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.

January 18, 2011 FASB/IASB Joint Board Meeting

Insurance contracts. The IASB and the FASB discussed the feedback received in the comment letters on the IASB's Exposure Draft, Insurance Contracts, and the FASB's Discussion Paper, Preliminary Views on Insurance Contracts. No decisions were made.


Accounting for financial instruments: impairment. The Boards tentatively agreed to a 60-day comment period for the upcoming joint supplementary impairment document to the FASB’s May 2010 and the IASB’s November 2009 Exposure Drafts.


January 19, 2011 FASB/IASB Joint Board Meeting

Revenue recognition. [See the summary for the January 20, 2011 FASB/IASB Joint Board Meeting.]


Leases.

Comment Letter Summary

The Boards considered a summary of:
  1. The feedback received in response to the Exposure Draft, Leases, which was published for public comment in August 2010
     
  2. Outreach activities undertaken after the publication of the Exposure Draft to explain the proposals in the Exposure Draft and to obtain feedback on the proposals.
The Boards also discussed the plan for redeliberating the issues raised by respondents to the Exposure Draft.

The Boards plan to begin redeliberations by considering two of the fundamental issues raised by respondents, which are the definition of a lease and the next steps to be taken relating to lessor accounting.

Definition of a Lease

The Boards discussed the definition of a lease and how to distinguish between a lease contract and a service contract. The Boards also discussed whether, under a right-of-use model, all lease contracts should have the same subsequent measurement approach.

This session was for education only, and thus the Boards did not make any technical decisions.


Insurance contracts. The FASB and the IASB had invited guest speakers to an education session on potential discount rates for nonparticipating insurance contracts. The IASB's Exposure Draft, Insurance Contracts, and the FASB's Discussion Paper, Preliminary Views on Insurance Contracts, had both proposed a bottom-up determination of the discount rate that starts with a risk-free interest rate and adds an adjustment for illiquidity. The guest speakers provided presentations on, as an alternative, various top-down approaches that start with the return on a specified portfolio of assets and then deduct components that do not reflect the characteristics of the insurance liability being measured. The approaches discussed were:
  1. Economic default adjusted discount rate (EDAR); speaker Rob Esson, National Association of Insurance Commissioners (NAIC) and the International Association of Insurance Supervisors (IAIS)
     
  2. Reference asset portfolio-based discount rate; speakers Francesco Nagari and Andrew Smith, Deloitte LLP
     
  3. Asset-linked discount rate; speaker Nick Bauer, Eckler Ltd.
No decisions were made.


January 20, 2011 FASB/IASB Joint Board Meeting

Revenue recognition. The IASB and the FASB began their redeliberations of the Exposure Draft, Revenue from Contracts with Customers, by discussing the following topics:
  1. Segmenting a contract
     
  2. Identifying separate performance obligations
     
  3. Determining the transfer of goods and services.
Segmenting a Contract

The Boards decided to eliminate the proposed requirement in the Exposure Draft to account for one contract as two or more contracts if the price of some goods or services in the contract is independent of the price of other goods or services in the contract. Consequently, an entity would separate a contract only if the entity identifies separate performance obligations in the contract. At a future meeting, the Boards will discuss further the implications of this decision on allocating the transaction price.

Identifying Separate Performance Obligations

The Boards decided that the revenue standard should clarify that the objective for identifying separate performance obligations is to depict the transfer of goods or services and the profit margin that is attributable to those goods or services.

The Boards decided to retain the principle of “distinct goods or services” as the basis for identifying separate performance obligations. The Boards asked the staff to analyze further the following attributes of a distinct good or service and consider how an entity would apply them in various scenarios:
  1. Distinct function
     
  2. Separable risks
     
  3. Different pattern of transfer to the customer.
The Boards also decided that it would not be necessary for the revenue standard to include additional requirements on accounting for perfunctory, incidental, or other similar obligations.

Determining the Transfer of Goods and Services

The Boards affirmed the core principle in the Exposure Draft that an entity should recognize revenue to depict the transfer of goods and services to a customer.

Goods

For determining the transfer of a good, the Boards decided that an entity should recognize revenue when the customer obtains control of the good. The Boards also decided that the revenue standard should:
  1. Carry forward from the Exposure Draft most of the proposed guidance on control
     
  2. Describe rather than define control
     
  3. Add “risks and rewards of ownership” as an indicator of control
     
  4. Eliminate “the design or function of the good or service is customer-specific” as an indicator of control.
Services

For determining the transfer of a service, the Boards decided that an entity should recognize revenue for the entity’s performance of a contractually agreed task or tasks if:
  1. The customer controls the work-in-process, or
     
  2. Another entity would not need to reperform the task(s) if that other entity were required to fulfill the remaining obligation to the customer, or
     
  3. The entity has a right to payment for the performed task(s) and the entity’s performance to date does not have an alternative use to the entity (that is, the performance to date has not created an asset that could be transferred to another customer).
The Boards decided that an entity would recognize revenue for a service only if the entity can reasonably measure its progress toward successful completion of the service. The Boards asked the staff to analyze further which method an entity should use to measure its progress toward completion of a service (for example, an output method, an input method, or a method based on the passage of time).

Goods and Services

The Boards decided that if an entity promises to transfer both goods and services, the entity should first determine whether the goods and services are distinct (in accordance with the guidance on identifying separate performance obligations).
  1. If the goods and services are distinct, the entity would account for them as separate performance obligations.
     
  2. If the goods and services are not distinct, the entity would account for the bundle of non-distinct goods and services as a service.
Next Steps

At their meetings in February, the Boards will discuss the following topics:
  1. Costs of obtaining a contract
     
  2. Combining contracts
     
  3. Contract modifications
     
  4. Product warranties.

Leases.

Lessor Accounting

The IASB and the FASB discussed the next steps for redeliberating the lessor accounting model proposed in the Exposure Draft, Leases.

The Boards noted the benefit of considering lease issues from the perspective of both a lessee and a lessor and, therefore, decided that they should continue to address lessee and lessor accounting issues together.

The Boards also noted that some respondents questioned why the Exposure Draft proposes consistent application of a right-of-use model by all lessees, but proposes that application by lessors depends on an assessment of whether the lessor retains exposure to significant risks and benefits associated with the underlying asset. The Boards noted that many respondents, including users, think some lessees and lessors enter into lease contracts to finance the use of an underlying asset, whereas other lessees and lessors enter into lease contracts for other reasons, such as the operational flexibility provided by the contract. The Boards directed the staff to explore whether there should be two approaches to apply the right-of-use model by both lessees and lessors, and therefore two different patterns of profit or loss recognition, and how to differentiate between the two approaches.

This session was for education only, and thus the Boards did not make any technical decisions.