performance obligation should be recognized based on the lease payments that will be received over the lease term. The recognized leased term would be the longest possible lease term that is more likely than not to occur.
  • The lease term would be reassessed at each reporting date. Detailed examination of every lease would not be required unless there is a change in facts or circumstances that would indicate that the lease term may need to be revised.
  • Any change to the lease receivable resulting from a reassessment of the lease term would be recorded as an adjustment to the performance obligation.
In December, the Boards will continue discussing lessee and lessor accounting issues including how to account for leases that include contingent rental arrangements.


Revenue recognition. The Boards discussed three topics:

  • Licensing contracts
  • Subsequent measurement of performance obligations
  • Contract costs.
Licensing contracts

The Boards discussed the nature of the performance obligations in a contract in which an entity grants a customer the right to use, but not own, intellectual property of the entity (for example, a software license).

The Boards tentatively decided that:

  • If a customer obtains control of the entire licensed intellectual property, the contract should be considered a sale, rather than a license or lease, of the intellectual property. That would be the case, for instance, if an entity grants a customer the exclusive right to use its intellectual property for the duration of its economic life.
  • If a customer does not obtain control of the entire licensed intellectual property and the entity has promised to grant an exclusive license, the promised asset is similar to the asset that a lessor promises in a lease. Therefore, consistently with the Boards’ tentative decisions in the leases project, the entity has a series of performance obligations. It satisfies those obligations over time as it permits the customer to use its intellectual property.
  • In all other cases, the promised asset is the license. The promise to grant that license is a single performance obligation. The entity satisfies that obligation when it enables the customer to use the license and benefit from it. If there are other performance obligations in the contract, an entity should consider whether the performance obligation for the license is a separate contract segment or should be combined with those other performance obligations.
Subsequent measurement of performance obligations

The Boards discussed how performance obligations should be measured after contract inception. The Boards tentatively confirmed that performance obligations in the scope of the revenue recognition standard should be remeasured after contract inception only when they are onerous.

For the onerous test, the Boards tentatively decided that:

  • An entity should conduct the onerous test at the level of contract segments.
  • An entity should compare the amount of the transaction price allocated to the remaining performance obligations in a segment with the expected costs to satisfy those performance obligations (rather than the current value of the goods and services underlying those performance obligations).
  • If the expected costs to satisfy the remaining performance obligations in a segment exceed the amount of the transaction price allocated to those performance obligations, an entity should recognize a liability and a corresponding contract loss. The entity should measure the liability at the expected costs to satisfy the remaining performance obligations in that contract segment less the transaction price allocated to those performance obligations.
  • At each subsequent financial statement date, an entity should update the measurement of the liability for the onerous segment.
  • For the onerous test, costs are the direct costs (that is, all costs that relate directly to the specific contract or that were incurred only because the entity entered into the contract).
Contract costs

The Boards discussed whether specific guidance on contract costs is needed in the revenue recognition standard.

The IASB tentatively decided not to develop guidance for accounting for contract costs. An entity would account for those costs in accordance with other standards as applicable (for example, IAS 2, Inventory).

The FASB directed the staff to analyze further the effects of withdrawing guidance relating to costs from FASB Accounting Standards CodificationTM Topic 605 Revenue.

Next steps

In November and December, the staff will test the proposed revenue recognition model by conducting a series of workshops in London, Tokyo, Melbourne and Norwalk with preparers of financial statements from various industries.

At the December meeting, the Boards plan to consider warranties, rights of return and the use of estimates of uncertain consideration.