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.

June 13, 2011 FASB/IASB Joint Board Meeting

Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts. They considered whether and how to unlock the residual margin, allocation methods for the residual margin, and the accounting for acquisition costs.

Whether to Unlock the Residual Margin

The IASB tentatively decided that the residual margin should not be locked in at inception.

The FASB indicated that it would not favor unlocking the residual margin after inception if it were to adopt an approach that includes both a risk adjustment and a residual margin rather than the single-margin approach, which was tentatively decided upon.

How to Unlock the Residual Margin

The IASB tentatively decided that an insurer should:
  1. Adjust the residual margin for favorable and unfavorable changes in the estimates of future cash flows used to measure the insurance liability. Experience adjustments would be recognized in profit or loss.
     
  2. Not limit increases in the residual margin.
     
  3. Recognize changes in the risk adjustment in profit or loss in the period of the change.
     
  4. Make any adjustments to the residual margin prospectively.
The IASB discussed whether changes in discount rate should be recognized as an adjustment to the residual margin or in profit or loss in the period of the change to the extent that those changes create an accounting mismatch. No decision was made. The FASB did not vote on how to unlock the residual margin.

Allocation Methods for the Residual Margin

The IASB tentatively decided that:
  1. The residual margin should not be negative.
     
  2. Insurers should allocate the residual margin over the coverage period on a systematic basis that is consistent with the pattern of transfer of services provided under the contract.
Accounting for Acquisition Costs

The Boards tentatively decided that the acquisition costs to be included in the initial measurement of a portfolio of insurance contracts should be all of the direct costs that the insurer will incur in acquiring the contracts in the portfolio such as:
  1. Direct costs of contract acquisition/origination.
     
  2. The portion of employee’s total compensation and payroll-related fringe benefits related directly to time spent performing any of the following activities for contracts that have been acquired/originated (FASB and IASB) and contracts that have not been acquired/originated (IASB only), including:
     
    1. Underwriting
       
    2. Policy issuance and processing
       
    3. Medical and inspection
       
    4. Sales force contract selling.
       
    5. Costs directly related to the activities in (2).
       
    6. Direct response advertising.
The Boards tentatively decided to exclude indirect costs such as:
  1. Software dedicated to contract acquisition
     
  2. Equipment maintenance and depreciation
     
  3. Agent and sales staff recruiting and training
     
  4. Administration
     
  5. Rent and occupancy
     
  6. Utilities
     
  7. Other general overhead
     
  8. Advertising.
The FASB tentatively decided that the acquisition costs included in the cash flows of insurance contracts will be limited to those costs related to successful acquisition efforts.

The IASB tentatively decided that no distinction should be made between successful acquisition efforts and unsuccessful efforts.

Next Steps

Both Boards will continue their discussion on insurance contracts on June 15, 2011, by considering presentation in the statement of comprehensive income.


Investment properties. FASB staff presented the IASB with an overview of decisions made on the FASB’s investment properties project. The meeting was informational; no decisions were reached.


Leases. The FASB and the IASB discussed Shariah-compliant lease contracts and lessor accounting.

Shariah-Compliant Lease Contracts

The Boards discussed the accounting implications of applying a right-of-use lease model to Shariah-compliant lease contracts. The discussion was educational in nature and no decisions were made.

Lessor Accounting

The Boards continued discussing the accounting by lessors under a right-of-use model.

The Boards discussed a single approach to lessor accounting whereby the lessor would recognize a lease receivable and a residual asset at lease commencement. The Boards will discuss at a future meeting whether and when, under such an approach, it is appropriate for a lessor to recognize profit at lease commencement. The Boards will also discuss at a future meeting whether there should be different lessor models for (1) a lease of a portion of an asset and (2) a lease of an entire asset.

The Boards did not make any decisions about lessor accounting at this meeting.



June 14, 2011 FASB/IASB Joint Board Meeting

Accounting for financial instruments: classification and measurement. At this joint Board meeting, FASB staff presented to the Boards a summary of tentative decisions reached by the FASB on classification and measurement of financial instruments. The meeting was informational; no decisions were reached.


Leases. [See the summary for the June 13, 2011 FASB/IASB Joint Board meeting.]


Revenue recognition. [See the summary for the June 15, 2011 FASB/IASB Joint Board meeting.]


Balance sheet—offsetting. The FASB and the IASB discussed alternative approaches for requiring offsetting of financial assets and financial liabilities on the face of the balance sheet. The staff proposed the following alternatives:
  1. Alternative 1—This approach requires a right of setoff that is exercisable both in the normal course of business and in bankruptcy, insolvency, or default and intention to settle a financial asset and financial liability net or simultaneously.
     
  2. Alternative 2—This approach requires a right of setoff that is legally enforceable in the normal course of business and intention to settle a financial asset and financial liability net or simultaneously.
     
  3. Alternative 3—For derivative instruments, this approach provides an exception from the general offsetting criteria, which would allow offsetting of fair value amounts recognized for derivatives and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instrument(s) recognized at fair value with the same counterparty under a master netting agreement. This approach requires a right of setoff that is only enforceable in bankruptcy, insolvency, or default of one of the counterparties.
     
    1. Alternative 3a—This approach limits the exception for offsetting of derivative instruments under Alternative 3 to only collateralized derivatives with daily variation margin postings.
The IASB supported Alternative 1. The majority of the FASB members supported Alternative 3.

The Boards noted that users consistently asked that information be provided to help reconcile any differences in the offsetting requirements under IFRS and US GAAP so the Boards decided to work on converging disclosure requirements to assist users comparing financial statements prepared under IFRS and US GAAP.


Insurance contracts. [See the summary for the June 13, 2011 FASB/IASB Joint Board meeting.]



June 15, 2011 FASB/IASB Joint Board Meeting

Leases.

Subleases

The Boards discussed the accounting for subleases under the proposed leases requirements for lessees and lessors and tentatively decided the following:
  1. A head lease and a sublease should be accounted for as separate transactions.
     
  2. An intermediate lessor, as a lessee in a head lease arrangement, should account for its assets and liabilities arising from the head lease in accordance with the decisions-to-date for all lessees.
     
  3. An intermediate lessor, as a lessor in a sublease arrangement, should account for its assets and liabilities arising from the sublease in accordance with the decisions-to-date for all lessors.
     
  4. If the Boards decide that there should be more than one approach to lessor accounting, an intermediate lessor, as a lessor in a sublease, should evaluate its right-of-use asset, not the underlying asset, to determine the appropriate lessor accounting approach to apply to the sublease.
Short-Term Leases

The Boards discussed the accounting for short-term leases by lessees. A short-term lease is defined as follows:

A lease that, at the date of commencement of the lease, has a maximum possible term, including any options to renew, of 12 months or less.
 
The Boards tentatively decided that for short-term leases a lessee need not recognize lease assets or lease liabilities. For those leases, the lessee should recognize lease payments in profit or loss on a straight-line basis over the lease term, unless another systematic and rational basis is more representative of the time pattern in which use is derived from the underlying asset.
 
The Boards also tentatively decided that a lessee may elect to apply the recognition and measurement requirements in the leases guidance to short-term leases.

The Boards expressed support for requiring disclosure of the rental expense recognized in the current period and a statement about the extent to which that expense is expected to be representative of rental expense in future periods. The Boards will continue to discuss disclosures for short-term leases, as well as lessor accounting for short-term leases, at a future meeting.


Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by discussing the presentation of the statement of comprehensive income.

Presentation of the Statement of Comprehensive Income

The Boards indicated a preference for the presentation model outlined in Example 2 in Appendix A of Agenda Paper 3A /FASB Memo No. 70A. The example presents the underwriting results of contracts measured under the building-block approach separately from contracts measured using the modified approach and includes volume information as follows:
  1. Line items for the underwriting margin of insurance contracts that present the following amounts for the reporting period:
     
    1. Building-block approach underwriting margin reflecting:
       
      1. Change in/release of

        (1) Risk adjustment (IASB)
         
        (2) Residual margin (IASB)
         
        (3) Composite margin (FASB)
         
      2. Experience adjustment related to the current period disaggregated as:

        (1) Premium due
         
        (2) Claims incurred

        (3) Expenses incurred
         
        (4) Expected net changes in the liability for the period
         
      3. Changes in assumptions
         
      4. Gains and losses at initial recognition
         
    2. Modified approach underwriting margin reflecting:
       
      1. Change in/release of

        (1) Risk adjustment (IASB)
         
        (2) Composite margin (FASB—if applicable)
         
      2. Premium revenue (based on the release of the preclaims obligation grossed up for amortization of acquisition costs)
         
      3. Claims incurred
         
      4. Expenses incurred
         
      5. Amortization of acquisition costs included in the preclaims obligation
         
      6. Experience adjustments related to the current period
         
      7. Changes in assumptions
         
      8. Changes in additional liabilities for onerous contracts
         
  2. Investment performance:
     
    1. Investment income
       
    2. Interest accreted on the expected net cash flows
       
  3. Changes in discount rate.
The Boards discussed whether they would require all insurers to present each of the above line items in all cases on the statement of comprehensive income, rather than in the notes. No decision was made.

Next Steps

The Boards will continue their discussion of insurance contracts at their July meeting.


Accounting for financial instruments: impairment. The IASB and the FASB discussed a “three-bucket” expected loss approach for the impairment of financial assets.

The guiding principle of the “three-bucket” approach is to reflect the general pattern of deterioration of credit quality of loans. Allowance balances would be established for all financial assets subject to impairment accounting. The different phases of the deterioration in credit quality are captured through the “three buckets” that determine the allowance balance. Generally, the “three-bucket” approach would encompass the following:
  1. Bucket 1: In the context of portfolios, assets evaluated collectively for impairment that do not meet the criteria of Bucket 2 or 3 (this would include loans that have suffered changes in credit loss expectations as a result of macroeconomic events that are not particular to either a group of loans or a specific loan).
     
  2. Bucket 2: Assets affected by the occurrence of events that indicate a direct relationship to possible future defaults, however the specific assets in danger of default have not yet been identified.
     
  3. Bucket 3: Assets for which information is available that specifically identifies that credit losses are expected to, or have, occurred on individual assets.
The Boards decided to continue to develop the “three-bucket” approach. In addition, the Boards agreed with the broad approach to distinguish between the buckets on the basis of credit risk deterioration. The Boards decided that the allowance balance of Buckets 2 and 3 should be the remaining lifetime expected loss estimate.

The Boards provided the following direction to the staff for future deliberations:
  1. Pursue an approach for Bucket 1 with an overall objective of recognizing an impairment allowance equal to 12 months’ worth of expected losses based on initial expectations plus the full amount of any changes in expected credit losses. However, the Boards also noted the operational complexities of such a model and directed the staff to consider how to operationalize the approach.
     
  2. The Boards noted the importance of having clear and well-defined indicators and guidance related to when to transfer assets between Buckets 1, 2, and 3. Therefore, they instructed the staff to further develop criteria to determine which of the three buckets financial assets should be attributed to.

Revenue recognition. The IASB and the FASB completed their planned redeliberations of the Exposure Draft, Revenue from Contracts with Customers, by discussing the following topics:
  1. The effect of the proposed standard on telecommunications (and other) companies
     
  2. The transition requirements for the proposed standard
     
  3. Whether it is necessary to re-expose the proposed standard.
Effect of the Proposed Standard on Telecommunications (and Other) Companies

The Boards discussed concerns raised by constituents in the telecommunications industry about the effect of the Boards’ proposed standard. The Boards tentatively decided not to revise the requirements of the proposed standard.

Transition Requirements

The Boards tentatively affirmed their decision in the Exposure Draft that an entity should apply the proposed standard on a retrospective basis. However, to ease the burden of applying the proposed standard in the first year of application, the Boards tentatively decided that:
  1. An entity should not be required to restate contracts that begin and end within the same reporting period.
     
  2. An entity should be permitted to use hindsight in estimating variable consideration in the comparative reporting periods.
     
  3. An entity should be required to perform the onerous test only at the effective date unless an onerous contract liability was recognized previously in a comparative period.
     
  4. An entity should not be required to disclose the maturity analyses of remaining performance for prior periods.
An entity should apply any relief employed consistently to all transactions throughout the comparative periods.

The Boards also tentatively decided that if an entity employs any of the available reliefs above, the entity should disclose the following information:
  1. The reliefs that have been employed by the entity
     
  2. To the extent possible, a qualitative assessment of the likely effect of applying those reliefs.
Re-exposure of the Proposed Standard

The Boards agreed to re-expose their revised proposals for a common revenue recognition standard. Re-exposing the revised proposals will provide interested parties with an opportunity to comment on revisions the Boards have undertaken since the publication of an Exposure Draft on revenue recognition in June 2010. Specifically, the Boards plan to invite feedback on the following topics:
  1. The extent to which the revised requirements are understandable and the drafting of the requirements has not created unintended consequences for specific contracts or industries
     
  2. A few specific aspects of the revised requirements.
It was the unanimous view of the Boards that while there was no formal due process requirement to re-expose the proposals, it was appropriate to go beyond established due process given the importance of the revenue number to all entities and the need to take all possible steps to avoid unintended consequences. The Boards intend to re-expose their work in the third quarter of 2011 for a comment period of 120 days.

Next Steps

The Boards directed the staff to draft an Exposure Draft for vote by written ballot. No Board members indicated that they intend to dissent to the publication of the Exposure Draft.