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 31, 2011 FASB/IASB Joint Videoconference Board Meeting

Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by discussing the accounting for reinsurance. The Boards tentatively decided the following:

1. If a reinsurance contract does not transfer significant insurance risk because the assuming company is not exposed to a loss (with loss defined as an excess of the present value of the cash outflows over the present value of the premiums), the reinsurance contract is deemed to transfer significant insurance risk if substantially all of the insurance risk relating to the reinsured portions of the underlying insurance contracts is assumed by the reinsurer. Substantially all of the insurance risk relating to the reinsurance portions of the underlying insurance contracts is not transferred unless the economic benefit transferred to the reinsurer for its respective portion of the underlying policies is virtually the same as the economic benefit previously held by the cedant.
    
2. An insurer should assess the significance of insurance risk at the individual contract level. Contracts entered into simultaneously with a single counterparty for the same risk, or contracts that are otherwise interdependent that are entered into with the same or a related party, should be considered a single contract for the purpose of determining risk transfer.
    
3. A cedant should not recognize a reinsurance asset until the underlying contract is recognized unless the amount paid under the reinsurance contract reflects aggregate losses of the portfolio of underlying contracts covered by the reinsurance contract. If the reinsurance coverage is based on aggregate losses, the cedant should recognize a reinsurance asset when the reinsurance contract coverage period begins. An onerous contract liability should be recognized if management becomes aware in the pre-coverage period that the reinsurance contract has become onerous.
    
4. The ceded portion of the risk adjustment should represent the risk being removed through the use of reinsurance.
    
5. If the present value of the fulfillment cash flows (including the risk adjustment under the IASB’s tentative decisions) for the reinsurance contract is:
    
   1. Less than zero and the coverage provided by the reinsurance contract is for future events, the cedant should establish that amount as part of the reinsurance recoverable, representing a prepaid reinsurance premium, and should recognize the cost over the coverage period of the underlying insurance contracts.
       
   2. Less than zero and the coverage provided by the reinsurance contract is for past events, the cedant should recognize the loss immediately.
       
   3. Greater than zero, the cedant should recognize a reinsurance residual or composite margin.
       
6. The cedant should estimate the present value of the fulfillment cash flows for the reinsurance contract, including the ceded premium and without reference to the residual/composite margin on the underlying contracts, in the same manner as the corresponding part of the present value of the fulfillment cash flows for the underlying insurance contract or contracts, after remeasuring the underlying insurance contracts on initial recognition of the reinsurance contract.
    
7. When considering nonperformance by the reinsurer:
    
   1. The cedant should apply the impairment model for financial instruments when determining the recoverability of the reinsurance asset.
       
   2. The cedant should consider all facts and circumstances, including collateral, when assessing the risk of nonperformance by the reinsurer.
       
   3. The losses from disputes should be reflected in the measurement of the recoverable when there is an indication that current information and events suggest the cedant may be unable to collect amounts due according to the contractual terms of the reinsurance contract.

June 1, 2011 FASB/IASB Joint Videoconference Board Meeting

Balance sheet—offsetting. Representatives from the International Swaps and Derivatives Association and clearing houses provided the Boards with an overview of settlement and collateral processes of derivative instruments in conjunction with the proposal on balance sheet offsetting.

The Boards discussed collateral and unit of account (payment netting) in conjunction with the proposal on balance sheet offsetting.

The meeting was informational; no decisions were made.


Leases. The IASB and the FASB continued their discussion on leases and discussed subsequent measurement issues relating to lessees, including foreign exchange differences, impairment, revaluation, and residual value guarantees.

Foreign Exchange Differences

The Boards discussed the accounting by lessees for leases denominated in a foreign currency. The Boards tentatively decided that foreign exchange differences related to the liability to make lease payments should be recognized in profit or loss, consistently with foreign exchange guidance in existing IFRSs and U.S. GAAP.

Impairment

The Boards discussed impairment of the lessee’s right-of-use asset. The Boards tentatively decided to affirm the proposal in the Leases Exposure Draft to refer to existing guidance in IFRSs and U.S. GAAP for impairment of the right-of-use asset.

Revaluation (IASB only)

The IASB discussed revaluation of the lessee’s right-of-use asset. The IASB tentatively decided to affirm the proposals in the Leases Exposure Draft allowing revaluation of the right-of-use asset.

Residual Value Guarantees

The Boards discussed the subsequent measurement of residual value guarantees by lessees (excluding guarantees provided by an unrelated third party) and tentatively decided that:

1. The amounts expected to be payable under residual value guarantees included in the measurement of the lessee’s right-of-use asset should be amortized consistently with how other lease payments that are included in the measurement of a right-of-use asset are amortized. That is, amortization should be on a systematic basis from the date of commencement of the lease to the end of the lease term, or over the useful life of the underlying asset, if this is shorter. The method of amortization should reflect the pattern in which the economic benefits of the right-of-use asset are consumed or otherwise used up. If that pattern cannot be reliably determined, a straight-line amortization method should be used.
    
2. The amounts expected to be payable under residual value guarantees that are included in the measurement of the lessee’s liability to make lease payments should be reassessed when events or circumstances indicate that there has been a significant change in the amounts expected to be payable under residual value guarantees. An entity would be required to consider all relevant factors to determine whether events or circumstances indicate that there has been a significant change.
    
3. The amount of the change to the lessee’s liability to make lease payments arising from changes in estimates of residual value guarantees should be recognized (a) in net income to the extent that those changes relate to current or prior periods and (b) as an adjustment to the right-of-use asset to the extent those changes relate to future periods. The allocation for changes in estimates of residual value guarantees should reflect the pattern in which the economic benefits of the right-of-use asset will be consumed or were consumed. If that pattern cannot be reliably determined, an entity should allocate changes in estimates of residual value guarantees to future periods.