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.

July 16, 2012 Joint FASB/IASB Videoconference Board Meeting

Investment companies. The FASB and the IASB continued their discussion about how an entity would determine whether it is an investment company. At the May 2012 joint Board meeting, the Boards decided that an entity would be required to meet specific criteria to be an investment company. At the July 16 joint Board meeting, the Boards decided to provide additional guidance describing the typical characteristics of an investment company that an entity would consider in determining whether it is an investment company.

The Boards decided that not meeting one or more of the typical characteristics would not necessarily preclude an entity from being an investment company. The Boards decided that if an entity does not meet one or more of the typical characteristics, it would be required to justify how its activities continue to be consistent with that of an investment company.

The Boards decided that an investment company should have all of the following typical characteristics:
  1. Multiple investments
     
  2. Multiple investors
     
  3. Investors that are not related to the parent entity or the investment manager
     
  4. Ownership interests in the form of equity or partnership interests.
At the May 2012 joint Board meeting, the FASB had decided that fair value management of investments would be a typical characteristic rather than a required characteristic to be an investment company. At the same joint Board meeting, the IASB had decided that an investment company would be required to manage its investments on a fair value basis to be an investment company.


July 17, 2012 Joint FASB/IASB Videoconference Board Meeting

Leases.

Lessee—Statement of Financial Position

The IASB and the FASB discussed presentation in a lessee’s statement of financial position for leases for which the lessee recognizes a single lease expense (SLE) in its statement of comprehensive income and tentatively decided that a lessee should:
  1. Separately present in the statement of financial position or disclose in the notes to the financial statements right of use (ROU) assets and liabilities to make lease payments (lease liabilities). If ROU assets and lease liabilities are not separately presented in the statement of financial position, the disclosures should indicate in which line item in the statement of financial position the ROU assets and lease liabilities are included.
     
  2. Present ROU assets under the SLE approach as if the underlying asset were owned.
Lessee—Statement of Cash Flows

The Boards discussed presentation in a lessee’s statement of cash flows for leases for which the lessee recognizes a SLE and tentatively decided that a lessee should:
  1. Classify cash paid for lease payments within operating activities.
     
  2. Disclose the ROU asset acquired as a supplemental noncash transaction.
Lessee Disclosures

The Boards discussed lessee disclosures and tentatively decided that a lessee should disclose the following:
  1. A single maturity analysis, which sets out the future undiscounted cash flows relating to all lease liabilities and reconciles to the total lease liability.
     
  2. A separate reconciliation of opening and closing balances for (a) lease liabilities recognized under the interest and amortization (I&A) approach and (b) lease liabilities recognized under the SLE approach. The reconciliation should include interest or the unwinding of the discount on the lease liability.
Additionally, the FASB tentatively decided not to bifurcate the disclosure of the maturity of contractual commitments associated with services and other non-lease components between the two lessee accounting approaches.

The IASB tentatively decided to require a lessee to provide a reconciliation of the opening and closing balances of ROU assets under both the I&A approach and the SLE approach, disaggregated by class of underlying asset. The FASB tentatively decided to not require any reconciliation relating to the ROU asset.

The Boards tentatively decided to revise the previous tentative decision regarding disclosure of lease costs incurred in the reporting period to only include costs relating to variable lease payments not included in the lease liability.

Lessee Transition—Measurement of the ROU Asset

The Boards discussed transition requirements for leases for which the lessee recognizes a SLE in its statement of comprehensive income and tentatively decided that a lessee should be permitted to either:
  1. Recognize a ROU asset for each outstanding lease, measured at the amount of the related lease liability, adjusted for any uneven lease payments; or
     
  2. Apply a fully retrospective transition approach.
Lessor Accounting—Measurement of the Underlying Asset When a Lease Terminates Prematurely

The Boards tentatively decided that, when applying the receivable and residual approach, a lessor should measure the underlying asset as the sum of the carrying amounts of the lease receivable (after any impairment) and the net residual asset when re-recognizing the underlying asset on termination of the lease before the end of the lease term.

Interim Disclosures

The Boards tentatively decided not to amend IAS 34, Interim Financial Reporting, and Topic 270, Interim Reporting, to require lessee disclosures at interim periods.

The FASB tentatively decided to amend Topic 270 to require a lessor to provide a table of all lease-related income items in its interim financial statements.

The IASB decided to amend IAS 34 to require a lessor to disclose total lease income in its interim financial statements. Additional information about that lease income would be required if there has been a significant change from the end of the last annual reporting period.

Exposure Draft Comment Period and Permission to Begin the Balloting Process

The Boards tentatively decided that the revised Exposure Draft for leases should have a comment period of 120 days. The FASB plans to address issues specific to non-public entities at a future FASB-only meeting. The staff plan to start drafting the revised Exposure Draft.


July 18, 2012 Joint FASB/IASB Videoconference Board Meeting

Accounting for financial instruments: classification and measurement. 

Reclassifications Resulting from a Change in Business Model

The FASB and the IASB discussed accounting for the reclassification of financial assets between measurement categories. Some topics in the discussion were FASB-only because IFRS 9, Financial Instruments, already contains relevant requirements. The discussion of reclassification disclosures was IASB-only. The FASB will discuss disclosures related to its classification and measurement model at a future FASB-only meeting.

Reclassification Date (FASB-only Discussion)

The FASB tentatively decided that the reclassification date should be the last day of the reporting period in which there is a change in an entity’s business model.

Reclassification Mechanics (FASB-only Discussion)

For reclassifications of financial assets as a result of a change in an entity’s business model, the FASB tentatively decided that when financial assets are reclassified from:
  1. Fair value through net income (FVNI) to amortized cost, the fair values of financial assets on the reclassification date should become their new carrying amounts for amortized cost purposes.
     
  2. Amortized cost to FVNI, the fair values of financial assets on the reclassification date should become their new carrying amounts, with the difference between the previous carrying amounts and fair values recognized in net income.
Reclassification Mechanics (Joint Discussion)

For reclassifications of financial assets as a result of a change in an entity’s business model, the Boards tentatively decided that when financial assets are reclassified from:
  1. Fair value through other comprehensive income (FVOCI) to FVNI, the financial assets should continue to be measured at fair value, and any accumulated OCI balances should be derecognized from OCI and recognized in net income on the date of reclassification.
     
  2. FVNI to FVOCI, the financial assets should continue to be measured at fair value, and certain changes in fair value after the reclassification date should be recognized in OCI.
     
  3. Amortized cost to FVOCI, the financial assets should be measured at fair value on the reclassification date with any difference between the previous carrying amounts and the fair values recognized in OCI.
     
  4. FVOCI to amortized cost, the financial assets should be measured at fair value on the reclassification date, and the accumulated OCI balance at the reclassification date should be derecognized through OCI with an offsetting entry against the financial assets’ balances. As a result, the financial assets will be measured at the reclassification date at amortized cost as if they had always been so classified.
Reclassification Disclosures (IASB-only Discussion)

The IASB discussed disclosures related to reclassifying eligible debt investments into and out of the FVOCI measurement category. The IASB tentatively decided that the reclassification disclosures in:
  1. Paragraph 12B of IFRS 7, Financial Instruments: Disclosures, should be extended to all reclassifications into and out of FVOCI.
     
  2. Paragraph 12C of IFRS 7 should be extended to reclassifications from fair value through profit and loss (FVPL) to FVOCI.
     
  3. Paragraph 12D of IFRS 7 should be extended to apply to reclassifications from FVPL to FVOCI and from FVOCI to amortized cost.

Accounting for financial instruments: impairment. The IASB and the FASB discussed the application of the impairment model to loan commitments and financial guarantees and disclosures for the impairment model.

Loan Commitments and Financial Guarantees

The IASB and the FASB discussed the application of the impairment model to loan commitments and financial guarantees. For the FASB, the scope was limited to loan commitments that are not accounted for at fair value through net income (FV-NI) and financial guarantee contracts that are not accounted for at FV-NI and not accounted for as insurance. For the IASB, the scope was limited to only include loan commitments and financial guarantees to which IAS 37, Provisions, Contingent Liabilities and Contingent Assets, applies. The Boards tentatively decided to apply the expected loss impairment model to such instruments. The Boards decided that the proposed impairment model should apply to instruments that create a legal obligation to extend credit and that the maximum contractual period over which the entity is exposed to credit risk should be considered when estimating expected credit losses. The Boards also decided that usage behavior will be estimated over the lifetime of a loan commitment when estimating expected lifetime losses. As to presentation, the Boards decided that expected credit losses on these financial guarantees and loan commitments should be reported separately as liabilities.

Disclosures

The Boards also discussed disclosures related to the impairment model and agreed to require the following disclosures (except where IASB-only decisions are noted):
  1. Expected loss calculations
     
    1. A discussion of the inputs and specific assumptions an entity factors into its expected loss calculations
       
    2. How the information above is developed and utilized in measuring expected losses.
       
  2. Transfer criteria
     
    1. A qualitative analysis that describes the indicators and information used to determine whether the transfer criteria have been satisfied.
       
  3. Collateral disclosures
     
    1. A description of collateral held as security and other credit enhancements for assets measured under a lifetime expected credit loss objective and their financial effect (for example, quantification of the extent to which collateral and other credit enhancements mitigate credit risk) in respect of the amount that best represents the maximum exposure to credit risk
       
    2. Balances of fully collateralized financial assets measured under a lifetime expected credit loss objective
       
    3. A discussion of the quality of collateral securing an entity’s financial assets
       
    4. An explanation of any changes in quality of collateral, whether because of a general deterioration, a change in appraisal policies by the reporting entity, or some other reason.

    4. Separately, the IASB agreed to require a disclosure about an entity’s collateral policy.

  4. Allowance narrative disclosures
     
    1. A discussion of the changes in credit loss expectations and the reasons for those changes
       
    2. A discussion of the changes in estimation techniques used and the reasons for the change
       
    3. Reasons for a significant amount of write-offs
       
    4. How assets are grouped for disclosure purposes, if necessary, including specific information on what credit characteristics are considered similar to enable grouping.
       
  5. Risk disaggregation disclosures
     
    1. A risk disaggregation of assets measured under the impairment model into lower, moderate, and higher risk categories for both assets measured under a 12 months’ expected credit loss objective and assets measured under a lifetime expected credit loss objective
       
    2. A description of how the entity determines which financial assets fall into the lower, moderate, and higher risk categories.

    6. For the IASB, these disclosures would be required only if other more granular disclosures related to credit risk profiles are not already required by regulators (for example, Basel III). For the FASB, the Board directed the staff to explore how this would be integrated into existing disclosures of credit quality information, including disclosures relating to credit quality indicators.

  6. For purchased credit-impaired assets
     
    1. A comparison of purchased credit-impaired financial assets to similar financial assets subject to impairment accounting. The gross carrying amount, impairment allowance, contractually required amounts expected to be collected, and contractually required amounts not expected to be collected for purchased credit-impaired financial assets must be displayed, along with the carrying amount and allowance for purchased and originated non-credit-impaired assets.
       
    2. The amount recognized due to the effect of favorable changes in the lifetime expectations of cash flows not expected to be collected (that is, the non-accretable difference).
       
    3. How the favorable changes have affected net income.
       
    4. To which accounts the favorable changes have been reclassified.
       
  7. Financial asset ending balances and respective allowances
     
    1. The balance of financial assets evaluated on an individual basis and for which impairment is measured under a lifetime expected credit loss objective of and the allowance balance related to these financial assets.
       
  8. Asset roll forward
     
    1. A roll forward of an entity’s financial asset balances from the beginning of the period to the end of the period, disaggregated by whether those assets are measured under a 12 months’ expected credit loss objective or a lifetime expected credit loss objective.
       
  9. Allowance roll forward
     
    1. A roll forward of an entity’s allowance balance from the beginning of the period to the end of the period, disaggregated by a 12 months’ expected credit loss objective or a lifetime expected credit loss objective.
The Boards also directed the staff to further consider the following:
  1. Whether these disclosures should apply to trade receivables of nonfinancial entities and lease receivables.
     
  2. Whether these disclosures should apply only to financial institutions and reportable segments considered to be financial institutions.
     
  3. The feedback received previously on the asset and allowance roll forward disclosures.
At the meeting, the FASB staff also indicated that a number of previously identified FASB-only issues still need to be discussed in order to proceed to an Exposure Draft on the three-bucket impairment model. In addition, the FASB staff is in the process of summarizing the feedback received from a number of outreach sessions with stakeholders on the application of the three-bucket impairment model. During these outreach activities, stakeholders consistently expressed significant concerns about the understandability, operability, and auditability of the three-bucket model. Consistent with the FASB’s normal due process procedures, the FASB staff expects to present a feedback summary to the Board in the near future and will seek direction from the Board about how to best address these concerns.


July 19, 2012 Joint FASB/IASB Videoconference Board Meeting

Revenue recognition. The FASB and the IASB commenced their redeliberations on the revised Exposure Draft, Revenue from Contracts with Customers (the "2011 ED"), by discussing the following topics:
  1. Identifying separate performance obligations (Step 2 of the proposed revenue model)
     
  2. Performance obligations satisfied over time (Step 5)
     
  3. Licenses
     
  4. Losses arising from onerous obligations in contracts with customers.
Identifying Separate Performance Obligations (Step 2)

The Boards tentatively decided:
  1. To retain the concept of a distinct good or service, which is used to determine whether a promise to transfer a good or service to a customer should be accounted for as a separate performance obligation;
     
  2. To improve the assessment of whether a good or service is distinct that was proposed in paragraphs 28 and 29 of the 2011 ED by clarifying the criterion proposed in paragraph 28 and by replacing the proposed criterion in paragraph 29 of the 2011 ED with indicators; and
     
  3. To remove the practical expedient in paragraph 30 of the 2011 ED (which permitted an entity to account for two or more distinct goods or services as a single performance obligation if those goods or services have the same pattern of transfer to the customer).
To retain and improve the distinct concept in the 2011 ED (paragraphs 28 and 29), the Boards tentatively decided that an entity should account for a promised good or service (or a bundle of goods or services) as a separate performance obligation only if:
  1. The promised good or service is capable of being distinct because the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (this criterion is based on paragraph 28(b) of the 2011 ED); and
     
  2. The promised good or service is distinct within the context of the contract because the good or service is not highly dependent on, or highly interrelated with, other promised goods or services in the contract.
The Boards tentatively agreed that the assessment of whether a promised good or service is distinct in the context of the contract should be supported by indicators, such as:
  1. The entity does not provide a significant service of integrating the good or service (or bundle of goods or services) into the bundle of goods or services that the customer has contracted. In other words, the entity is not using the good or service as an input to produce the output specified in the contract.
     
  2. The customer was able to purchase or not purchase the good or service without significantly affecting the other promised goods or services in the contract.
     
  3. The good or service does not significantly modify or customize another good or service promised in the contract.
     
  4. The good or service is not part of a series of consecutively delivered goods or services promised in a contract that meet the following two conditions:
     
    1. The promises to transfer those goods or services to the customer are performance obligations that are satisfied over time (in accordance with paragraphs 35 of the 2011 ED); and
       
    2. The entity uses the same method for measuring progress to depict the transfer of those goods or services to the customer.
Performance Obligations Satisfied over Time (Step 5)

The Boards tentatively decided to make the following refinements to the criteria proposed in paragraph 35 of the 2011 ED for determining whether an entity satisfies a performance obligation over time and, hence, recognizes revenue over time:
  1. Retain the criterion proposed in paragraph 35(a), which considers whether the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced;
     
  2. Combine the "simultaneous receipt and consumption of benefits" criterion proposed in paragraph 35(b)(i) and the "another entity would not need to substantially re-perform" proposed criterion in paragraph 35(b)(ii) into a single criterion that would apply to "pure service" contracts; and
     
  3. Link more closely the "alternative use" criterion in paragraph 35(b) and the "right to payment for performance completed to date" criterion in paragraph 35(b)(iii) by combining them into a single criterion.
The Boards also tentatively decided to clarify aspects of the "alternative use" and "right to payment for performance completed to date" criteria. For example:
  1. The assessment of alternative use is made at contract inception and that assessment considers whether the entity would have the ability throughout the production process to readily redirect the partially completed asset to another customer.
     
  2. The right to payment should be enforceable and, in assessing the enforceability of that right, an entity should consider the contractual terms as well as any legislation or legal precedent that could override those contractual terms.
Licenses

The Boards discussed possible refinements to the implementation guidance on licenses and rights to use. The Boards requested the staff to perform additional analysis and bring the topic back to a future meeting.

Losses Arising from Onerous Obligations in Contracts with Customers

The Boards tentatively decided to not develop new requirements for onerous contracts that would apply to contracts with customers in the scope of the revenue standard. As a result, the IASB tentatively decided that the requirements for onerous contracts in IAS 37, Provisions, Contingent Liabilities and Contingent Assets, should apply to all contracts with customers in the scope of the revenue standard. The FASB tentatively decided to retain existing guidance related to the recognition of losses arising from contracts with customers, including the guidance relating to construction-type and production-type contracts in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. The FASB also indicated it would consider whether to undertake a separate project to develop new guidance for onerous contracts.

Next Steps

The Boards expect to continue redeliberations in September 2012.