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 12, 2011 FASB/IASB Joint Board Meeting

Leases.

Variable Lease Payments

At the February 2011 joint Board meeting, the FASB and the IASB tentatively decided that the lessee’s liability and the lessor’s receivable should include:

  1. Lease payments that meet a high threshold
     
  2. Lease payments for which the variability lacks economic substance
     
  3. Lease payments that depend on an index or a rate.
At that meeting, the Boards directed the staff to perform targeted outreach on those tentative decisions.

Lease payments that meet a high threshold

The Boards tentatively decided that the measurement of the lessee’s liability and the lessor’s receivable should not include variable lease payments that meet a high threshold.

Lease payments for which the variability lacks economic substance

The Boards tentatively decided that the measurement of the lessee’s liability and the lessor’s receivable should include lease payments that are in-substance fixed lease payments but are structured as variable lease payments in form.

Lease payments that depend on an index or a rate

The Boards will discuss lease payments that depend on an index or a rate, including reassessment, at a future meeting.

In addition, the Boards directed the staff to consider appropriate disclosures for variable lease payments for future discussions.

Definition of a Lease

In the Leases Exposure Draft, the Boards defined a lease as a contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration.

The Boards tentatively decided the following in relation to applying that definition, having considered feedback received from targeted outreach meetings held during March 2011 as well as feedback received in comment letters and through other outreach:
  1. An entity would determine whether a contract contains a lease on the basis of the substance of the contract, by assessing whether:
     
    1. The fulfilment of the contract depends on the use of a specified asset; and
       
    2. The contract conveys the right to control the use of a specified asset for a period of time.
       
  2. A contract would convey that right to control the use if the customer has the ability to direct the use, and receive the benefit from use, of a specified asset throughout the lease term. Guidance on separating the use of a specified asset from other services should be aligned with the Boards’ tentative decisions in March 2011 relating to the separation of lease and non-lease components.
     
  3. A “specified asset” refers to an asset that is explicitly or implicitly identifiable.
     
  4. A physically distinct portion of a larger asset of which a customer has exclusive use is a specified asset. A capacity portion of a larger asset that is not physically distinct (for example, a capacity portion of a pipeline) is not a specified asset.

Revenue recognition. [See the summary for the April 14, 2011 FASB/IASB Joint Board meeting.]


Insurance contracts.

Top-Down Approaches to Discount Rates

The IASB and the FASB tentatively decided on February 17, 2011, that an insurer could use either a top-down approach or a bottom-up approach to determine discount rates that reflect the characteristics of the insurance contract liability (rather than how the insurer funds the liability). At this meeting, the Boards tentatively decided that in applying the top-down approach: 
  1. An insurer should determine an appropriate yield curve based on current market information. The insurer may base its determination of the yield curve for the insurance contract liability on a yield curve that reflects current market returns for the actual portfolio of assets the insurer holds or for a reference portfolio of assets with characteristics similar to those of the insurance contract liability.
     
  2. If there are no observable market prices for some points on that yield curve, the insurer should use an estimate that is consistent with the Boards' guidance on fair value measurement, in particular for Level 3 fair value measurement.
     
  3. The cash flows of the instruments should be adjusted so that they reflect the characteristics of the cash flows of the insurance contract liability. In adjusting the cash flows, the insurer should make both of the following adjustments:
     
    1. Type I, which adjusts for differences between the timing of the cash flows to ensure that the assets in the portfolio (actual or reference) selected as a starting point are matched with the duration of the liability cash flows.
       
    2. Type II, which adjusts for risks inherent in the assets that are not inherent in the liability. In the absence of an observable market risk premium for risks inherent in the asset but not inherent in the liability, the insurer uses an appropriate technique to determine that market risk premium, consistent with (2).
       
  4. An insurer using a top-down approach need not make adjustments for remaining differences between the liquidity inherent in the liability cash flows and the liquidity inherent in the asset cash flows.


April 13, 2011 FASB/IASB Joint Board Meeting

Leases.

One or Two Accounting Approaches for Leases

The Boards tentatively decided that:
  1. There should be two accounting approaches for leases for both lessees and lessors.
     
  2. Both lessees and lessors would use guidance similar to that in IAS 17, Leases, to determine which accounting approach to apply.
Lessee Accounting Approaches

The Boards discussed the two accounting approaches that would be applied by lessees.

For both lessee accounting approaches, the Boards affirmed their proposals in the Leases Exposure Draft that a lessee would:
  1. Initially recognize a liability to make lease payments and a right-of-use asset, both measured at the present value of lease payments.
     
  2. Subsequently measure the liability to make lease payments using the effective interest method.
For finance leases, a lessee would, consistent with the proposals in the Exposure Draft:
  1. Amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits in accordance with IAS 38, Intangible Assets, and Topic 350, Intangibles—Goodwill and Other.
     
  2. Present amortization of the right-of-use asset and interest expense on the liability to make lease payments, either in profit or loss or in the notes.
For other-than-finance leases, a lessee would:
  1. Amortize the right-of-use asset in a manner that would result in total lease expense (representing the sum of amortization of the right-of-use asset and interest expense on the liability to make lease payments) being recognized over the lease term on a straight-line basis unless another systematic basis is more representative of the time pattern of the total lease expense.
     
  2. Present amortization of the right-of-use asset and interest expense on the liability to make lease payments together as a single line item within operating expense (for example, as rent expense).
Lessor Accounting Approaches

The Boards held an education session to discuss the two accounting approaches that would be applied by lessors. The session was for educational purposes only, and the Boards were not asked to make any decisions on these issues.


Revenue recognition. [See the summary for the April 14, 2011 FASB/IASB Joint Board meeting.]


Accounting for financial instruments: impairment. The IASB and the FASB discussed the comment letters received on the January 11 joint supplementary document, Financial Instruments: Impairment, and other outreach activities.

The Boards also discussed interest revenue recognition and the definition of amortized cost. They tentatively decided that to determine interest revenue an entity should apply the effective interest rate to an amortized cost balance that is not reduced for credit impairment.

The Boards discussed whether to discount a loss estimate, specifically, whether expected losses should be measured as principal only on an undiscounted basis or as all shortfalls in cash flows (both principal and interest) on a discounted basis. The Boards tentatively decided that the measurement of expected losses should reflect the effect of discounting. Any finalized guidance will clarify that a variety of techniques can be used to measure this amount and that the unit of account does not have to be an individual loan.

The Boards then discussed several alternatives on whether to unwind any discount on expected losses through interest revenue (either separately presented or in a net presentation) or through impairment losses. The Boards tentatively decided to include the unwinding of the discount in the impairment losses line item. The Boards will later consider whether to require disclosure of the effect of the unwinding on the allowance account including following consideration of any operational issues.

The Boards tentatively decided that they did not need to consider the inclusion of a nonaccrual principle for an impairment accounting model using these decisions at this time.

At future meetings, the Boards will redeliberate the feedback received on the supplementary document as they continue to develop the impairment accounting model.



April 14, 2011 FASB/IASB Joint Board Meeting

Revenue recognition. During their joint meetings on April 12–14, the FASB and the IASB discussed the following topics:

Determining the transaction price
 
Allocating the transaction price
 
Licenses and rights to use
 
Fulfillment costs
 
Sale and repurchase agreements.

Determining the Transaction Price

The Boards discussed how an entity would determine the transaction price and recognize revenue when the customer promises an amount of consideration that is uncertain. The Boards tentatively decided that:

An entity’s objective when determining the transaction price is to estimate the total amount of consideration to which the entity will be entitled under the contract.
 
To meet that objective, an entity should estimate either of the following amounts depending on which is most predictive of the amount of consideration to which the entity will be entitled:
 
The probability-weighted amount, or
 
The most likely amount.
 
An entity should recognize revenue at the amount allocated to a satisfied performance obligation unless the entity is not reasonably assured to be entitled to that amount. That would be the case in each of the following circumstances:
 
The customer could avoid paying an additional amount of consideration without breaching the contract (for example, a sales-based royalty).
 
The entity has no experience with similar types of contracts (or no other persuasive evidence).
 
The entity has experience, but that experience is not predictive of the outcome of the contract based on an evaluation of the factors proposed in the Exposure Draft (for example, susceptibility to factors outside the influence of the entity, the amount of time until the uncertainty is resolved, the extent of the entity’s experience, and the number and variability of possible consideration amounts).
Allocating the Transaction Price

The Boards discussed how an entity should allocate the transaction price on a relative selling price basis.

The Boards tentatively decided that if the standalone selling price of a good or service underlying a separate performance obligation is highly variable, the most appropriate technique to estimate a standalone selling price may be a residual technique. Using a residual technique, an entity would determine a standalone selling price by reference to the total transaction price less the standalone selling prices of other goods or services in the contract.

The Boards also tentatively decided that an entity should allocate a portion of (or a change in) the transaction price entirely to one (or more) performance obligation if both of the following conditions are met: 
  1. The contingent payment terms of the contract relate specifically to the entity’s efforts to satisfy that performance obligation or a specific outcome from satisfying that separate performance obligation.
     
  2. The amount allocated (including the change in the transaction price) to that particular performance obligation is reasonable relative to all of the performance obligations and payment terms (including other potential contingent payments) in the contract.

Licenses and Rights to Use

The Boards discussed how an entity should account for contracts in which the entity grants a license or other rights to a customer. The Boards tentatively decided that the promised rights give rise to a performance obligation that the entity satisfies at the point in time when the customer obtains control (that is, the use and benefit) of the rights. If there are other performance obligations in the contract, an entity should consider whether the rights give rise to a separate performance obligation or whether the rights should be combined with those other performance obligations.

Fulfillment Costs

The Boards discussed the accounting for costs of fulfilling a contract with a customer and affirmed the guidance proposed in the Exposure Draft subject to minor drafting improvements. Specifically, the Boards decided that:

The scope of the proposed guidance should be retained in the final standard.
 
The costs that relate directly to a contract include costs that are incurred before the contract is obtained if those costs relate specifically to an anticipated contract.
 
The costs of abnormal amounts of wasted materials, labor, or other resources that were not considered in the price of the contract should be recognized as an expense when incurred.

Sale and Repurchase Agreements

The Boards discussed how an entity should account for an agreement in which the entity sells an asset to a customer and grants the customer the right to require the entity to repurchase the asset at a price below the original sales price. The Boards tentatively decided that if the customer has a significant economic incentive to exercise that right, the customer effectively pays the entity for the right to use the asset for a period of time. Consequently, the entity should account for the agreement as a lease. To determine whether a customer has a significant economic incentive to exercise its right, an entity should consider various factors including the relationship of the repurchase price to the expected market value of the asset at the date of repurchase and the amount of time until the right expires.

Next Steps

In May 2011, the Boards will discuss the following topics:

Disclosures
 
Transition
 
Fulfillment costs: amortization and impairment.


Accounting for financial instruments: impairment. [See the summary for the April 13, 2011 FASB/IASB Joint Board meeting.]