Tentative Board Decisions
Tentative Board decisions are provided for those interested in
following the Board´s deliberations. All of the reported decisions are
tentative and may be changed at future Board meetings.
October 7, 2015 FASB Board Meeting
Accounting for Financial Instruments—Hedging.
The Board continued deliberations on the accounting for hedging
activities, specifically discussing net investment hedges, excluded
components for net investment and cash flow hedges, use of total coupon
cash flows in fair value hedges of benchmark interest rate risk,
sub-benchmark hedges, and contract features that limit exposure to
hedged risks. A description of Board decisions follows.
Net Investment Hedges
For qualifying net investment hedges, entities would record the entire
change in the fair value of the hedging instrument that is included in
the assessment of hedge effectiveness in the cumulative translation
adjustment section of other comprehensive income (OCI). In the period(s)
the hedged item affects earnings, entities would reclassify changes in
fair value of the hedging instrument recorded in OCI to the same income
statement line item where the earnings effect of the hedged item is
presented. This decision would effectively eliminate the recognition of
hedge ineffectiveness for net investment underhedges.
Net Investment Hedges—Excluded Components
The current guidance in Topic 815 as it relates to the treatment of the
portion (if any) of the hedging instrument´s change in fair value that
is excluded from the assessment of hedge effectiveness in net investment
hedges will be retained without change. Entities would continue to
recognize the portion of the hedging instrument´s change in fair value
that is excluded from the assessment of hedge effectiveness immediately
in earnings. The Board decided not to provide guidance on how such
changes would be presented.
Cash Flow Hedges—Excluded Components
As under current GAAP, entities must recognize immediately in net income
the portion (if any) of the hedging instrument´s change in the fair
value that is excluded from the assessment of hedge effectiveness in a
cash flow hedge. However, entities would be required to present
recognized amounts in the same income statement line item where the
earnings effect of the hedged item is presented.
Use of Total Coupon Cash Flows in Fair Value Hedges of Benchmark Interest Rate Risk and Sub-Benchmark Hedges
An entity would have the choice to use either the cash flows associated
with the benchmark interest rate or the total coupon cash flows in
calculating the change in the fair value of the hedged item attributable
to interest rate risk in a fair value hedge of benchmark interest rate
risk. If the effective interest rate of the financial instrument is less
than the benchmark interest rate on the date of hedge designation
("sub-benchmark" hedge), however, an entity would be required to use the
total coupon cash flows.
Cash Flow Hedges of Nonfinancial Items—Contract Features That Limit Exposure
A cap, floor, or negative basis associated with the price of a
contractually specified component of a nonfinancial item would not
prohibit an entity from designating that contractually specified
component as the hedged risk but would potentially affect the assessment
of effectiveness should the price of the contractually specified
component move above or below the exposure limit.
Next Steps
Based on the Board´s decisions, the staff plans to:
- Discuss with the Board documentation requirements for entities that are other than public business entities
- Develop a staff draft of a proposed Accounting Standards Update to amend Topic 815 reflecting the Board´s decisions
- Prepare an analysis of the costs, benefits, and complexity of
the proposed Update, including any additional consideration of the
effect the Board´s decisions may have on entities that are other than
public business entities, and discuss external comments on the staff
draft from the external review process
- Determine the transition approach
- Discuss the comment period with the Board.
Disclosure Framework: Disclosure Review—Fair Value Measurement.
The Board discussed disclosures about the uncertainty inherent in Level
3 fair value measurements and made the following decisions.
- The disclosure required by paragraph 820-10-50-2(g) will be
retained, but the Board will clarify that the purpose of the disclosure
is to communicate information about the uncertainty in measurement at
the reporting date and not to provide information about sensitivity to
future changes.
- The quantitative information about significant unobservable
inputs used in the fair value measurement required by paragraph
820-10-50-2(bbb) should include both (1) the range of the unobservable
inputs used and (2) the weighted average of the unobservable inputs
used, as depicted by the illustration in paragraph 820-10-55-103.
- Disclosure of the time period used to develop any significant
unobservable inputs that are based on historical data would be required.
The Board decided that those changes would not apply to private companies.
The Board discussed a proposed method of transition, deciding that
proposed changes to disclosures about changes in unrealized gains and
losses and the changes described in items 2 and 3 above would be applied
prospectively beginning in the period of adoption. Entities would apply
all other changes in disclosures retrospectively to all periods
presented.
The Board also discussed comment period, deciding that the proposed
changes would be exposed 75 days or until February 29, 2016, whichever
is longer.
Leases. The Board continued redeliberating the proposals in the May 2013 Exposure Draft, Leases, specifically discussing the following topics:
- Summary of external review comments
- Recognition of initial direct costs in sales-type leases
- Lessor presentation of its net investment in the lease
- Lease modifications that extend the term of a lease
- Private Company Council considerations.
Summary of External Review Comments
The Board agreed with the staff´s analysis of the external review
comments and the approach taken by the staff for each area of
significant comment.
Recognition of Initial Direct Costs in Sales-Type Leases
The Board decided to require that initial direct costs arising from a
sales-type lease be deferred and recognized over the lease term if the
lease does not give rise to selling profit or selling loss.
Lessor Presentation of Its Net Investment in the Lease
The Board decided that a lessor should present its net investment in
sales-type and direct financing leases separately from other assets on
the statement of financial position. A lessor also should disclose in
the notes to the financial statements the components of its net
investment in sales-type and direct financing leases (that is, its lease
receivables, its unguaranteed residual assets, and any deferred selling
profit on direct financing leases).
Lease Modifications That Extend the Term of a Lease
The Board decided that a modification that extends a lease term changes
the right of use the lessee already controls; it does not grant the
lessee an additional right of use. A lease term modification that solely
extends the term of a lease would, therefore, never be accounted for as
a separate contract (that is, separate from the contract that is, or
contains, the original lease).
The Board also decided:
- Not to make any revisions to the lessor modification guidance as a result of the lessee lease modification decisions.
- That lessees should reassess the classification of a lease when
there is a change in the lease term or a change in the assessment of a
lessee option to purchase the underlying asset.
Private Company Council Considerations
The Board affirmed its decision that the requirements for recognition
and presentation of lease assets and lease liabilities will apply to all
entities; it considered but decided to not provide differential
requirements for private companies and not-for-profit organizations.
Next Steps
The staff is currently drafting the final leases standard based on the
Board´s decisions. The staff plans to bring the following topics to the
Board in November for discussion before issuing a final leases standard:
- Consideration of benefits and costs
- Effective date
- Permission to ballot.