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.

March 31, 2010 FASB Board Meeting

[Revised 04/06/10]—Accounting for financial instruments: impairments. The Board discussed various aspects of the approach for recognition and measurement of credit impairment for financial assets for which certain changes in fair value may be recognized in other comprehensive income.

The Board discussed the recognition and measurement of credit impairment for financial assets assessed for impairment on an individual basis. The Board decided that, for such financial assets, even if the asset is not impaired based on an entity’s assessment of the asset on an individual basis, recognition of a credit impairment may be appropriate based on loss experience for financial assets with similar characteristics. Therefore, the entity can recognize a credit impairment for such financial assets and measure the credit impairment based on a historical loss rate for financial assets having similar risk characteristics. If a financial asset is impaired based on an entity’s assessment of the asset on an individual basis, the entity should recognize a credit impairment for that asset equal to the amount by which the amortized cost exceeds the present value of the cash flows the entity expects to collect. In that situation, the entity should not recognize any additional credit impairment for the financial asset in addition to the amount determined based on the net present value of cash flows not expected to be collected.

The Board also discussed the recognition and measurement of credit impairment for pools of homogeneous financial assets for which impairment is assessed and measured based on a historical loss rate. For such financial assets, the Board decided that the amount of credit impairment to be recognized in net income at the end of the reporting period during which the assets were originated or acquired should be determined by applying an aggregate loss rate to the pool balance. In subsequent periods, changes in the loss rate would generally result in the recognition of an additional credit impairment or the reversal of a credit impairment recognized in a previous period.

Interest Income Recognition

The Board discussed the approach for recognition of interest income related to interest-earning financial assets based on previous decisions in the Accounting for Financial Instruments project. The Board agreed that the difference between the amount of the accrued interest receivable based on the contractual interest due and the amount of interest income accrued based on the application of the asset’s effective interest rate to the amortized cost balance net of the allowance should be recognized as an increase to the allowance for credit losses. [Revised] To the extent that the allowance account exceeds an entity’s estimate of expected losses, the difference would be recognized in income as a recovery.


Accounting for financial instruments: disclosures. The Board discussed disclosures about financial assets and financial liabilities within the scope of the project.

The Board decided that an entity would be required to provide disclosures that are disaggregated on the basis of the nature, characteristics, and risks of the financial instruments. The Board decided that the following disclosures would be required for each annual and interim reporting period:

For financial liabilities whose fair value changes are recognized in net income, an entity would disclose:
  1. Qualitative information about the reasons for changes in fair value attributable to changes in the entity’s creditworthiness (excluding the change in the price of credit)
  2. How the gains and losses attributable to changes in instrument-specific credit risk related to the entity’s change in creditworthiness were determined.
For financial instruments whose fair value changes are recognized in other comprehensive income, an entity would disclose:
  1. Information about the contractual maturities of the financial instruments
  2. For all purchased financial assets:
    1. Principal amount of the instrument
      (Less) Purchaser’s assessment of the discount related to credit
      (Plus or minus) Purchase premium or discount
      Amortized cost
    2. How the entity determined its assessment of the discount related to credit
  3. For financial liabilities:
    1. Qualitative information about the reasons for changes in fair value attributable to changes in the entity’s creditworthiness (excluding the change in the price of credit)
    2. How the gains and losses attributable to changes in instrument-specific credit risk related to the entity’s change in creditworthiness were determined
  4. For financial instruments that an entity sells or settles before their contractual maturity:
     
    1. The fair value of the financial instruments
    2. The gross realized gains and gross realized losses recognized in net income
    3. The basis on which the cost of an instrument sold was determined (that is, specific identification, average cost, or other method used)
    4. An explanation of the reasons for selling or settling the financial instruments
  5. For financial instruments on which an entity recognizes interest income:
    1. The method used for calculating interest income on a pool of financial assets that are collectively assessed for impairment
    2. If interest income is calculated on a pool basis using a weighted-average interest rate, the amortized cost basis, allowance for credit losses, and weighted-average interest rate of each pool
  6. For financial assets that have a negative yield and are not accruing interest, an entity would disclose the carrying amount and amortized cost.
     
  7. For financial assets with an allowance account, an entity would disclose:
    1. The total allowance for credit losses by portfolio segment and in the aggregate, including the balance in the allowance at the beginning and end of each period, additions charged due to operations, additions from recognizing less interest than the gross interest contractually due, direct write-downs charged against the allowance, changes in methods and estimates, if any, and recoveries of amounts previously charged off.
    2. The factors considered in determining whether the financial asset is impaired.
    3. The inputs and assumptions used to measure credit impairments recognized in the performance statement. Examples of significant inputs include, but are not limited to, performance indicators of the underlying assets in the instrument (including default rates, delinquency rates, and percentage of nonperforming assets), collateral values, loan-to-collateral-value ratios, third-party guarantees, current levels of subordination, vintage, geographic concentration, and credit ratings.
    4. The cumulative amount of credit impairments by class and the related carrying amount and unpaid principal balance for financial assets.
    5. The average carrying amount and the related amount of interest income recognized during each reporting period for impaired financial assets.
    6. The amortized cost and fair value of financial assets, by class, that are written off.
For financial liabilities for which the amortized cost option is elected, an entity would disclose:
  1. An explanation of the reasons why measuring the financial liability at fair value would create or exacerbate an accounting attribute mismatch.
  2. The fair value of the financial liability.
For core deposit liabilities, an entity would disclose, disaggregated by class:
  1. The calculation of average core deposit balances
  2. The determination of the implied maturity period
  3. The sources of the alternative funds rate used and why
  4. The all-in-cost-to-service rate
  5. A measurement uncertainty analysis.
The Board decided that for all financial instruments measured at fair value and classified as Level 3 in the fair value hierarchy except unquoted equity instruments, an entity would be required to comply with the measurement uncertainty disclosures decided by the Board in the joint fair value measurement project. For the measurement uncertainty disclosures, for each significant input, an entity would disclose the weighted-average input used to measure fair value in each interim and annual reporting period. However, the measurement uncertainty analysis disclosure would be required in annual reporting periods. For interim reporting periods, if the volatility of those inputs has significantly changed from the previous reporting period, the entity would provide the measurement uncertainty disclosures. If the volatility of those inputs did not significantly change from the previous fiscal year end, the entity would disclose such and would not be required to provide the measurement uncertainty disclosures.

The Board decided that entities would be required to disaggregate FASB Accounting Standards CodificationTM Topic 820 recurring fair value disclosures by whether the changes in fair value for the financial instruments are recognized in net income or in other comprehensive income.

The Board decided for equity investments accounted for under the equity method of accounting, an entity should disclose management’s assessment about how the investment is considered related to the entity’s consolidated businesses for each interim and annual reporting period. Factors to consider when determining if the investee’s operations are considered related to the entity’s consolidated businesses include the line of business in which the entity and investee operate, the level of intra-entity transactions between the entity and the investee (for example, the investee provides procurement, production, or distribution functions), and the level of common management between the entity and investee.


Going concern. The Board discussed changes to the proposed accounting model for management’s going concern assessment and whether and how to proceed with the liquidation basis of accounting portion of this project.

The Board made the following decisions about management’s going concern assessment:
  1. The Board decided not to specifically define a going concern. Instead, the Board decided to require the following disclosures when management, applying commercially reasonable business judgment, is aware of conditions and events that indicate, based on current facts and circumstances, that it is reasonably foreseeable that an entity may not be able to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, issuance of equity, externally or internally forced revisions of its operations, or similar actions.
     
    1. Pertinent conditions and events giving rise to the assessment, including when such conditions and events are anticipated to occur, if reasonably estimable
    2. The possible effects of those conditions and events
    3. Possible discontinuance of operations
    4. Management’s evaluation of the significance of those conditions and events and any mitigating factors
    5. Management’s plans to mitigate the effects of the conditions and events, whether those plans can be effectively implemented, and the likelihood that such plans will mitigate the adverse effects.
    6. Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.
The Board decided to provide the following principles-based guidance on the adoption and application of the liquidation basis of accounting.
  1. An entity should prepare financial statements on the going concern basis unless liquidation is imminent. Liquidation is imminent if (a) a plan of liquidation has been approved by the entity’s owners or (b) the plan to liquidate is being imposed by other forces and it is remote that the entity will become a going concern in the future. If liquidation is imminent, an entity’s financial statements shall be prepared on a liquidation basis.
     
  2. Liquidation basis financial statements should reflect relevant information about the value of an entity’s resources and obligations in liquidation. Such financial statements should consist of a “Statement of Net Assets in Liquidation” and a “Statement of Changes in Net Assets in Liquidation.” An entity that applies the liquidation basis of accounting should measure the items in its financial statements to reflect the actual amount of cash that the entity expects to collect or pay during the course of liquidation. This measurement should include, but is not limited to, recognition of (a) costs to dispose of assets or liabilities and (b) expense and income to be incurred through liquidation. The measurement bases and significant assumptions used should be disclosed.
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. The Board decided that the proposed Update will have a 60-day comment period and that the guidance should be applied prospectively.


Fair value measurement. The Board discussed the scope, transition method, and comment period for its Exposure Draft of proposed changes to its fair value measurement guidance (FASB Accounting Standards Codification™ Topic 820), deciding:
  1. Not to change the scope of Topic 820.
     
  2. An entity would adopt the proposed changes that affect a fair value measurement using a limited retrospective method.
     
  3. An entity would be required to provide the additional proposed disclosures only for periods beginning after the changes are effective (prospectively).
The Board decided that the Exposure Draft would have a minimum of a 45-day comment period, with the comment period ending August 16, 2010. The Board will discuss whether to allow early adoption when it decides on the effective date of an Accounting Standards Update. The Board directed the staff to draft the proposed Update for vote by written ballot.


FASB ratification of ETIF consensuses and tentative conclusions. The Board ratified the following consensuses reached at the March 18, 2010 EITF meeting.

  1. Issue No. 08-9, “Milestone Method of Revenue Recognition”
    The scope of this consensus is limited to arrangements that include milestones relating to research or development deliverables.

    The guidance in this consensus must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance applies to milestones in arrangements within the scope of this consensus regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting.

    The following information shall be disclosed in the notes to the financial statements for each arrangement that includes a material milestone payment:

    1. A description of the overall arrangement
    2. A description of the individual milestones and related contingent consideration
    3. A determination as to whether the milestones are considered substantive
    4. A list of the factors considered by the entity in making its assessment of whether the milestones are substantive
    5. The amount of milestone consideration recognized during the period.

    The consensus shall be applied prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010, with earlier application and retrospective application permitted.

  2. Issue No. 09-B, “Consideration of an Insurer’s Accounting for Majority-Owned Investments When Ownership Is through a Separate Account”
    An insurance entity should not be required to consolidate a voting-interest investment fund when it holds the majority of the voting interests of the fund through its separate accounts or through a combination of its general and separate accounts.

    The scope of this consensus includes investment funds determined to be variable interest entities (VIEs). An insurance entity should not consider the interests held through separate accounts for the benefit of policyholders in the insurer’s evaluation of its economics in a VIE, unless the separate account contract holder is a related party.

    The consensus does not require any additional recurring disclosures.

    The consensus will be effective for interim and annual periods beginning after December 15, 2010.

    The consensus shall be applied retrospectively to all prior periods upon the date of adoption, with early adoption permitted.

  3. Issue No. 09-F, “Casino Jackpot Liabilities”
    A casino entity should accrue a jackpot at the time the entity has the obligation to pay that jackpot.

    The consensus does not require any additional recurring disclosures.

    The consensus will be effective for interim and annual periods beginning on or after December 15, 2010.

    Early adoption is permitted. If an entity elects early application of the guidance and the period of adoption is not the first reporting period in the entity’s fiscal year, the consensus must be applied retrospectively from the beginning of the vendor’s fiscal year.

  4. Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset”
    An entity should not apply troubled debt restructuring accounting guidance to loans accounted for as a pool that were initially acquired with credit deterioration.

    The consensus does not require any additional recurring disclosures.

    The consensus will be effective for modifications of loans accounted for within a pool in interim or annual periods ending on or after July 15, 2010.

    The consensus shall be applied prospectively only. Early application is permitted. A one-time election to terminate pool accounting on a pool-by-pool basis is permitted.

  5. Issue No. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”
    An employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met.

    The consensus does not require any additional recurring disclosures.

    The consensus will be effective for interim and annual periods beginning on or after December 15, 2010.

    The consensus shall be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the consensus is applied. Early adoption is permitted. If an entity elects early adoption and the period of adoption is not the first reporting period of the entity’s fiscal year, the entity shall apply the consensus retrospectively from the beginning of the entity’s fiscal year.
The Board also ratified the following consensuses-for-exposure reached at the March 18, 2010 EITF meeting. Each consensus-for-exposure is expected to be exposed for a period of 30 days.
  1. Issue No. 09-K, “Health Care Entities: Presentation of Insurance Claims and Related Insurance Recoveries”
    A health care entity would be required to present claim liabilities and insurance recoveries on a gross basis on the statement of financial position.

    The consensus-for-exposure would not require any additional recurring disclosures.

    The consensus-for-exposure would be applied as of the beginning of the year of adoption by recognizing the claim liability and insurance receivable on a gross basis. The net effect of recording the liability and receivable, if any, would be recognized as a cumulative-effect adjustment to beginning retained earnings. The effective date will be determined after the exposure period.

  2. Issue No. 09-L, “Health Care Entities: Measuring Charity Care for Disclosure”
    A health care entity would be required to disclose charity care using cost as the measurement basis. Cost would be determined consistent with the measurement used for reporting charity care for regulatory purposes (that is, the direct and indirect costs related to providing the service).

    The consensus-for-exposure would not require any additional recurring disclosures.

    The consensus-for-exposure would be applied retrospectively, with the effective date to be determined after the exposure period.