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.

July 19, 2010 FASB/IASB Joint Videconference Board Meeting

Leases. The Boards discussed:

1. Lessor accounting—application guidance on when to use the performance obligation or derecognition approaches
    
2. Scope—purchase or sale of underlying asset
    
3. Lessor accounting—accounting for arrangements with service and lease components
    
4. Consequential amendments—business combinations
    
5. Additional disclosures.

Lessor Accounting—Application Guidance on When to Use the Performance Obligation or Derecognition Approaches

The Boards discussed application guidance on when to use the performance obligation or derecognition approaches and tentatively decided to:

1. Consider third-party residual value guarantees when determining whether a lessor is exposed to significant risks and benefits associated with the underlying asset
    
2. Not include specific guidance on long-term leases of land in the application guidance.

The Boards asked the staff to provide additional analysis about the timing of the assessment of which lessor approach to use and will discuss it again later in the week.

Scope—Purchase or Sale of Underlying Asset

The Boards tentatively decided to keep the requirement to exclude contracts that are purchases or sales of the underlying asset from the scope of the proposed new leases requirements. However, the Boards tentatively decided to remove the following two criteria from the list of indicators that a contract is a purchase and sale:

1. The contract covers the whole of the expected useful life of the asset.
    
2. The contract specifies a fixed return to the transferor.

The Boards asked the staff to consider further the effect of removing those two criteria on sale and leaseback transactions and will discuss this again later in the week.

Lessor Accounting—Accounting for Arrangements with Service and Lease Components

The Boards had split views. The FASB tentatively decided that lessors should not bifurcate nondistinct services from the lease components in a lease arrangement under the derecognition approach to lessor accounting. The IASB tentatively decided that under the derecognition approach to lessor accounting, the lessor should be required to bifurcate nondistinct services from the lease components. In addition, the IASB tentatively decided that the service element of the contract should be accounted for in accordance with the proposed new guidance on revenue recognition. Although the FASB decided that nondistinct services should not be bifurcated, it tentatively decided that if they were bifurcated, the lessor should recognize a receivable for both the service element and the lease element and recognize a separate performance obligation for the service component.

Consequential Amendments—Business Combinations

The Boards tentatively decided that for leases acquired in a business combination, an adjustment would be made to the right-of-use asset for the lessee and the performance obligation for the lessor, reflecting the difference between the rate charged in the lease and market rates.

In addition, the Boards tentatively decided that if the acquired entity is a lessor under the derecognition approach to lessor accounting, the acquirer would initially measure the right to receive rentals at the present value of the remaining rental payments discounted using the acquirer’s discount rate. The lessor’s residual asset would be measured at fair value.

Additional Disclosures

The Boards tentatively decided that a lessor shall disclose:

1. Its accounting policy regarding which accounting model(s) the lessor applies
    
2. The types of risks/benefits of the underlying asset that the lessor considered when deciding which accounting model to apply
    
3. Separately for each accounting model any impairment recognized.

In addition, the Boards tentatively decided that both lessors and lessees should disclose the existence and principal terms of any purchase options.


Insurance contracts. At this meeting, the Boards discussed:

1. Unbundling
    
2. Unit-Linked Contracts
    
3. Measurement Approach for Short-Duration Contracts
    
4. Investment Contracts with a Discretionary Participating Feature

Unbundling

The IASB and FASB decided tentatively to require unbundling on the basis of the following principle:

If a component is not closely related to the insurance coverage specified in a contract, an insurer shall account for that component as if it were a separate contract and apply the relevant standard to that component (i.e., shall unbundle that component).

The Boards also agreed to specify the most common examples of components that are not closely related to the insurance coverage, namely:

1. An investment component reflecting an account balance that meets both of the following conditions:
   
   
   1. The account balance is credited with an explicit return (i.e., it is not an implicit account balance, for example derived by discounting an explicit maturity value at a rate not explicitly stated in the contract)
       
   2. The crediting rate for the account balance is based on the investment performance of the underlying investments, namely a specified pool of investments for unit-linked contracts, a notional pool of investments for index-linked contracts or a general account pool of investments for universal life. That crediting rate must pass on to the individual policyholder all investment performance, net of contract fees and assessments.
       
2. An embedded derivative that is separated from its host contract in accordance with existing bifurcation guidance.
    
3. Contractual terms relating to goods and services that are not closely related to the insurance coverage but have been combined in a contract with that coverage for reasons other than economic.

1. The insurer’s own shares
    
2. Owner-occupied real estate, owned by the fund and occupied by the insurer.

1. Should measure this asset at fair value
    
2. Recognize changes in that fair value through profit or loss to the extent those changes relate to the interest of unit-linked contract holders in the pool of assets
    
3. Recognize in other comprehensive income those changes in fair value attributable to the insurer’s own interest in the pool of assets.

1. Assets and liabilities associated with unit-linked contracts as single line items in the statement of financial position and not commingle them with the insurer’s assets
    
2. Income and expense arising from the pool of assets underlying unit-linked contracts as a single line item and not commingle them with income and expense arising from the insurer’s other assets.

Measurement Approach for Short-Duration Contracts

The Boards discussed remaining issues relating to the measurement model for short-duration contracts (premium allocation model).

The IASB affirmed its previous decision to require, rather than merely permit, the application of the premium allocation model for the pre-claims liability of short-duration contracts and decided tentatively to apply it to short-duration contracts incorporating both of the following features:

1. The coverage period is approximately 12 months or less.
    
2. The contracts do not contain embedded options or guarantees that are not separated under the bifurcation requirements and also have a significant impact on the variability of cash flows during the coverage period.

The IASB discussed whether to include the following third condition and decided not to include it: the insurer is unlikely to become aware of events during the coverage period that could cause significant decreases in the expected cash outflows.

Regarding the treatment of acquisition costs under the premium allocation model, the IASB decided tentatively:

1. To defer incurred incremental acquisition costs associated with insurance contracts that are measured and presented using that model
    
2. To present those deferred acquisition costs as a deduction from the unallocated premium liability.

The IASB also decided tentatively:

1. That an insurer should accrete interest on the contract position (expected present value of remaining premiums less unallocated premium obligation). The IASB noted that such interest might often be immaterial.
    
2. To use a current rate to accrete interest to an unallocated premium liability.

The FASB will continue its deliberations on the premium allocation model during its meeting on July 28.

Investment Contracts with a Discretionary Participating Feature

The IASB discussed the treatment of the residual margin associated with the measurement of an investment contract containing a discretionary participating feature. The IASB tentatively decided that an insurer should recognize that residual margin in profit or loss over the life of the contract in a systematic way that best reflects the asset management services, as follows:

1. On the basis of passage of time, but
    
2. If the insurer expects to provide asset management services in a pattern that differs significantly from passage of time, it shall release the residual margin on the basis of the fair value of assets under management.

Next Steps

The IASB expects to publish an Exposure Draft, Insurance Contracts, at the end of July.


July 21, 2010 FASB/IASB Joint Videconference Board Meeting

Leases. The Boards discussed application guidance on when to use the performance obligation or derecognition approach to lessor accounting. The Boards did not reach any decisions at this meeting. The Boards will continue their discussion at the July 22 joint Board meeting.


July 22, 2010 FASB/IASB Joint Videconference Board Meeting

Leases.The Boards discussed:

1. Application guidance on when to use the performance obligation or derecognition approach to lessor accounting
    
2. Sale and leaseback transactions—definition of a purchase or sale.

Application Guidance on When to Use the Performance Obligation or Derecognition Approach to Lessor Accounting

The Boards tentatively decided that a lessor should account for a lease contract on the basis of whether the lessor retains exposure to significant risks or benefits associated with the underlying asset either:

1. During the expected term of the current lease contract; or
    
2. Subsequent to the term of the current lease contract by having the expectation or ability to generate significant returns by leasing that asset multiple times subsequent to the current contract or by selling the underlying asset.

For the purposes of this assessment, risks associated with the counterparty credit risk of the lessee should not be considered.

A lessor that retains exposure to significant risks or benefits associated with the underlying asset should apply the performance obligation approach to such leases. A lessor that does not retain exposure to significant risks or benefits associated with the underlying asset should apply the derecognition approach to such leases. This assessment would be made at the inception of the lease and would not be reassessed subsequently.

The Boards tentatively decided that a lessor should consider the following factors when determining whether it retains exposure to significant risks or benefits associated with the underlying asset during the expected term of the current lease contract:

1. Significant contingent rentals during the expected lease term that are based on the use or performance of the underlying asset
    
2. Options to extend or terminate the current lease term
    
3. Material nondistinct services provided under the current lease contract.

The Boards tentatively decided that a lessor should consider the following factors when determining whether it retains exposure to significant risks or benefits associated with the underlying asset subsequent to the term of the current lease contract.

1. Whether the lease term is short in relation to the useful life of the asset
    
2. Whether a significant change in the value of the underlying asset at the end of the lease term is expected. In making this assessment the lessor should consider the present value of the underlying asset at the end of the lease term and the effect that any residual value guarantees may have on the lessor’s exposure to risks and benefits.

Sale and Leaseback Transactions—Definition of a Purchase or Sale

The Boards affirmed their previous tentative decision to remove the following two criteria from the list of indicators on whether a contract is a purchase or sale:

1. The contract covers the whole of the expected useful life of the asset.
    
2. The contract specifies a fixed return to the transferor.

The Boards affirmed their previous tentative decision to retain the requirement to consider whether a transaction results in a purchase or sale in order to qualify for sale and leaseback accounting.

For determining whether a contract is a purchase or sale (both for scope purposes and for sale and leaseback transactions), the Boards affirmed their previous tentative decision that a contract is a purchase or sale of an underlying asset if, at the end of the contract, an entity transfers to another entity control of the underlying asset and all but a trivial amount of the risks and benefits associated with the underlying asset.