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.June 13, 2011
FASB/IASB Joint Board Meeting
contracts. The IASB and the FASB continued their discussions on
insurance contracts. They considered whether and how to unlock the residual
margin, allocation methods for the residual margin, and the accounting for
Whether to Unlock the Residual Margin
The IASB tentatively decided that the residual margin should not be
locked in at inception.
The FASB indicated that it would not favor
unlocking the residual margin after inception if it were to adopt an approach
that includes both a risk adjustment and a residual margin rather than the
single-margin approach, which was tentatively decided upon.
Unlock the Residual Margin
The IASB tentatively decided that an
IASB discussed whether changes in discount rate should be recognized as an
adjustment to the residual margin or in profit or loss in the period of the
change to the extent that those changes create an accounting mismatch. No
decision was made. The FASB did not vote on how to unlock the residual margin.
- Adjust the residual margin for favorable and unfavorable changes in the
estimates of future cash flows used to measure the insurance liability.
Experience adjustments would be recognized in profit or loss.
- Not limit increases in the residual margin.
- Recognize changes in the risk adjustment in profit or loss in the period
of the change.
- Make any adjustments to the residual margin prospectively.
Allocation Methods for the Residual Margin
tentatively decided that:
Accounting for Acquisition
- The residual margin should not be negative.
- Insurers should allocate the residual margin over the coverage period on a
systematic basis that is consistent with the pattern of transfer of services
provided under the contract.
The Boards tentatively decided that the acquisition costs to
be included in the initial measurement of a portfolio of insurance contracts
should be all of the direct costs that the insurer will incur in acquiring the
contracts in the portfolio such as:
The Boards tentatively
decided to exclude indirect costs such as:
- Direct costs of contract acquisition/origination.
- The portion of employee’s total compensation and payroll-related fringe
benefits related directly to time spent performing any of the following
activities for contracts that have been acquired/originated (FASB and IASB)
and contracts that have not been acquired/originated (IASB only),
- Policy issuance and processing
- Medical and inspection
- Sales force contract selling.
- Costs directly related to the activities in (2).
- Direct response advertising.
The FASB tentatively decided that the acquisition
costs included in the cash flows of insurance contracts will be limited to those
costs related to successful acquisition efforts.
- Software dedicated to contract acquisition
- Equipment maintenance and depreciation
- Agent and sales staff recruiting and training
- Rent and occupancy
- Other general overhead
The IASB tentatively
decided that no distinction should be made between successful acquisition
efforts and unsuccessful efforts.
will continue their discussion on insurance contracts on June 15, 2011, by
considering presentation in the statement of comprehensive income.
properties. FASB staff presented the IASB with an overview of
decisions made on the FASB’s investment properties project. The meeting was
informational; no decisions were reached.
The FASB and the IASB discussed Shariah-compliant lease contracts and lessor
The Boards discussed the accounting implications
of applying a right-of-use lease model to Shariah-compliant lease contracts. The
discussion was educational in nature and no decisions were
continued discussing the accounting by lessors under a right-of-use
The Boards discussed a single approach to lessor accounting
whereby the lessor would recognize a lease receivable and a residual asset at
lease commencement. The Boards will discuss at a future meeting whether and
when, under such an approach, it is appropriate for a lessor to recognize profit
at lease commencement. The Boards will also discuss at a future meeting whether
there should be different lessor models for (1) a lease of a portion of an asset
and (2) a lease of an entire asset.
The Boards did not make any decisions
about lessor accounting at this meeting.
June 14, 2011
FASB/IASB Joint Board Meeting
for financial instruments: classification and measurement. At this
joint Board meeting, FASB staff presented to the Boards a summary of tentative
decisions reached by the FASB on classification and measurement of financial
instruments. The meeting was informational; no decisions were
[See the summary for the June 13,
2011 FASB/IASB Joint Board meeting.]
recognition. [See the
summary for the June 15, 2011 FASB/IASB Joint Board
sheet—offsetting. The FASB and the IASB discussed alternative
approaches for requiring offsetting of financial assets and financial
liabilities on the face of the balance sheet. The staff proposed the following
supported Alternative 1. The majority of the FASB members supported Alternative
- Alternative 1—This approach requires a right of setoff that is exercisable
both in the normal course of business and in bankruptcy, insolvency, or
default and intention to settle a financial asset and financial liability net
- Alternative 2—This approach requires a right of setoff that is legally
enforceable in the normal course of business and intention to settle a
financial asset and financial liability net or simultaneously.
- Alternative 3—For derivative instruments, this approach provides an
exception from the general offsetting criteria, which would allow offsetting
of fair value amounts recognized for derivatives and fair value amounts
recognized for the right to reclaim cash collateral or the obligation to
return cash collateral arising from derivative instrument(s) recognized at
fair value with the same counterparty under a master netting agreement. This
approach requires a right of setoff that is only enforceable in bankruptcy,
insolvency, or default of one of the counterparties.
- Alternative 3a—This approach limits the exception for offsetting of
derivative instruments under Alternative 3 to only collateralized
derivatives with daily variation margin postings.
The Boards noted that users consistently asked that information be
provided to help reconcile any differences in the offsetting requirements under
IFRS and US GAAP so the Boards decided to work on converging disclosure
requirements to assist users comparing financial statements prepared under IFRS
and US GAAP.
contracts. [See the
summary for the June 13, 2011 FASB/IASB Joint Board
June 15, 2011 FASB/IASB
Joint Board Meeting
Boards discussed the accounting for subleases under the proposed leases
requirements for lessees and lessors and tentatively decided the following:
- A head lease and a sublease should be accounted for as separate
- An intermediate lessor, as a lessee in a head lease arrangement, should
account for its assets and liabilities arising from the head lease in
accordance with the decisions-to-date for all lessees.
- An intermediate lessor, as a lessor in a sublease arrangement, should
account for its assets and liabilities arising from the sublease in accordance
with the decisions-to-date for all lessors.
- If the Boards decide that there should be more than one approach to lessor
accounting, an intermediate lessor, as a lessor in a sublease, should evaluate
its right-of-use asset, not the underlying asset, to determine the appropriate
lessor accounting approach to apply to the sublease.
discussed the accounting for short-term leases by lessees. A short-term lease is
defined as follows:
A lease that, at the date of commencement of the
lease, has a maximum possible term, including any options to renew, of 12 months
The Boards tentatively decided that for short-term leases a lessee need not
recognize lease assets or lease liabilities. For those leases, the lessee should
recognize lease payments in profit or loss on a straight-line basis over the
lease term, unless another systematic and rational basis is more representative
of the time pattern in which use is derived from the underlying
asset.The Boards also tentatively decided that a lessee may
elect to apply the recognition and measurement requirements in the leases
guidance to short-term leases.
The Boards expressed support for
requiring disclosure of the rental expense recognized in the current period and
a statement about the extent to which that expense is expected to be
representative of rental expense in future periods. The Boards will continue to
discuss disclosures for short-term leases, as well as lessor accounting for
short-term leases, at a future meeting.
contracts. The IASB and the FASB continued their discussions on
insurance contracts by discussing the presentation of the statement of
Presentation of the Statement of Comprehensive
The Boards indicated a preference for the presentation model
outlined in Example 2 in Appendix A of Agenda Paper 3A /FASB Memo No. 70A. The
example presents the underwriting results of contracts measured under the
building-block approach separately from contracts measured using the modified
approach and includes volume information as follows:
The Boards discussed whether they would
require all insurers to present each of the above line items in all cases on the
statement of comprehensive income, rather than in the notes. No decision was
- Line items for the underwriting margin of insurance contracts that present
the following amounts for the reporting period:
- Building-block approach underwriting margin reflecting:
- Change in/release of
(1) Risk adjustment
(2) Residual margin (IASB)
- Experience adjustment related to the current period disaggregated
(1) Premium due
(3) Expenses incurred
(4) Expected net
changes in the liability for the period
- Changes in assumptions
- Gains and losses at initial recognition
- Modified approach underwriting margin reflecting:
- Change in/release of
(1) Risk adjustment
(2) Composite margin (FASB—if applicable)
- Premium revenue (based on the release of the preclaims obligation
grossed up for amortization of acquisition costs)
- Claims incurred
- Expenses incurred
- Amortization of acquisition costs included in the preclaims
- Experience adjustments related to the current period
- Changes in assumptions
- Changes in additional liabilities for onerous contracts
- Investment performance:
- Investment income
- Interest accreted on the expected net cash flows
- Changes in discount rate.
The Boards will continue their
discussion of insurance contracts at their July meeting.
for financial instruments: impairment. The IASB and the FASB
discussed a “three-bucket” expected loss approach for the impairment of
The guiding principle of the “three-bucket” approach
is to reflect the general pattern of deterioration of credit quality of loans.
Allowance balances would be established for all financial assets subject to
impairment accounting. The different phases of the deterioration in credit
quality are captured through the “three buckets” that determine the allowance
balance. Generally, the “three-bucket” approach would encompass the following:
The Boards decided to continue to develop the
“three-bucket” approach. In addition, the Boards agreed with the broad approach
to distinguish between the buckets on the basis of credit risk deterioration.
The Boards decided that the allowance balance of Buckets 2 and 3 should be the
remaining lifetime expected loss estimate.
- Bucket 1: In the context of portfolios, assets evaluated
collectively for impairment that do not meet the criteria of Bucket 2 or 3
(this would include loans that have suffered changes in credit loss
expectations as a result of macroeconomic events that are not particular to
either a group of loans or a specific loan).
- Bucket 2: Assets affected by the occurrence of events
that indicate a direct relationship to possible future defaults, however the
specific assets in danger of default have not yet been identified.
- Bucket 3: Assets for which information is available that
specifically identifies that credit losses are expected to, or have, occurred
on individual assets.
The Boards provided the
following direction to the staff for future deliberations:
- Pursue an approach for Bucket 1 with an overall objective of recognizing
an impairment allowance equal to 12 months’ worth of expected losses based on
initial expectations plus the full amount of any changes in expected credit
losses. However, the Boards also noted the operational complexities of such a
model and directed the staff to consider how to operationalize the approach.
- The Boards noted the importance of having clear and well-defined
indicators and guidance related to when to transfer assets between Buckets 1,
2, and 3. Therefore, they instructed the staff to further develop criteria to
determine which of the three buckets financial assets should be attributed
recognition. The IASB and the FASB completed their planned
redeliberations of the Exposure Draft, Revenue from Contracts with
Customers, by discussing the following topics:
Effect of the Proposed Standard on Telecommunications (and Other)
- The effect of the proposed standard on telecommunications (and other)
- The transition requirements for the proposed standard
- Whether it is necessary to re-expose the proposed standard.
The Boards discussed concerns raised by constituents in
the telecommunications industry about the effect of the Boards’ proposed
standard. The Boards tentatively decided not to revise the requirements of the
tentatively affirmed their decision in the Exposure Draft that an entity should
apply the proposed standard on a retrospective basis. However, to ease the
burden of applying the proposed standard in the first year of application, the
Boards tentatively decided that:
An entity should apply any
relief employed consistently to all transactions throughout the comparative
- An entity should not be required to restate contracts that begin and end
within the same reporting period.
- An entity should be permitted to use hindsight in estimating variable
consideration in the comparative reporting periods.
- An entity should be required to perform the onerous test only at the
effective date unless an onerous contract liability was recognized previously
in a comparative period.
- An entity should not be required to disclose the maturity analyses of
remaining performance for prior periods.
The Boards also tentatively decided that if an entity employs
any of the available reliefs above, the entity should disclose the following
Re-exposure of the Proposed
- The reliefs that have been employed by the entity
- To the extent possible, a qualitative assessment of the likely effect of
applying those reliefs.
The Boards agreed to re-expose their revised proposals for
a common revenue recognition standard. Re-exposing the revised proposals will
provide interested parties with an opportunity to comment on revisions the
Boards have undertaken since the publication of an Exposure Draft on revenue
recognition in June 2010. Specifically, the Boards plan to invite feedback on
the following topics:
It was the
unanimous view of the Boards that while there was no formal due process
requirement to re-expose the proposals, it was appropriate to go beyond
established due process given the importance of the revenue number to all
entities and the need to take all possible steps to avoid unintended
consequences. The Boards intend to re-expose their work in the third quarter of
2011 for a comment period of 120 days.
- The extent to which the revised requirements are understandable and the
drafting of the requirements has not created unintended consequences for
specific contracts or industries
- A few specific aspects of the revised requirements.
Boards directed the staff to draft an Exposure Draft for vote by written ballot.
No Board members indicated that they intend to dissent to the publication of the