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.

April 20, 2010 FASB/IASB Joint Videconference Board Meeting

Leases. The Boards discussed:

1. Accounting for sale and leaseback transactions
2. Lessor accounting for the performance obligation, including consideration of recognizing profit/loss at lease commencement
3. Accounting for subleases.

Accounting for Sale and Leaseback Transactions

The Boards tentatively decided that a sale and leaseback transaction should be accounted for as a sale and leaseback rather than a financing if it is determined that the underlying asset has been sold. The underlying asset has been sold if at the end of the contract control of the underlying asset has been transferred and all but a trivial amount of the risks and benefits associated with the underlying asset have been transferred to the buyer/lessor.

The Boards also tentatively decided that if a sale and leaseback transaction results in a sale of the underlying asset and both the sale and the leaseback are established at fair value, gains or losses arising from the transaction should not be deferred. If the sale or the leaseback is not established at fair value, an entity should adjust the asset, liabilities, gains, and losses recognized to reflect current market rentals.

Lessor Accounting for the Performance Obligation

The Boards tentatively decided that the amortization of the performance obligation should be performed in a systematic and rational manner based on the pattern of use of the underlying asset by the lessee (for example, over time, based on hours of use, etc.).

The Boards instructed the staff to provide additional analysis on when and how revenue should be recognized upon lease commencement.

Accounting for Subleases

The Boards tentatively decided that:

1. An intermediate lessor, as a lessee in a head lease, should account for its assets and liabilities arising from the head lease in accordance with the lessee model developed by the Boards. Similarly, the intermediate lessor, as a lessor in a sublease, should account for its assets and liabilities arising from the sublease in accordance with the lessor model developed by the Boards.
2. Intermediate lessors should present all assets and liabilities, excluding their obligation to pay rentals to the head lessor, arising from lease contracts with subleases together, in the statement of financial position, gross with a net subtotal. The obligation to pay rentals to the head lessor should be presented separately.
3. Intermediate lessors should disclose in its financial statements the nature and amount of significant subleases.
    

Consolidation. At the February 2010 joint Board meeting, the IASB and the FASB tentatively decided that an investment company should measure its investments in entities that it controls at fair value through profit or loss. This is consistent with current U.S. GAAP, but a change to the approach in IFRS.

At this meeting, the Boards continued to deliberate the definition of an investment company and tentatively decided that an investment company is an entity that meets all of the following criteria:

1. Express business purpose. The express business purpose of an investment company is investing for current income, capital appreciation, or both.
2. Exit strategy. The entity has identified potential exit strategies and a defined time (or range of dates) at which it expects to exit the investment.
3. Investment activity. Substantially all of the entity’s activities are investment activities carried out for the purposes of generating current income, capital appreciation, or both. The entity and its affiliates shall not obtain benefits from its investees that would be unavailable to other investors or unrelated parties of the investee.
4. Unit ownership. Ownership in the entity is represented by units of investments.
5. Pooling of funds. The funds of the entity’s owners are pooled to avail owners of professional investment management.
6. Fair value. All of the investments are managed, and their performance evaluated (both internally and externally), on a fair value basis.
7. Reporting entity. The entity must be a reporting entity.
8. Debt. Any providers of debt to the investees of the entity shall not have direct recourse to any of the entity’s other investees.

The Boards asked the staff to clarify some aspects of the criteria in drafting. In particular, the Boards asked that it be clear that significant third-party investment is required for an entity to be an investment company.

The Boards also tentatively decided that the fair value measurement basis for controlled investees applied by an investment company should be retained in the consolidated financial statements of a parent of an investment company.

Transition Requirements

The FASB tentatively decided that an entity currently applying the investment company guidance in Topic 946 of the FASB Accounting Standards Codification™ should discontinue the application of this guidance if it no longer qualifies as an investment company. This change should be applied prospectively from the date the revised consolidation requirements are first applied. For those investees that are required to be consolidated as a result of an entity no longer qualifying as an investment company, the entity should apply the same transition guidance for all other entities that will be required to be consolidated as a result of the revised consolidation requirements.

Both the IASB and the FASB tentatively decided that an entity that was not previously considered an investment company, but meets the new definition of an investment company, should recognize its investments in entities that it controls at fair value on the date that it first applies the revised consolidation requirements, with an adjustment made to retained earnings.


April 21, 2010 FASB/IASB Joint Videoconference Board Meeting

Leases. The Boards discussed:

1. Lessor accounting for impairment of assets
2. Accounting for long-term leases of land
3. Lessor accounting for purchase options
4. Lessee presentation of total cash rentals paid.

Lessor Accounting for Impairment of Assets

The Boards discussed impairment of assets under the performance obligation approach to lessor accounting. The Boards instructed the staff to further develop through a flowchart how the interrelationship between the lease receivable, the performance obligation, and underlying asset would be assessed for impairment.

Accounting for Long-Term Leases of Land

The Boards tentatively decided that long-term leases of land would not be excluded from the scope of the proposed new leases requirements for lessees and lessors.

Lessor Accounting for Purchase Options

The Boards tentatively decided that purchase options would be accounted for by lessors in the same way as lessors account for renewal or termination options. Therefore:

1. Purchase options would not be recognized as separate assets.
2. A lessor’s receivable and performance obligation would be measured based on the lease payments that would be received; therefore, the lessor would decide whether it is more likely than not that an option to purchase will be exercised. If the lessor decides that the option to purchase is more likely than not to be exercised, the lease receivable would include the exercise price of the purchase option.
3. The exercise of the purchase option 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 purchase option would be exercised.
4. Any change to the lease receivable resulting from a reassessment of the exercise of a purchase option would be recognized as an adjustment to the performance obligation.
5. The lessor’s performance obligation relating to rental payments would be recognized in income over the lease term in a manner that depicts the pattern of use of the underlying asset that the lessor is providing the lessee. The lessor’s performance obligation relating to the purchase option would not be recognized in income until the purchase option is exercised.

Lessee Presentation of Total Cash Rentals Paid

The Boards tentatively decided that no additional disclosures of the total cash rentals paid would be required on the face of the financial statements. That information would be disclosed in the notes to the financial statements for each period presented as part of the reconciliation between opening and closing balances for the lessee’s obligation to pay rentals.


Insurance contracts. The Boards discussed the two approaches to margins that the Boards are considering for insurance contracts:

1. A separate risk adjustment and a residual margin
    
2. A single composite margin.

The purpose of the discussion was to develop these approaches further. The Boards intend to select one of these approaches at the May 2010 Joint Board meeting.

Risk Adjustment and Residual Margin

The Boards provided staff with input on the objective and other draft language for the risk adjustment and asked the staff to develop further the objective and other guidance.

The Boards decided tentatively that the residual margin should be part of the insurance liability rather than a separate liability outside the insurance liability. The Boards also decided tentatively that the residual margin should be disclosed separately.

The Boards discussed whether interest should be accreted on the residual margins:

1. The IASB decided tentatively that interest should be accreted.
    
2. The FASB decided tentatively that interest should not be accreted.

Composite Margin

The Boards tentatively agreed that if the initial measurement of an insurance contract results in a negative day-one difference:

1. The insurer should recognize that difference (loss) immediately in profit or loss.
    
2. For this purpose, a day-one loss would arise only if, at inception, the expected present value of the outflows exceeds the expected present value of the premiums. In other words, no separate risk adjustment would be included in determining whether there is a day-one loss under a composite margin approach.

The Boards decided tentatively that the composite margin should be:

1. Released over both the coverage period (during which the insurer provides insurance coverage)and the claims handling period (during which the insurer is expected to pay claims)
    
2. Displayed with the insurance liability rather than a separate liability outside the insurance liability
    
3. Disclosed separately.

The Boards asked that the staff research an approach whereby the composite margin is remeasured.

The Boards also discussed whether interest should be accreted on the composite margin.

1. The IASB tentatively decided that interest should be accreted.
    
2. The FASB tentatively decided that no interest should be accreted.

Derecognition. The Boards discussed the proposed IASB derecognition model. No decisions were made. The Boards will continue deliberating the derecognition model at their next joint Board meeting.


April 22, 2010 FASB/IASB Joint Videoconference Board Meeting

Financial statement presentation. At their April joint meeting, the Boards discussed issues that had been raised in drafting the Exposure Draft on financial statement presentation.

Unusual or Infrequently Occurring Items

U.S. GAAP currently requires the presentation of unusual or infrequently occurring items in the statement of comprehensive income and disclosure of related information in the notes to financial statements; however IFRS does not have similar requirements. The Boards agreed to include those requirements in the forthcoming Exposure Draft.

Guidance on Classifying Short-Term Assets and Liabilities

Both U.S. GAAP and IAS 1, Presentation of Financial Statements, include application guidance on the classification of assets and liabilities as current (short-term) or noncurrent (long-term) in the statement of financial position. The Boards decided not to include that application guidance in the Exposure Draft because the requirement in the Exposure Draft for classification of assets and liabilities as short-term or long-term should be sufficient.

Classification of Debt

U.S. GAAP and IAS 1 include different guidance for the classification of financial liabilities. The Boards agreed to consider addressing those differences in a separate project. Consequently, the IASB’s forthcoming Exposure Draft on financial statement presentation will retain the guidance in IAS 1 on classification of financial liabilities, and the FASB’s Exposure Draft will retain the classification guidance in Topic 470, Debt, of the FASB Accounting Standards Codification™. The Boards noted that any change to their existing guidance on classification of financial liabilities resulting from a potential separate project would be incorporated into the final standard on financial statement presentation.

Mixed Presentation in the Statement of Financial Position

IAS 1 (paragraph 65) includes guidance on how an entity can use a mixed basis of presentation in the statement of financial position. This mixed basis permits some assets and liabilities to be classified using a short-term/long-term distinction, and for other assets and liabilities to be classified in order of liquidity. The Boards agreed to retain that guidance in the Exposure Draft and to clarify its application.

Supplemental Cash Flow Information

The Boards agreed that both the reconciliation of operating income and cash flows and the presentation of non–cash transaction information should be an integral part of the statement of cash flows and not be disclosed in the notes instead.

Other Disclosures from IAS 7, Statement of Cash Flows

IAS 7 (paragraph 50) encourages disclosure of the following information:

1. The amount of undrawn borrowing facilities that may be available for future business activities and to settle capital commitments
2. The amount of cash flows that represent increases in operating capacity and the amount of cash flows that are required to maintain operating capacity
3. The amount of cash flows arising from activities of each reportable segment.

1. Not prescribe the order in which an entity presents its sections and categories in the financial statements.
2. Clarify that an entity should try to align the sections and categories across the statements but choose an order that produces the most understandable depiction of its activities and allows for presentation of meaningful subtotals and totals.

1. If the cash flows for the insurance contracts do not depend on the performance of specific assets, the discount rate should be a risk-free rate plus an adjustment for illiquidity.
    
2. If the amount, timing, or uncertainty of cash flows for the insurance contracts depends, wholly or partly, on the performance of specific assets, the measurement of these contracts should consider that fact.

1. Lessor disclosure requirements
2. Lessor accounting for impairment of assets.

Lessor Disclosure Requirements

The Boards tentatively approved a set of disclosure requirements for the forthcoming Exposure Draft.

An entity would disclose the quantitative and qualitative financial information that:

1. Identifies and explains the amounts recognized in its financial statements arising from lease contracts
2. Enables users to evaluate the nature and extent of the amount, timing, and uncertainty of cash flows arising from lease contracts and how the entity manages those cash flows.

1. The nature of the lease arrangement, if leasing arrangements are a significant part of the lessor’s business activities in terms of revenue, net income, or assets, disaggregated (for example, by nature or function), including:
   1. A general description of those leasing arrangements
   2. The existence and terms of renewal, termination, and purchase options
   3. A description of how the effect of contingent rentals on the carrying amounts of the lease receivable and performance obligation is determined
   4. Initial direct costs incurred.
2. In addition to the disclosures already required for the leased asset, a description of any restrictions placed on leased assets as a result of any lease arrangements and a description of the existence and terms of any residual value guarantees.
3. For its lease receivables, a maturity analysis on an annual basis for the first five years, and a lump figure for the remaining amounts, comparing the potential differences in cash flow attributable to those that are the minimum contractual receivables and those that are the total estimated lease receivable. A lessor would not be required to disclose the fair value of its lease receivable.
4. The disclosures required by the Revenue Recognition project for its performance obligations. For example, a lessor would disclose a maturity analysis surrounding the satisfaction of performance obligations. For all remaining performance obligations in contracts expected to be completed after one year from contract inception, an entity would disclose the amount of the transaction price allocated to the performance obligations that are expected to be satisfied between one and two years, between two and three years, and after three years from the end of the reporting period.
5. A reconciliation between opening and closing balances for its receivable and its performance obligation. That reconciliation would follow the disaggregation principle in the Financial Statement Presentation project to provide useful information. The Boards asked the staff to consider whether changes (for example, increases and decreases attributable to changes in estimates due to options, contingent rents, and residual value guarantees) should be shown gross or net.
6. For IFRS preparers, information relating to risks surrounding a lease receivable in accordance with IFRS 7, Financial Instruments: Disclosures, and for U.S. GAAP preparers, information in accordance with the proposed Accounting Standard Update relating to credit quality upon final issuance to help users to evaluate the nature and extent of the amount, timing, and uncertainty of future cash flows arising from lease contracts, and the way in which the lessor manages those uncertainties.
7. The fact that a lessor applied a simplified form of lease accounting for short-term leases, if applicable. The lessor would also disclose the gross amount recognized in the statement of financial position that was accounted for under the simplified accounting model.