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.

August 29, 2012 FASB Board Meeting

Accounting for financial instruments: classification and measurement. The Board discussed the application guidance related to the business model assessment for the classification and measurement of financial assets at amortized cost, fair value though other comprehensive income (FVOCI), and fair value through net income (FVNI). The Board decided that the application guidance to be included in the proposed standard should incorporate the following concepts to assist stakeholders in applying the principle associated with the business model assessment for classification and measurement of financial assets.

Amortized Cost

  1. Examples of types of business activities that would be consistent with an amortized cost classification.
     
  2. Sales of financial assets as a result of significant credit deterioration would be consistent with the objective of amortized cost classification if such sales are to maximize the collection of contractual cash flows through sales rather than through cash collection. Sales for other reasons should be very infrequent.

  3. Sales of financial assets that result from managing the credit exposure due to concentration of credit risk would not be consistent with the primary objective of amortized cost classification.

FVOCI

  1. Examples of types of business activities that would be consistent with a FVOCI classification.
     
  2. Financial assets classified at FVOCI may be held for collection of contractual cash flows or sold. That is, management may hold the assets for an unspecified period of time or sell the assets to meet certain objectives.

FVNI

  1. Financial assets that are held for sale at initial recognition would not be consistent with the primary objective of amortized cost or FVOCI classification.

The Board also tentatively decided to clarify that financial assets are classified at initial recognition into one of the three classification categories on the basis of an entity’s business model. The classification of financial asset(s) is determined at origination or acquisition by the entity’s key management personnel on the basis of how the asset(s) will be managed together with other financial assets within a distinct business model. An entity may have more than one business model for managing its financial assets.



Investment companies. The Board discussed the following issues:

  1. Accounting by an investment company parent for an investment company subsidiary
     
  2. Disclosure requirements for investments in another investment company.

Accounting by an Investment Company Parent for an Investment Company Subsidiary

At the June 13, 2012 joint Board meeting, the Boards decided that an investment company should measure a controlling financial interest in another investment company at fair value. The FASB revisited that decision at this meeting and decided not to require an investment company to measure a controlling financial interest in another investment company at fair value but instead continue applying the guidance in paragraphs 946-810-45-2 and 45-3.

Disclosure Requirements for Investments in Another Investment Company

The Board decided that an investment company should disclose the following for significant investments in another investment company (investee fund):

  1. A description of the investee fund (name and category)
     
  2. The percentage of the reporting investment company’s net assets invested in the investee fund
     
  3. The total assets of the investee fund
     
  4. The total debt outstanding of the investee fund
     
  5. The net assets of the investee fund
     
  6. The expense ratio of the investee fund
     
  7. The proportionate ownership interest in the investee fund.

These disclosures would not apply to consolidated investment company subsidiaries.

The Board affirmed its decision that a feeder fund should attach the financial statements of the master fund along with its financial statements in a master-feeder structure, which would satisfy these disclosure requirements. The Board also decided that for structures that are not master-feeder structures, an investment company would be permitted to attach the financial statements of the investee fund along with its financial statements to satisfy these disclosure requirements.

The Board also decided to amend paragraph 946-210-50-9 to require all investments companies (regulated and nonregulated) to disclose each investment owned by an investee fund that represents a significant portion (rather than those that exceed 5 percent) of the reporting investment company’s net assets at the reporting date.



Consolidation: policy and procedures. The Board discussed the alignment of the treatment of the evaluation of participating rights for assessing consolidation for voting interest entities, variable interest entities, and other similar entities (including limited partnerships). Under current guidance, a participating right allows the holder to participate in significant decisions related to a limited partnership’s ordinary course of business, which can include more than one activity. The Board unanimously reaffirmed its intent to align the models by aligning the treatment of participating rights for entities controlled by voting rights, variable interest entities, and other similar entities by reaffirming that the principal versus agent analysis would consider whether the noncontrolling shareholders (or limited partners) participate in each of the activities that most significantly impact an entity’s economic performance for all entities, regardless of whether they are controlled by voting rights or other arrangements.

The Board also discussed how to evaluate the purpose and design of an entity in determining whether a decision maker is a principal or an agent. The Board deliberated whether:

  1. Purpose and design should be considered in the overall principal versus agent analysis, both initially and as part of evaluating the three existing factors (compensation, rights held by other parties, and other interests held by the decision maker).
     
  2. Purpose and design should be considered as a separate factor in the principal versus agent analysis.

The Board decided that the consideration of purpose and design should be included in the overall principal versus agent analysis. The Board decided that when evaluating the factors of compensation, rights held by other parties, and other interests held by the decision maker, the purpose and design of the entity should also be taken into consideration as opposed to being considered as a separate factor. The Board also decided that the guidance for considering the purpose and design of an entity should be consistent for all consolidation evaluations required in Topic 810.