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.
February 16, 2011 FASB/IASB Joint Board Meeting
Revenue recognition. [See the summary for the February 17, 2011 FASB/IASB Joint Board Meeting.]
Insurance contracts. The IASB and the FASB invited guest speakers from PricewaterhouseCoopers and MetLife to provide an education session on separating insurance contracts into insurance and noninsurance components, which is referred to as unbundling. The IASB's Exposure Draft, Insurance Contracts and the FASB's Discussion Paper, Preliminary Views on Insurance Contracts, proposed that an insurer should account separately for the investment or service components of an insurance contract that are not closely related to the insurance coverage. The purpose of this education session was to give the Boards information on the effect, costs, and benefits of unbundling. Because this was an education session, the Boards were not asked to make any decisions.
The FASB and the IASB tentatively decided that the lease term should be defined, for both lessees and lessors, as follows:
The lease term is the non-cancellable period for which the lessee has contracted with the lessor to lease the underlying asset, together with any options to extend or terminate the lease when there is a significant economic incentive for an entity to exercise an option to extend the lease, or for an entity not to exercise an option to terminate the lease.
The Boards tentatively decided that a lessee and a lessor should reassess the
lease term only when there is a significant change in relevant factors such that
the lessee would then either have, or no longer have, a significant economic
incentive to exercise any options to extend or terminate the lease.
February 17, 2011 FASB/IASB Joint Board Meeting
Types of Leases and the Definition of a Lease
The FASB and the IASB discussed types of leases and the definition of a lease and directed the staff to seek input through targeted outreach on the approaches detailed below. The purpose of the outreach is to:
The feedback received will provide the Boards with input to help make final
decisions at a future meeting about the definition of a lease and about types of
Types of Leases
The Boards tentatively decided to identify a principle for identifying two types of leases for both lessees and lessors, with different profit and loss effects, as follows:
The Boards tentatively decided to establish indicators to distinguish a
finance lease from an other than finance lease.
The Boards asked the staff to use these tentative decisions to perform targeted outreach to determine if stakeholders’ concerns about the profit and loss recognition pattern proposed in the Exposure Draft would be addressed.
Definition of a Lease
A lease is defined as a contract in which the right to use a specified asset is conveyed, for a period of time, in exchange for consideration. The Leases Exposure Draft included two principles relating to that definition to help to assess whether a contract contains a lease:
At this meeting, the Boards discussed how those principles might be clarified
to address comments received from respondents to the Exposure Draft and through
other outreach activities.
Definition of specified asset
The Boards expressed support for defining a specified asset as an asset of a particular specification. The Boards also discussed an alternative approach that defines a specified asset as a uniquely identified or identifiable asset, which is closer to the application of current requirements in IFRSs and U.S. GAAP. The Boards will seek input on both of those approaches.
Assets that are incidental to the delivery of specified services
The Boards expressed support for specifying that a contract would not contain a lease if an asset is incidental to the delivery of specified services.
A portion of a larger asset
The Boards expressed support for clarifying that both physical and nonphysical portions of a larger asset can be specified assets. The Boards tentatively decided that such a clarification would be made only in conjunction with revising the definition of the right to control the use of an asset. This is to maintain consistency with how control is articulated in the revenue recognition Exposure Draft, Revenue from Contracts with Customers. The Boards also discussed an alternative approach of clarifying only that physically distinct portions of a larger asset can be specified assets. The Boards will seek input on both approaches.
Right to control the use of a specified asset
The Exposure Draft proposed that the right to control the use of an asset is conveyed if any one of three particular conditions is met. Comments received from respondents suggested that the third condition (set out in paragraph B4(c) of the Leases Exposure Draft) raised a number of questions about its application. Some respondents also questioned why control was defined differently in the Leases Exposure Draft than in other publications. The Boards expressed support for an approach that defines the right to control the use of an asset consistently with how control is articulated in the revenue recognition Exposure Draft. This approach would state that a customer has the right to control the use of a specified asset if it has the ability to direct the use, and receive the benefit from use, of the asset throughout the lease term. The Boards also discussed an alternative approach to retain the three conditions in paragraph B4 of the Exposure Draft but to clarify the principle underlying condition (c) of paragraph B4. The Boards will seek input on both approaches.
Variable Lease Payments and Other Lease Payment Considerations
Variable Lease Payments
The Boards considered which variable lease payments should be included in the lessee’s liability to make lease payments and the lessor’s right to receive lease payments. Variable lease payments include any lease payments that arise under the contractual terms of a lease because of changes in facts or circumstances occurring after the date of inception of the lease, other than the passage of time.
The Boards tentatively decided that:
The Boards will continue their discussion of initial and subsequent
measurement of variable lease payments at a future meeting.
Residual Value Guarantees
The Boards tentatively decided to clarify that the lease payments should include amounts expected to be payable under residual value guarantees, except for amounts payable under guarantees provided by an unrelated third party.
Term Option Penalties
The Boards tentatively decided that the accounting for term option penalties should be consistent with the accounting for options to extend or terminate a lease. That is, if a lessee would be required to pay a penalty if it does not renew the lease and the renewal period has not been included in the lease term, then that penalty should be included in the recognized lease payments.
Accounting for financial instruments: impairment. The IASB and the FASB discussed the definition of write-off and tentatively decided that it will be defined as “a direct reduction of the amortized cost of a financial asset resulting from uncollectibility.”
In addition, guidance will be included in the standard to indicate that:
“A financial asset is considered uncollectible if the entity has no reasonable expectation of recovery. Therefore, an entity shall write off a financial asset or part of a financial asset in the period in which the entity has no reasonable expectation of recovery of the financial asset (or part of the financial asset).”
All IASB and FASB members supported the decision.
In March, the Boards will continue to discuss issues from their original Exposure Drafts that are not integral to the supplementary document, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Impairment.
Revenue recognition. The FASB and the IASB discussed the following topics:
Identification of Separate Performance Obligations
The Boards continued their discussions from January 2011 on identifying the separate performance obligations in a contract with a customer. The Boards tentatively decided that:
Revenue Recognition for Services
The Boards continued their discussions from January 2011 on how an entity would recognize revenue for services. The Boards tentatively decided that to recognize revenue for a service, an entity must determine that a performance obligation is satisfied continuously and then must select a method of measuring progress toward complete satisfaction of that performance obligation.
The Boards tentatively decided that an entity satisfies a performance obligation continuously if at least one of the following two criteria is met:
To clarify how an entity should measure progress toward complete satisfaction of a performance obligation, the Boards tentatively decided that the final revenue standard should:
The Boards also discussed some issues that arise when an entity uses an input
method of measuring progress toward complete satisfaction of a single
performance obligation. In some cases, an entity merely procures goods that are
transferred at a different time from related services (for example, materials
that the customer controls before the entity installs the materials). The Boards
tentatively decided that in those cases an entity should measure progress by
recognizing revenue for the transfer of those goods in an amount equal to the
costs of the transferred goods.
The Boards tentatively decided that an entity should combine, and account for as a single contract, two or more contracts that are entered into at or near the same time with the same customer (or related entities) if one or more of the following criteria are met:
The staff will consider further the implications of limiting the combination
of contracts to contracts with the same customer (or related
The Boards tentatively decided that if a contract modification results only in the addition of a separate performance obligation at a price that is commensurate with that additional performance obligation, the entity should account for the contract modification as a separate contract. Otherwise, the entity should reevaluate the performance obligation and reallocate the transaction price to each separate performance obligation.
Definition of a Performance Obligation
The Boards decided to amend the definition of a performance obligation by deleting the word enforceable.
Breakage and Prepayments for Future Goods or Services
The Boards discussed the accounting for a customer’s nonrefundable prepayment for future goods or services and the portion of the customer’s rights that is not exercised (often referred to as breakage). The Boards tentatively decided that if an entity can reasonably estimate the amount of expected breakage, the entity should recognize the effects of the expected breakage as revenue in proportion to the pattern of rights exercised by the customer. Otherwise, the entity should recognize the effects of the expected breakage when the likelihood of the customer exercising its remaining rights becomes remote.
Onerous Performance Obligations
The Boards began discussing issues in applying the test to assess whether performance obligations are onerous. The Boards tentatively decided that the unit of account for the onerous test should be the contract, specifically the remaining performance obligations in the contract.
At their meetings in March, the Boards will discuss the following topics:
Measurement of liabilities with uncertain cash flows. The FASB and the IASB discussed different ways of using estimates of uncertain cash flows as a basis for measurement, but did not attempt to reach any decisions about measurement methods in specific projects.
Insurance contracts. [This topic will be posted as soon as it becomes available.]
February 18, 2011 FASB/IASB Joint Board Meeting
Insurance contracts. [This topic will be posted as soon as it becomes available.]