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.

May 17, 2010 FASB/IASB Joint Board Meeting

Revenue recognition. The Boards considered:

  1. Repurchase agreements
  2. Sales of assets that are not an output of an entity’s ordinary activities.

Repurchase Agreements

The Boards tentatively decided that the forthcoming Exposure Draft will explain how an entity would determine whether a buyer obtains control of an asset subject to a repurchase agreement.

  1. If a buyer has the unconditional right to require the entity to repurchase the asset (a put option), the buyer obtains control of the asset and the entity should account for the agreement similarly to the sale of a product with a right of return.
  2. If an entity has an unconditional obligation or unconditional right to repurchase the asset (a forward or a call option), the buyer does not obtain control of the asset. The entity should account for the repurchase agreement as:
    1. A lease in accordance with FASB Accounting Standards Codification™ Topic 840, Leases, or IAS 17, Leases, if the entity repurchases the asset for less than the original sales price of the asset (that is, the buyer pays a net amount of consideration to the entity).
    2. A financing arrangement if the entity repurchases the asset for more than the original sales price of the asset (that is, the entity pays a net amount of consideration to the buyer).
  3. If the sale and repurchase agreement is a financing arrangement, the entity should continue to recognize the asset and should recognize a financial liability for any consideration received from the buyer. The entity should recognize the difference between the amount of consideration received from the buyer and the amount of consideration paid to the buyer as interest and, if applicable, holding costs (for example, insurance).
The FASB tentatively decided to remove from the Accounting Standards Codification Subtopic 470-40, Debt— Product Financing Arrangements.

Sales of Assets That Are Not an Output of an Entity’s Ordinary Activities

The Boards tentatively decided that an entity should apply the recognition and measurement principles of the proposed revenue model to contracts for the sale of the following assets that are not an output of the entity’s ordinary activities: 
  1. Intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other, or IAS 38, Intangible Assets
  2. Property, plant, and equipment within the scope of Topic 360, Property, Plant, and Equipment, or IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property.

Consequently, the entity would:

  1. Derecognize the asset when the buyer obtains control of the asset.
  2. Recognize at that date a gain or loss equal to the difference between the transaction price and the carrying amount of the asset. The transaction price would be limited to amounts that can be reasonably estimated at the date of transfer.

Next Steps

The Boards plan to publish the Exposure Draft in June.
 

Conceptual framework: objective & qualitative characteristics. The Boards discussed two issues that arose from the ballot draft on the objective of financial reporting and the qualitative characteristics chapters. First, they agreed that materiality is an entity-specific aspect of relevance rather than a constraint to be considered in setting financial reporting standards. Second, they discussed how best to describe the objective of financial reporting. The Boards directed the staff to prepare a new ballot draft to reflect the results of the decision about materiality and the discussion of the objective.


May 18, 2010 FASB/IASB Joint Board Meeting

Leases. The Boards discussed:
  1. Lessor accounting for the performance obligation
  2. Derecognition approach to lessor accounting.
Lessor Accounting for the Performance Obligation

The Boards tentatively decided that under a performance obligation approach to lessor accounting, the lessor has a single performance obligation to continue to permit the lessee to use the leased asset over the lease term. That performance obligation would be satisfied, and revenue recognized, continuously over the lease term.

Derecognition Approach to Lessor Accounting

The Boards discussed an alternative approach to lessor accounting, the derecognition approach. The Boards then discussed two possible models—a full derecognition approach and a partial derecognition approach.

If the Boards adopt a derecognition approach to lessor accounting, they tentatively decided to adopt a partial derecognition approach. Under that approach, the Boards discussed:
  1. Accounting for residual assets
  2. Accounting for options.
Accounting for Residual Assets

The Boards tentatively decided that the residual asset would be an allocation of the previous carrying amount of the underlying asset. The residual asset would not be remeasured unless for impairment.

Accounting for Options

The Boards tentatively decided that initial measurement of the residual asset recognized by the lessor would be based on the assessed lease term, that is, the longest possible lease term that is more likely than not to occur.


Insurance contracts. At this meeting, the Boards discussed margins and disclosures.

Margins

The Boards further discussed the measurement approach for insurance contracts.
  1. By a narrow margin, the IASB tentatively selected an approach that includes a risk adjustment plus a residual margin.
  2. By a narrow margin, the FASB tentatively selected an approach that includes a single composite margin.
Risk Adjustment

The Boards discussed the objective for a risk adjustment, together with draft supporting guidance, and tentatively decided:
  1. That the objective is to reflect the maximum amount that an insurer would rationally pay to be relieved of the risk, taking into consideration that the amount of benefits and claim costs actually paid may exceed the amount expected to be paid.
  2. That the guidance accompanying this objective should clarify that a risk adjustment would capture the level of uncertainty inherent in the cash flows from the insurance liability from the perspective of the insurer, rather than from the perspective of a market participant.
  3. To limit the range of available techniques to measure the risk adjustment. Staff will bring back at a future meeting a discussion on which techniques would be available for measuring the risk adjustment, including a further analysis on whether a cost-of-capital approach would meet the objective of the risk adjustment.
Composite Margin

The Boards discussed how to amortize a composite margin and considered the application of two possible factors:
  1. The insurer's exposure from the provision of insurance coverage
  2. The insurer's exposure from uncertainties related to future cash flows.
The Boards tentatively decided that these factors should be implemented through the following formula:
(Premium allocated to current period + current period claims and benefits)/
(Total contract premium + total claims and benefits)

The Boards also affirmed that an insurer should not adjust a composite margin for changes in cash flow estimates.

Level of Measurement

The Boards then discussed the issue of the level of measurement and tentatively decided:
  1. That an entity should measure any risk adjustment at a portfolio level of aggregation
  2. To retain the definition of portfolio of contracts in the existing IFRS 4 as contracts that are subject to broadly similar risks and managed together as a single portfolio
  3. That residual or composite margins should be determined at a cohort level of aggregation, by grouping insurance contracts by portfolio and, within the same portfolio, by date of inception of the contract and by length (or life) of the contract.
The Boards asked the staff to investigate and recommend whether to require or permit the insurer to determine a composite margin on an individual contract basis rather than on a cohort basis.

Disclosures

The Boards tentatively approved disclosure requirements for the forthcoming Exposure Draft, including a principle on the level of disaggregation for disclosure purposes. The Boards provided some comments for the staff to consider in drafting the proposed requirements.

Next Steps

The Boards will continue their discussion of this project at the joint board meeting on May 19.


May 19, 2010 FASB/IASB Joint Board Meeting

Leases. At this meeting, the Boards discussed a derecognition approach to lessor accounting. If the Boards adopt a derecognition approach to lessor accounting, the Boards tentatively decided to adopt a partial derecognition approach. Under that approach, the Boards discussed:
  1. Accounting for options
  2. Accounting for contingent rentals and residual value guarantees
  3. Accounting for subleases
  4. Presentation
  5. Disclosures.
Accounting for Options

The Boards tentatively decided that accounting for a reassessment of the expected lease term would be treated as a new derecognition/re-recognition event. That is, the lessor would derecognize/reinstate a portion of its residual asset.

The Boards asked the staff to provide additional analysis on accounting for purchase options under lessee and lessor accounting.

Accounting for Contingent Rentals and Residual Value Guarantees

The Boards tentatively decided that changes in amounts receivable under all types of contingent rentals and residual value guarantees would be recognized in profit or loss.

Accounting for Subleases

The Boards tentatively decided that different measurement guidance would not be provided for assets and liabilities arising under a sublease. Also, intermediate lessors would present all assets and liabilities arising under a sublease gross in the statement of financial position.

Presentation

The Boards tentatively decided that a lessor would present:
  1. Lease receivables separately from other receivables in the statement of financial position
  2. Residual assets separately with property, plant, and equipment in the statement of financial position with disclosures by class of assets
  3. Revenue and cost of sales based on the lessor’s business model, that is, some lessors would present gross and other lessors would present net in the statement of comprehensive income.
Disclosures

The Boards tentatively agreed to a set of disclosure requirements for lessors under the derecognition approach including the following:
  1. Additional disclosures about the residual asset
  2. Additional disclosures about the service obligations.
The Boards instructed to the staff to consider the disclosure requirements in the Derecognition project.

The FASB expressed a preference for the performance obligation approach for lessors. The IASB expressed a preference for a hybrid model, which the lessor would apply the derecognition approach for some leases and the performance obligation approach for others. The IASB instructed the staff to develop proposals for deciding when to apply which model.

The Boards will continue discussing lease accounting at the joint meeting in June.


Insurance contracts. At this meeting, the Boards discussed unbundling and the scope for a forthcoming Exposure Draft on insurance contracts.

Unbundling

The Boards discussed a possible guiding principle for unbundling, built around the notion of significant interdependence. They asked the staff to refine the guidance supporting the proposed principle so as to explain more clearly how an insurer would assess whether interdependence is significant. If the refined guidance cannot address this point, the Boards may need to review the proposed principle at a future meeting. The Boards tentatively decided that account balances of account-driven contracts should be unbundled. For this purpose, the characteristics of these contracts will be defined in accordance with the guidance in U.S. GAAP in FASB Accounting Standards Codification™ Subtopic 944-20.

On embedded derivatives:
  1. The IASB decided tentatively that embedded derivatives should be unbundled when the IASB's existing standards on financial instruments would require this.
  2. The FASB decided tentatively that embedded derivatives should be unbundled using the unbundling principle being developed for insurance contracts.
In addition, the Boards tentatively decided that unbundling should be prohibited except in cases where it was required.

Scope

The Boards tentatively decided that the scope of the future standard on insurance contracts should:
  1. Exclude fixed-fee service contracts
  2. Not exclude financial guarantee contracts, defined as contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
The Boards noted that the proposed definition of an insurance contract:
  1. Captures financial guarantee contracts, as defined above, but
  2. Does not capture contracts that pay out regardless of whether the counterparty holds the underlying debt instrument, and
  3. Revised 05/27/10—Does not capture contracts that pay out on a change in credit rating or change in credit index, rather than on the failure of a specified debtor to make payments when due. Thus, financial guarantee contracts, as defined above, would be within the scope of the standard on insurance contracts.
The contracts described in (2) and (3) above would be within the scope of standards on financial instruments.

Next Steps

The Boards will continue their discussion of this project at the joint board meeting on June 1.


Consolidation. The Boards discussed two issues relating to the consolidation project and tentatively made the following decisions:
  1. A decision-maker should assess whether it controls regulated funds that it manages. It should make this assessment by using the agency guidance that applies to all decision-makers that have been delegated decision-making authority. Consequently, there is no need to include specific guidance for regulated funds.
  2. When preparing its consolidated financial statements, the parent of an investment company (if it is not an investment company itself) shall be prohibited from retaining the fair value accounting that is applied by an investment company subsidiary to that investment company's controlled investees.
Accordingly, a parent of an investment company should consolidate all entities that it controls, including those that are controlled by an investment company subsidiary, unless that parent is an investment company itself. The Boards affirmed their previous tentative decision that an investment company should be required to measure investment in entities that it controls at fair value through profit or loss. See the April 19-23, 2010 IASB Update regarding the criteria that must be met for an entity to be considered an investment company. The Boards will discuss separate presentation and transition at future meetings.


Derecognition. [This topic was cancelled.]