Action Alert No. 08-06
February 7, 2008
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board meetings are available by audio webcast and telephone.)
Wednesday, February 13, 2008, 9:00 a.m.
- Agenda decision: financial reporting by entities in reorganization under the bankruptcy code (estimated 1-hour discussion). The Board will discuss whether to add a project to its agenda to consider the potential conflict between AICPA Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, which requires early adoption of new accounting standards and other authoritative accounting standards that expressly prohibit early adoption.
- Disclosures about plan assets (estimated 1-hour discussion). The Board will discuss proposed amendments to FASB Statement No. 132(revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The proposed changes would affect disclosure requirements for plan assets and nonpublic entities.
- Open discussion. If necessary, the Board will allow time to discuss minor issues with staff members on technical projects or administrative matters. Those discussions are held following regular Board meetings as topics come up.
OPEN EDUCATION SESSION
Wednesday, February 13, 2008, following the Board meeting
The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at a future Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.
The Board Actions 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 a final Statement, Interpretation, FSP, or Statement 133 Implementation Issue.
January 30, 2008 Board Meeting
Revenue recognition. The Board discussed the customer consideration model, the second of the two revenue recognition models that were developed over the past year by the staff and a group of Board members (drawn from both the FASB and IASB). In the customer consideration model, an entity accounts for the contract asset or liability that arises from the rights and performance obligations in an enforceable contract with a customer.
At contract inception, the rights in the contract are measured at the amount of customer consideration in the contract. That amount is then allocated to the individual performance obligations identified within the contract in proportion to the standalone selling price of each good or service underlying the performance obligation. Therefore, at contract inception, the sum of the amounts allocated to the individual performance obligations equals the customer consideration so that neither a contract asset nor a contract liability is recognized. Subsequently, the performance obligations are measured at the amount of the customer consideration allocated to them at contract inception. They are not remeasured except when the contract is judged to be onerous. As each performance obligation identified in the contract is satisfied, the resulting decrease in the contract liability or increase in the contract asset results in the recognition of revenue.
The Board also considered the nature of performance obligations. Both revenue recognition models are based on the principle that after contract inception, revenue is recognized when performance obligations are satisfied. The Board discussed a staff suggestion that a performance obligation be defined as a promise in a contract between the entity and a customer to transfer an economic resource to that customer. Therefore, a performance obligation would be satisfied (and revenue recognized) when the economic resource is transferred to the customer. The Board discussed the following:
- In the case of a good, the economic resource is transferred when the entity relinquishes its enforceable right (or other access) to the good and the customer obtains that right (or other access) to that good.
- In the case of a service, the economic resource is transferred when the activities undertaken by the entity result in an immediate benefit to the customer (because the activities enhance an economic resource of the customer or the activities produce cash inflows or reduce cash outflows for the customer).
The Board was not asked to make any decisions. However, there was general agreement in three areas. First, the Board agreed that there are measurement issues in both the measurement model and the customer consideration model, but the Board seemed more comfortable with those issues in the customer consideration model. Second, the Board agreed that the preliminary definition of performance obligations is promising, but it asked the staff to continue testing the definition on other examples. Finally, the Board agreed that a simplifying assumption might help determine when an enforceable right to a good transfers to a customer. Specifically, the Board agreed that any time an entity is delivering both a good and services that will incorporate that good, it might be helpful to assume that the good transfers when it is used unless the language in the contract or the operation of law indicates that the customer has the enforceable right or access to the good once it is delivered.
Financial guarantee insurance. The Board concluded redeliberations of the FASB Exposure Draft, Accounting for Financial Guarantee Insurance Contracts. The Board discussed disclosures, effective date, and transition. The Board decided that:
- An insurance enterprise should disclose the premium receivable (asset) and the unearned premium revenue (liability) and the run-off of the unearned premium revenue (liability) using the contractual term. However, in instances where the expected term is used to measure those assets or liabilities, the related disclosures should reflect the expected term.
- An insurance enterprise will not be required to display the accretion of the premium receivable (asset) as investment income. However, disclosure of the amount of accretion will be required as well as the line item in which it is reported in the income statement.
- An insurance enterprise should disclose the weighted-average discount rate used to measure the claim liability, a schedule of future expected cash receipts related to the premium receivable (asset), and where the accretion on the claim liability is recognized in the income statement. In addition, an insurance enterprise should disclose information about potential recoveries as part of the disclosures related to the surveillance list. An insurance enterprise will not be required to disclose information about the remaining quarters of the current annual period for the schedule of run-off of the unearned premium revenue (liability) and the expected future cash receipts. However, an insurance enterprise should disclose information about the four quarters of the subsequent annual period, the next four annual periods, and the remaining periods aggregated in five-year increments.
- An insurance enterprise should disclose a rollforward of the premium receivable (asset). That rollforward would include the beginning premium receivable (asset) balance, new business written during the period, cash receipts received during the period, adjustments, and the ending premium receivable (asset) balance. As part of the adjustments, a separate display of the adjustment for changes in prepayment assumptions that affect the expected term will be required.
- The final Statement should be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. In addition, certain disclosures related to the surveillance list will be required for the first quarter after issuance of the final Statement. These disclosures pertain to a description of the surveillance list used, including (a) a description of each surveillance category, (b) the insurance enterprise’s policies for placing an insured financial obligation in and monitoring each surveillance category, (c) the insurance enterprise’s policies for avoiding or mitigating claim liabilities, the related expense and liability reported during the period for those risk mitigation activities, and a description of where that expense is reported in the statement of income and the statement of financial position, and (d) a schedule of insured financial obligations included on the surveillance list at the end of each period detailing, at a minimum, the following for each surveillance category: number of financial guarantee insurance contracts, insured contractual payments outstanding (segregating principal and interest), and remaining weighted-average term.
- Consistent with the Exposure Draft, the guidance should be applied to existing and future financial guarantee insurance contracts issued by an insurance enterprise as of the beginning of the fiscal year in which the guidance is initially applied. An insurance enterprise should recognize the cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained earnings for that fiscal year. An insurance enterprise also should disclose in the first interim period of the fiscal year in which the guidance is initially applied the cumulative effect of the change on retained earnings in the statement of financial position. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial position before the initial application of the Statement and the amounts recognized in the statement of financial position at initial application, measured using information that is current at that date. The discount rates should reflect the relevant risk-free rate at the date the Statement is initially applied.
The Board directed the staff to proceed to a draft of a final Statement for vote by written ballot.
Agenda decision: relief from Statement 114. The Board discussed whether to add a project to its agenda at the request of the Mortgage Bankers Association (MBA) for relief from the impairment testing requirements specific to troubled debt restructurings of residential mortgage loans as prescribed in FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. The MBA had asked to be allowed to continue to assess impairment for residential mortgage loans under FASB Statement No. 5, Accounting for Contingencies, even when those loans were modified in a troubled debt restructuring. The Board decided not to add a project to its agenda for this issue.
FASB DOCUMENT AVAILABLE
Final FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises, was issued on February 1, 2008, and is available on the FASB website.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through March. Because schedules may change, please check the FASB calendar before finalizing your plans. Revisions to this list since the last issue of Action Alert are highlighted in bold.
Wednesday, February 20, 2008FASB Board Meeting
Wednesday, February 20, 2008FASB Education Session
Wednesday, February 27, 2008FASB Board Meeting (canceled)
Wednesday, February 27, 2008FASB Education Session
Wednesday, March 5, 2008FASB Board Meeting
Wednesday, March 5, 2008FASB Education Session
Wednesday, March 12, 2008FASB Board Meeting
Wednesday, March 12, 2008Emerging Issues Task Force Meeting
Tuesday, March 18, 2008Financial Accounting Standards Advisory Council Meeting
Wednesday, March 19, 2008FASB Board Meeting
Wednesday, March 19, 2008FASB Education Session
Wednesday, March 26, 2008FASB Board Meeting
Wednesday, March 26, 2008FASB Education Session