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, 2011 FASB/IASB Joint Board Meeting

Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by considering how risk should be reflected in the measurement of an insurance contract liability.

The IASB tentatively decided that the measurement of an insurance contract should contain an explicit adjustment for risk. The adjustment would be determined independently from the premium and would be remeasured in each reporting period.

The FASB tentatively decided the following:
  1. An insurance contract measurement model should use a single margin approach that recognizes profit as the insurer satisfies its performance obligation to stand ready to compensate the policyholder in the event of an occurrence of a specified uncertain future event that adversely affects that policyholder.
     
  2. An insurer satisfies its performance obligation as it is released from exposure to risk as evidenced by a reduction in the variability of cash outflows.
     
  3. An insurer should not remeasure or recalibrate the single margin to recapture the previously recognized margin.
The FASB will consider the inclusion of an onerous contract test as part of the model at a future meeting.

The Boards will continue to explore whether the two approaches could be made comparable through disclosures.


Balance sheet—offsetting. The Boards discussed feedback received on the Offsetting Exposure Draft and instructed the staff to provide analyses of various issues raised by stakeholders for future deliberations, including simultaneous settlement, collateral, and unit of account.


Revenue recognition. The FASB and the IASB continued their deliberations by discussing the presentation and disclosure requirements about an entity’s contracts with customers, disclosures about assets from contract acquisition or fulfilment costs, impairment and amortization of assets from contract acquisition or fulfilment costs, recognition of an asset from contract acquisition costs, and onerous contracts.

Presentation and Disclosures of Contracts with Customers

The Boards tentatively decided to retain the presentation and disclosure requirements that were proposed in the Exposure Draft, Revenue from Contracts with Customers, with the following amendments and clarifications.

Presentation of contract assets and contract liabilities

The Boards clarified that an entity could use labels other than “contract asset” and “contract liability” to describe those assets and liabilities in the financial statements. However, an entity should disclose sufficient information that users of the financial statements can clearly distinguish between unconditional rights to consideration (a receivable whether billed or unbilled) and conditional rights to consideration (that is, a contract asset).

Disaggregation of revenue

The Boards tentatively decided that:
  1. The revenue standard should not prescribe the specific categories into which an entity should disaggregate revenue. Rather, the standard should provide a clear disaggregation principle and examples of categories that may be appropriate.
     
  2. An entity should disaggregate revenue either on the face of the statement of comprehensive income or in the notes to the financial statements.
     
  3. An entity would not be required to also disaggregate the impairment loss allowance (for customers’ credit risk that is presented adjacent to revenue).
Reconciliation of contract assets and contract liabilities

The Boards clarified that an entity should include additional line items in the reconciliation of contract assets and contract liabilities if those additional reconciling items would be needed to understand the change in the balance of a contract asset or contract liability. The Boards also decided tentatively that an entity does not need to include specified line items in the reconciliation if those reconciling items would not be useful for explaining a material change in that contract asset or contract liability balance.

Disclosure of remaining performance obligations

The Boards tentatively decided that:
  1. An entity should disclose the amount of the transaction price allocated to remaining performance obligations for contracts that have both of the following attributes:
     
    1. An original expected contract duration of more than one year; and
       
    2. Terms and conditions that result in the entity, in practice, being required to apply each step of the revenue model (specifically, to determine the transaction price and allocate that transaction price to the separate performance obligations) in order to recognize revenue. An entity would not be required to provide this disclosure if, in practice, the entity would not need to specifically apply those steps of the revenue model to recognize revenue (for example, some “time and materials” contracts).
       
  2. An entity should explain when it expects those amounts to be recognized as revenue, either on a quantitative basis in time bands that would be most appropriate for the duration of the contract or by using a mixture of quantitative and qualitative information.
Disclosures about Assets from Contract Acquisition or Fulfilment Costs

The Boards tentatively decided that an entity should disclose, for each reporting period, a reconciliation of the carrying amount of an asset arising from the costs to acquire or fulfil a contract with a customer, by major classification (for example, acquisition costs, precontract costs, and setup costs), at the beginning and end of the period, separately showing:
  1. Additions
     
  2. Amortization
     
  3. Impairments
     
  4. Impairment losses reversed (under IFRSs only, not applicable under U.S. GAAP).
In addition, the Boards tentatively decided that an entity should provide the following qualitative disclosures:
  1. A description of the method used to determine the amortization for the period
     
  2. For impairment losses reversed under IFRSs, the circumstances that led to the reversal of the impairment loss.
Impairment of Assets Arising from Contract Acquisition or Fulfilment Costs

The Boards tentatively decided that an entity should recognize an impairment loss to the extent that the carrying amount of the asset exceeds (1) the amount of consideration to which the entity expects to be entitled in exchange for the goods or services to which the asset relates less (2) the remaining costs that relate directly to providing those goods or services. To determine the amount to which an entity expects to be entitled, an entity should use the principles for determining the transaction price. For IFRSs, reversals of previous impairments are required when the impairment condition ceases to exist. For U.S. GAAP, reversals of previous impairments are prohibited.

Amortization of Assets Arising from Contract Acquisition or Fulfilment Costs

The Boards tentatively decided to retain the proposal in the Exposure Draft that would require an entity to amortize the asset on a systematic basis consistent with the pattern of transfer of goods or services to which the asset relates. The Boards clarified that the asset might relate to goods or services to be provided under future contracts with the same customer (for example, renewal options).

Recognition of an Asset from Contract Acquisition Costs

As a practical expedient, the Boards tentatively decided that for contracts with a duration of one year or less, an entity should be permitted to recognize contract acquisition costs as an expense when incurred.

Onerous Contracts

The Boards tentatively decided to limit the application of the onerous test to performance obligations that an entity satisfies over time (for example, long-term service contracts).

In addition, the Boards tentatively decided that the costs an entity should consider when applying the onerous test are the lower of:
  1. The costs that relate directly to satisfying the performance obligation (defined in paragraph 58 of the Exposure Draft), and
     
  2. Any amounts the entity would have to pay to cancel the contract.
FASB Board only: The FASB tentatively decided that when a not-for-profit entity enters into a contract with a customer for a social benefit or charitable purpose, the contract is exempt from applying the onerous test.

Next Steps

In June 2011, the Boards plan to discuss the following topics:
  1. Transition and effective date
     
  2. Application of the revenue model to some industries (for example, the telecommunications industry).


Leases. The IASB and the FASB continued their discussion on leases and discussed the following topics: lessee accounting, lessor accounting, contract modifications or changes in circumstances after the date of inception of the lease, reassessment of options in a lease, and reassessment of the discount rate in a lease.

Lessee Accounting

The Boards tentatively decided that lessees should apply a single accounting approach for all leases consistently with the approach proposed in the Leases Exposure Draft. This accounting approach would require a lessee to:
  1. Initially recognize a liability to make lease payments and a right-of-use asset, both measured at the present value of the lease payments.
     
  2. Subsequently measure the liability to make lease payments using the effective interest method.
     
  3. Amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits.
At a future meeting, the Boards will consider further:
  1. The presentation and disclosure of additional information about amortization of the right of-use asset, interest expense on the liability to make lease payments, total lease expense, and lease payment cash flows.
     
  2. Short-term lease accounting.
Lessor Accounting

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

The Boards discussed whether there should be one or two approaches to lessor accounting. The Boards will continue discussing this issue at a future meeting, at which they will consider the implications of their decision to require a single approach to lessee accounting. The Boards requested the staff to provide further analysis at a future meeting that compares the accounting described below with the accounting for lessors applying operating lease accounting in existing IFRS and U.S. GAAP.

Lessor accounting: one approach

The Boards discussed accounting for the underlying asset and the residual asset if there is a single approach to lessor accounting. If a single approach is used, the Boards tentatively decided that:
  1. The lessor would derecognize a portion of the carrying amount of the underlying asset.
     
  2. The lessor would initially measure the residual asset as an allocation of the carrying amount of the underlying asset. The lessor would subsequently measure the residual asset by accreting the amount of the residual asset over the lease term, using the rate that the lessor charges the lessee.
Lessor accounting: two approaches

The Boards tentatively decided that if there are two approaches to lessor accounting, distinguishing between those two approaches would be based on indicators relating to a definition of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. These indicators would:
  1. Include a “fair value indicator”;
     
  2. Include a “variable rent indicator”; and
     
  3. Not include an “embedded or integral services indicator.”
The Boards discussed the accounting for the underlying asset and the residual asset if there are two approaches to lessor accounting. If substantially all of the risks and rewards of ownership of the underlying asset are transferred to the lessee and the lessor does not apply operating lease accounting in existing IFRS and U.S. GAAP, the Boards indicated a preference that the lessor would:
  1. Derecognize the entire carrying amount of the underlying asset.
     
  2. Initially measure the residual asset at the present value of the estimated value of the underlying asset at the end of the lease term, discounted using the rate that the lessor charges the lessee.
     
  3. Subsequently measure the residual asset by accreting the amount of the residual asset over the lease term using the rate the lessor charges the lessee.
Accounting for the right to receive lease payments

The Boards indicated a tentative preference for measuring a lessor’s right to receive lease payments in accordance with the requirements for other similar financial assets. The Boards nevertheless requested the staff to analyze whether this would create any unintended consequences, specifically if the Boards were to specify two approaches for lessor accounting.

Presentation of the lessor’s right to receive lease payments and the residual asset

The Boards tentatively decided that a lessor should present its right to receive lease payments separately from any residual asset. The Boards will discuss the presentation of the residual asset at a future meeting.

Contract Modifications or Changes in Circumstances after the Date of Inception of the Lease

The Boards tentatively decided to provide guidance on accounting for changes after the date of inception of the lease as follows:
  1. A modification to the contractual terms of a contract that is a substantive change to the existing contract should result in the modified contract being accounted for as a new contract. The change is a substantive change if it results in a different determination of whether the contract is, or contains, a lease or, if applicable, whether the contract transfers substantially all of the risks and rewards incidental to ownership of the underlying asset.
     
  2. A change in circumstances other than a modification to the contractual terms of the contract that would affect the assessment of whether a contract is, or contains, a lease should result in a reassessment as to whether the contract is, or contains, a lease.
     
  3. A change in circumstances other than a modification to the contractual terms of the contract that would affect whether a lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset should not result in a reassessment or a change in the accounting approach.
Reassessment of Options in a Lease

The Boards discussed how lessees and lessors should reassess whether a lessee has a significant economic incentive to exercise:
  1. An option to extend or terminate a lease, and
     
  2. An option to purchase the underlying asset.
The Boards tentatively decided that a lessee and a lessor should consider contract-based, asset-based, and entity-based factors in reassessing whether a lessee has a significant economic incentive to exercise an option. The boards noted that all these factors should be considered together and the existence of only one factor does not necessarily, by itself, signify a significant economic incentive to exercise the option.

The Boards tentatively decided that the thresholds for evaluating a lessee’s economic incentive to exercise options to extend or terminate a lease and options to purchase the underlying asset should be the same for both initial and subsequent evaluation, except that a lessee and lessor should not consider changes in market rates after lease commencement when evaluating whether a lessee has a significant economic incentive to exercise an option.

The Boards tentatively decided that changes in lease payments that is due to a reassessment in the lease term should result in:
  1. A lessee adjusting its obligation to make lease payments and its right-of-use asset; and
     
  2. A lessor adjusting its right to receive lease payments and any residual asset, and recognizing any corresponding profit or loss (pending the Boards’ decision on lessor accounting).
Reassessment of the Discount Rate

The Boards discussed whether there are circumstances that would require a lessee or a lessor to reassess the discount rate that is used to measure the present value of lease payments.

The Boards tentatively decided that the discount rate should not be reassessed if there is no change in the lease payments.

The Boards tentatively decided that the discount rate should be reassessed when the changes below are not reflected in the initial measurement of the discount rate:
  1. When there is a change in lease payments that is due to a change in the assessment of whether the lessee has a significant economic incentive to exercise an option to extend a lease or to purchase the underlying asset.
     
  2. When there is a change in lease payments that is due to the exercise of an option that the lessee did not have a significant economic incentive to exercise.
The Boards also decided that a lessee or lessor should determine a revised discount rate using the spot rate at the reassessment date and should then apply that rate to the remaining lease payments (i.e. to the remaining payments due in the initial lease plus the payments due during the extension period or upon exercise of a purchase option).



May 18, 2011 FASB/IASB Joint Board Meeting

Insurance contracts. [See the summary for the May 17, 2011 FASB/IASB Joint Board meeting.]


Revenue recognition. [See the summary for the May 17, 2011 FASB/IASB Joint Board meeting.]


Accounting for financial instruments: impairment. The FASB and the IASB discussed the way forward on the impairment project considering the feedback received on the supplementary document. The Boards considered four alternatives:
  1. Finalize the approach developed by the IASB based on deliberations before convergence discussions (that is, a time-proportional approach for a “good book” and full lifetime expected losses for a “bad book”)
     
  2. Finalize the approach developed by the FASB based on deliberations before convergence discussions (that is, recognize losses expected to occur in the “foreseeable future” period)
     
  3. Finalize the model in the supplementary document taking into consideration feedback received
     
  4. Develop a variation of the previous proposals, taking into account the feedback from the Boards’ original Exposure Drafts and the supplementary document.
The Boards tentatively decided to pursue the fourth alternative. A small working group of Board members and senior staff from both the FASB and the IASB has been created to develop some specific suggestions to move forward, such as baseline models or objectives. This group will develop suggestions to be presented to the Boards expeditiously.



May 19, 2011 FASB/IASB Joint Board Meeting

Leases. [See the summary for the May 17, 2011 FASB/IASB Joint Board meeting.]