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 14, 2011 FASB/IASB Joint Videoconference Board Meeting

Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by considering the following topics:

  1. Alternative presentation models
     
  2. Recognition of the composite margin in earnings
     
  3. Whether the Boards should permit or require a practical expedient for the discount rate.

Alternative Presentation Models

The Boards discussed several presentation approaches for the performance statement for insurers. The Boards directed the staff to seek input on these approaches from the Insurance Working Group and from other users of insurance financial statements to help the Boards understand which approaches are most likely to meet the needs of users and whether those approaches would cause practical difficulties for the preparers of the financial statements.

The Boards were not asked to make any decisions on this topic.

Recognition of the Composite Margin in Earnings

The Boards considered alternative ways by which the composite margin could be recognized in earnings in the income statement.

The Boards were not asked to make any decisions on this topic.

Practical Expedient for the Discount Rate

The Boards discussed whether to provide a practical expedient for determining the discount rate for a particular subset of entities.

The Boards tentatively decided not to provide a practical expedient for determining the discount rate.

The FASB also noted that it would review this issue when it considered the scope and definition, particularly if those decisions would lead to contracts issued by nonfinancial institutions being within the scope of the standard.


Leases. The IASB and the FASB discussed how to distinguish between a lease and a purchase or a sale, and the accounting for purchase options.

Distinguishing between a Lease and a Purchase or a Sale

The Boards discussed whether the leases standard should provide guidance for distinguishing a lease from a purchase or a sale.

The Boards tentatively decided that guidance should not be provided in the leases standard for distinguishing a lease of an underlying asset from a purchase or a sale of an underlying asset. That is, if an arrangement does not contain a lease, it should be accounted for in accordance with other applicable standards (for example, property, plant, and equipment or revenue recognition).

Accounting for Purchase Options

The Boards discussed how lessees and lessors should account for options to purchase the underlying assets that are included within an arrangement that contains a lease.

The Boards tentatively decided that lessees and lessors should include the exercise price of a purchase option (including bargain purchase options) in the measurement of the lessee’s liability to make lease payments and the lessor’s right to receive lease payments, if the lessee has a significant economic incentive to exercise the purchase option. If it is determined that the lessee has a significant economic incentive to exercise the purchase option, the right-of-use asset recognized by the lessee should be amortized over the economic life of the underlying asset, rather than over the lease term.

The Boards also discussed whether a lessee and a lessor should reassess how to account for a purchase option included within an arrangement that contains a lease in subsequent periods. The Boards tentatively indicated a preference for specifying the same reassessment guidance for purchase options as was tentatively decided for options to extend or terminate a lease. However, the Boards instructed the staff to seek input through targeted outreach on the costs and benefits of requiring reassessment.

The Boards will continue redeliberating the Leases Exposure Draft at future meetings.



March 15, 2011 FASB/IASB Joint Videoconference Board Meeting

Leases.

Short-Term Leases

The IASB and the FASB discussed the accounting for short-term leases by lessees and lessors. The Boards tentatively decided that:

  1. A short-term lease, for both lessees and lessors, is defined as:
     
      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.

  2. Lessees and lessors may elect, as an accounting policy for a class of underlying asset(s), to account for all short-term leases by not recognizing lease assets or lease liabilities and by recognizing 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 will continue redeliberating the Leases Exposure Draft at future meetings.


Fair value measurement.

Transition Method and Effective Date

The Board tentatively decided that the amendments in the final Accounting Standards Update on Topic 820, Fair Value Measurement and Disclosures, should be applied prospectively as follows:

  1. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011.
     
  2. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011.
     
  3. In the period of adoption, all entities should disclose the change, if any, in valuation technique and related inputs resulting from application of the amendments and should quantify the total effect, if practicable.

The Board also tentatively decided that public entities may not early adopt the amendments. Nonpublic entities may early adopt using the effective date for public entities.


Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by considering the following topics:

  1. Risk adjustment
     
  2. An alternative approach to deriving a discount rate
     
  3. The discount rate for participating contracts
     
  4. The timing of initial recognition
     
  5. The definition of an insurance contract.

Risk Adjustment

The Boards invited a guest speaker to provide an education session on how a risk margin is calculated using a cost of capital approach in practice and the linkage to determining the best estimate liabilities.

The Boards were not asked to make any decisions on this topic.

An Alternative Approach to Deriving a Discount Rate

The Boards invited guest speakers to present an approach that derives a yield curve for a discount rate for all cash flows expected at a given duration by:

  1. Identifying liability cash flows that are matched in duration with the cash flows from the insurer's existing asset portfolio
     
  2. Considering the reinvestment needs for cash flows that are not matched in duration
     
  3. Considering the effect of options and guarantees embedded in the liabilities.

The Boards were not asked to make any decisions on this topic.

Discount Rate for Participating Contracts

The Boards discussed the discount rate for insurance contracts that contain participating features. The Boards tentatively decided to:

  1. Clarify that the objective of the discount rate used to measure participating insurance contracts should be consistent with the objective of the discount rate used to measure nonparticipating insurance contracts
     
  2. Provide guidance that, to the extent that the amount, timing, or uncertainty of the cash flows arising from insurance contracts depends wholly or partly on the performance of specific assets, the insurer should adjust those cash flows using a discount rate that reflects that dependency.

Recognition

The Boards tentatively decided that insurance contract assets and liabilities should initially be recognized when the coverage period begins and that an onerous contract liability should be recognized in the pre-coverage period if management becomes aware of onerous contracts during that period.

Definition of an Insurance Contract

The IASB's Exposure Draft, Insurance Contracts, and the FASB's Discussion Paper, Preliminary Views on Insurance Contracts, proposed to define an insurance contract as “a contract under which one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder.” The Boards tentatively decided to affirm that proposal. They also tentatively decided that:

  1. An insurer should consider the time value of money in assessing whether the additional benefits payable in any scenario are significant.
     
  2. A contract does not transfer significant insurance risk if there is no scenario that has commercial substance in which the insurer can suffer a loss, with loss defined as an excess of the present value of the cash outflows over the present value of the premiums.



March 16, 2011 FASB/IASB Joint Videoconference Board Meeting

Accounting for financial instruments: hedge accounting. In December 2010, the IASB published the Exposure Draft, Hedge Accounting. The comment period for the Exposure Draft ended on March 9, 2011.

On February 9, 2011, the FASB issued an Invitation to Comment, Selected Issues about Hedge Accounting, to solicit input on the IASB Exposure Draft, in order to improve, simplify, and bring about convergence of the financial reporting requirements for hedging activities. The comment period on the Invitation to Comment ends April 25, 2011.

At this meeting, the IASB staff provided summaries of feedback that the IASB received from its outreach efforts and comment letters on the Exposure Draft. The Boards were not asked to make any decisions at this meeting.