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.

October 19, 2011 FASB/IASB Joint Board Meeting

Fair value measurement. Based on suggestions made during the deliberations of IFRS 13, Fair Value Measurement, and FASB Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, the FASB and the IASB discussed the IASB’s consideration of the formation of a fair value advisory committee to create educational material about the implementation and application of IFRS 13, specifically for developing economies.


Leases.

Lessor Accounting

The FASB and the IASB tentatively decided that a lessor’s lease of investment property would not be within the scope of the receivable and residual approach. Instead, for such leases the lessor should continue to recognize the underlying asset and recognize lease income over the lease term.

The Boards discussed the receivable and residual approach and tentatively decided that for all lease contracts within the scope of that approach, a lessor should:
  1. Initially measure the right to receive lease payments at the present value of the lease payments, discounted using the rate the lessor charges the lessee, and subsequently measure at amortized cost applying an effective interest method.
     
  2. Initially measure the residual asset as an allocation of the carrying amount of the underlying asset. The initial measurement of the residual asset comprises two amounts: (a) the gross residual asset, measured at the present value of the estimated residual value at the end of the lease term discounted using the rate the lessor charges the lessee, and (b) the deferred profit, measured as the difference between the gross residual asset and the allocation of the carrying amount of the underlying asset.
     
  3. Subsequently measure the gross residual asset by accreting to the estimated residual value at the end of the lease term using the rate the lessor charges the lessee. The lessor would not recognize any of the deferred profit in profit or loss until the residual asset is sold or re-leased.
     
  4. Present the gross residual asset and the deferred profit together as a net residual asset.
The Boards also tentatively decided that there should be no distinction between when profit is or is not reasonably assured in accounting for a lease contract by a lessor.

Variable Lease Payments

The Boards discussed the subsequent measurement of a lessor’s residual asset when the lease contract includes variable lease payments that are not recognized as a part of the lease receivable at lease commencement.

The Boards tentatively decided that:
  1. If the rate the lessor charges the lessee does not reflect an expectation of variable lease payments, the lessor would not make any adjustments to the residual asset with respect to variable lease payments.
     
  2. If the rate the lessor charges the lessee reflects an expectation of variable lease payments, the lessor would adjust the residual asset on the basis of its expectation of variable lease payments by recognizing a portion of the cost of the residual asset as an expense when variable lease payments are recognized in profit or loss. Any difference between actual and expected variable lease payments would not result in any further adjustment to the residual asset with respect to variable lease payments.
Transfer/Securitization of Lease Receivables

The Boards discussed the measurement of lease receivables held for the purpose of sale and the derecognition guidance to be applied when lease receivables are transferred or sold.

The Boards tentatively decided that a lessor:
  1. Should not measure a lease receivable at fair value, even if part or all of that receivable is held for the purpose of sale.
     
  2. Should apply existing derecognition requirements (in IFRS 9, Financial Instruments, or FASB Accounting Standards Codification® Topic 860, Transfers and Servicing) to lease receivables, but allocate the carrying amount of a lease receivable on the basis of its fair value excluding any option elements and variable lease payments that are not transferred.
     
  3. Should apply the disclosure requirements in IFRS 7, Financial Instruments: Disclosures, and Topic 860 for transferred lease receivables.
Lessor Presentation

The Boards discussed presentation requirements for lessors in the statement of comprehensive income. The Boards tentatively decided that a lessor should present:
  1. The accretion of the residual asset as interest income.
     
  2. The amortization of initial direct costs as an offset to interest income.
     
  3. Lease income and lease expense (for example, revenue and cost of sales) in the statement of comprehensive income either in separate line items (gross) or in a single line item (net), on the basis of which presentation best reflects the lessor’s business model.
The Boards also tentatively decided that a lessor should separately identify income and expenses arising from leases by either separate presentation in the statement of comprehensive income or disclosure in the notes to the financial statements. If disclosed, the notes should reference the line item in which the income is presented.

Transition

The Boards discussed transition requirements and transition disclosures for lessees and lessors.

Lessees

The Boards tentatively decided that for capital/finance leases existing at the beginning of the earliest comparative period presented, a lessee would not be required to make any adjustments to the carrying amount of lease assets and lease liabilities and should reclassify those lease assets and lease liabilities as right-of-use assets and liabilities to make lease payments.

The Boards tentatively decided that for operating leases existing at the beginning of the earliest comparative period presented, a lessee should:
  1. Recognize liabilities to make lease payments at transition measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of the effective date for each portfolio of leases with reasonably similar characteristics. The incremental borrowing rate for each portfolio of leases should consider the lessee’s total leverage, including leases in other portfolios.
     
  2. Recognize right-of-use assets equal to the proportion of the liability to make lease payments at lease commencement calculated on the basis of the remaining lease payments.
     
  3. Record to retained earnings any difference between the liabilities to make lease payments and the right-of-use assets at transition.
The Boards also tentatively decided that when lease payments are uneven over the lease term, a lessee should adjust the right-of-use asset recognized at the beginning of the earliest comparative period presented by the amount of any recognized prepaid or accrued lease payments.

Lessors

The Boards tentatively decided that for finance/sales-type and direct finance leases existing at the beginning of the earliest comparative period presented, a lessor would not be required to make adjustments to the carrying amount of the assets associated with those leases.

For operating leases existing at the beginning of the earliest comparative period presented, the Boards tentatively decided that a lessor should:
  1. Recognize a right to receive lease payments, measured at the present value of the remaining lease payments, discounted using the rate charged in the lease determined at the date of commencement of the lease, subject to any adjustments required to reflect impairment.
     
  2. Recognize a residual asset consistent with the initial measurement of the residual asset under the receivable and residual approach, using information available at the beginning of the earliest comparative period presented.
     
  3. Derecognize the underlying asset.
The Boards also tentatively decided that when lease payments are uneven over the lease term, a lessor should adjust the cost basis in the underlying asset that is derecognized at the date of the earliest comparative period presented by the amount of any recognized prepaid or accrued lease payments.

Lessees and Lessors

To ease the potential burden of applying the final standard in the first year of application, the Boards tentatively decided that lessees and lessors may elect the following reliefs:
  1. An entity is not required to evaluate initial direct costs for contracts that began before the effective date.
     
  2. An entity may use hindsight in comparative reporting periods including the determination of whether or not a contract is or contains a lease.
The Boards also tentatively decided that lessees and lessors should provide transition disclosures consistent with Topic 250, Accounting Changes and Error Corrections, and IAS 8, Accounting Policies, Changes in Estimates and Errors, without the disclosure of the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per-share amounts for the current period and any prior periods retrospectively adjusted. Additionally, if an entity elects any of the available reliefs, the entity should disclose which reliefs it elected.

Notwithstanding all of the above tentative decisions on transition, the Boards tentatively decided that a lessee or lessor could choose to apply the requirements in the new leases standard retrospectively in accordance with Topic 250 or IAS 8.


Revenue recognition. The FASB and the IASB discussed whether an entity should apply the proposed disclosure requirements in the forthcoming revised Exposure Draft, Revenue from Contracts with Customers, to interim financial statements. The Boards decided tentatively to amend Topic 270 on interim reporting and IAS 34, Interim Financial Reporting, to specify that an entity that prepares interim financial statements should disclose in its interim financial statements the following information (if material):
  1. A disaggregation of revenue
     
  2. A tabular reconciliation of the movements in the aggregate balance of contract assets and contract liabilities for the current reporting period
     
  3. A maturity analysis of remaining performance obligations
     
  4. Information on onerous performance obligations and a tabular reconciliation of the movements in the corresponding onerous liability for the current reporting period
     
  5. A tabular reconciliation of the movements of the assets recognized from the costs to obtain or fulfill a contract with a customer.
The FASB observed that the above decision would not be applicable to a nonpublic entity because a nonpublic entity would not be required to disclose most of the information above in its annual financial statements.


October 20, 2011 FASB/IASB Joint Board Meeting

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

The Boards decided to pursue a model in which the overall objective is to reflect the deterioration in the credit quality of financial assets. Under this approach, recognition of impairment losses would initially be based on the objective for Bucket 1. The Boards directed the staff to develop a principle that underpins the measurement attribute of the credit allowance for financial assets in Bucket 1. In addition, the Boards directed the staff to develop a principle and indicators for when recognition of lifetime expected losses becomes appropriate. The Boards emphasized that robust disclosures will be critical to support the principle-based impairment model and to ensure comparability between entities. Furthermore, the Boards emphasized that the staff should consider the application of the model for various types of financial assets, notably debt securities, and various types of entities, notably nonfinancial institutions.


Insurance contracts. The FASB and the IASB continued their discussions on insurance contracts with the following topics: fixed-fee service contracts, eligibility criteria for premium allocation approach, and presentation in the statement of financial position and statement of comprehensive income. The staff also reported on recent investor outreach activities.

Fixed-Fee Service Contracts

The Boards tentatively decided to exclude from the scope of the insurance contracts standard fixed-fee service contracts that provide service as their primary purpose if they meet all the following criteria:
  1. The contracts are not priced on the basis of an assessment of the risk associated with an individual customer.
     
  2. The contracts compensate customers by providing a service, rather than cash payment.
     
  3. The type of risk transferred by the contracts is primarily related to the utilization (or frequency) of services relative to the overall risk transferred.
Eligibility Criteria for the Premium Allocation Approach

The Boards discussed when insurers should apply the premium allocation approach. No decisions were made.

Presentation in the Statement of Financial Position

The Boards tentatively decided that:
  1. An insurer should disaggregate the following components, either in the statement of financial position or in the notes, in a way that reconciles to the amounts included in the statement of financial position:
     
    1. Expected future cash flows
       
    2. Risk adjustment (for the IASB)
       
    3. Residual margin (for the IASB)
       
    4. The single margin, where relevant (for the FASB)
       
    5. The effect of discounting.
       
  2. For those contracts measured using the premium allocation approach, the liability for remaining coverage should be presented separately from the liability for incurred claims in the statement of financial position.
     
  3. For those contracts measured using the building-block approach, any unconditional right to any premiums or other consideration should be presented in the statement of financial position as a receivable separately from the insurance contract asset or liability and accounted for in accordance with existing guidance for receivables. The remaining insurance contract rights and obligations should be presented on a net basis in the statement of financial position.
     
  4. For those contracts measured using the premium allocation approach, all insurance contract rights and obligations should be presented on a gross basis in the statement of financial position.
     
  5. Liabilities (or assets) for insurance contracts should be presented separately for those measured using the building-block approach and those measured using the premium allocation approach.
     
  6. Portfolios that are in an asset position should not be aggregated with portfolios that are in a liability position in the statement of financial position.
Presentation in the Statement of Comprehensive Income

The Boards tentatively decided that an insurer should present premiums, claims, benefits, and the gross underwriting margin in the statement of comprehensive income. The Boards will consider at a future meeting whether these items should be presented in the statement of comprehensive income separately for contracts measured using the building-block approach and the premium allocation approach.

Next Steps

Both Boards will continue their discussions on insurance contracts in November 2011.


Accounting for financial instruments: disclosures. The Boards summarized the FASB’s decisions on liquidity and interest rate risk disclosures. The meeting was informational; no decisions were reached.