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.
May 31, 2011 FASB/IASB Joint Videoconference Board
contracts. The IASB and the FASB continued their discussions on
insurance contracts by discussing the accounting for reinsurance. The Boards
tentatively decided the following:
- If a reinsurance contract does not transfer significant insurance risk
because the assuming company is not exposed to a loss (with loss defined as an
excess of the present value of the cash outflows over the present value of the
premiums), the reinsurance contract is deemed to transfer significant
insurance risk if substantially all of the insurance risk relating to the
reinsured portions of the underlying insurance contracts is assumed by the
reinsurer. Substantially all of the insurance risk relating to the reinsurance
portions of the underlying insurance contracts is not transferred unless the
economic benefit transferred to the reinsurer for its respective portion of
the underlying policies is virtually the same as the economic benefit
previously held by the cedant.
- An insurer should assess the significance of insurance risk at the
individual contract level. Contracts entered into simultaneously with a single
counterparty for the same risk, or contracts that are otherwise interdependent
that are entered into with the same or a related party, should be considered a
single contract for the purpose of determining risk transfer.
- A cedant should not recognize a reinsurance asset until the underlying
contract is recognized unless the amount paid under the reinsurance contract
reflects aggregate losses of the portfolio of underlying contracts covered by
the reinsurance contract. If the reinsurance coverage is based on aggregate
losses, the cedant should recognize a reinsurance asset when the reinsurance
contract coverage period begins. An onerous contract liability should be
recognized if management becomes aware in the pre-coverage period that the
reinsurance contract has become onerous.
- The ceded portion of the risk adjustment should represent the risk being
removed through the use of reinsurance.
- If the present value of the fulfillment cash flows (including the risk
adjustment under the IASB’s tentative decisions) for the reinsurance contract
- Less than zero and the coverage provided by the reinsurance contract is
for future events, the cedant should establish that amount as part of the
reinsurance recoverable, representing a prepaid reinsurance premium, and
should recognize the cost over the coverage period of the underlying
- Less than zero and the coverage provided by the reinsurance contract is
for past events, the cedant should recognize the loss immediately.
- Greater than zero, the cedant should recognize a reinsurance residual or
- The cedant should estimate the present value of the fulfillment cash flows
for the reinsurance contract, including the ceded premium and without
reference to the residual/composite margin on the underlying contracts, in the
same manner as the corresponding part of the present value of the fulfillment
cash flows for the underlying insurance contract or contracts, after
remeasuring the underlying insurance contracts on initial recognition of the
- When considering nonperformance by the reinsurer:
- The cedant should apply the impairment model for financial instruments
when determining the recoverability of the reinsurance asset.
- The cedant should consider all facts and circumstances, including
collateral, when assessing the risk of nonperformance by the
- The losses from disputes should be reflected in the measurement of the
recoverable when there is an indication that current information and events
suggest the cedant may be unable to collect amounts due according to the
contractual terms of the reinsurance contract.
recognition. The FASB and the IASB discussed how an entity should
account for the costs of products manufactured for delivery under long-term
production programs. The Boards noted the potential to improve and converge the
financial reporting for those costs. However, they agreed that the accounting
for those costs is not in the scope of the revenue recognition
June 1, 2011 FASB/IASB Joint Videoconference Board
sheet—offsetting. Representatives from the International Swaps and
Derivatives Association and clearing houses provided the Boards with an overview
of settlement and collateral processes of derivative instruments in conjunction
with the proposal on balance sheet offsetting.
The Boards discussed
collateral and unit of account (payment netting) in conjunction with the
proposal on balance sheet offsetting.
The meeting was informational; no
decisions were made.
IASB and the FASB continued their discussion on leases and discussed subsequent
measurement issues relating to lessees, including foreign exchange differences,
impairment, revaluation, and residual value guarantees.
The Boards discussed the accounting by lessees
for leases denominated in a foreign currency. The Boards tentatively decided
that foreign exchange differences related to the liability to make lease
payments should be recognized in profit or loss, consistently with foreign
exchange guidance in existing IFRSs and U.S. GAAP.
The Boards discussed impairment of the
lessee’s right-of-use asset. The Boards tentatively decided to affirm the
proposal in the Leases Exposure Draft to refer to existing guidance in IFRSs and
U.S. GAAP for impairment of the right-of-use asset.
The IASB discussed revaluation of the lessee’s
right-of-use asset. The IASB tentatively decided to affirm the proposals in the
Leases Exposure Draft allowing revaluation of the right-of-use asset.
Residual Value Guarantees
The Boards discussed the
subsequent measurement of residual value guarantees by lessees (excluding
guarantees provided by an unrelated third party) and tentatively decided
- The amounts expected to be payable under residual value guarantees
included in the measurement of the lessee’s right-of-use asset should be
amortized consistently with how other lease payments that are included in the
measurement of a right-of-use asset are amortized. That is, amortization
should be on a systematic basis from the date of commencement of the lease to
the end of the lease term, or over the useful life of the underlying asset, if
this is shorter. The method of amortization should reflect the pattern in
which the economic benefits of the right-of-use asset are consumed or
otherwise used up. If that pattern cannot be reliably determined, a
straight-line amortization method should be used.
- The amounts expected to be payable under residual value guarantees that
are included in the measurement of the lessee’s liability to make lease
payments should be reassessed when events or circumstances indicate that there
has been a significant change in the amounts expected to be payable under
residual value guarantees. An entity would be required to consider all
relevant factors to determine whether events or circumstances indicate that
there has been a significant change.
- The amount of the change to the lessee’s liability to make lease payments
arising from changes in estimates of residual value guarantees should be
recognized (a) in net income to the extent that those changes relate to
current or prior periods and (b) as an adjustment to the right-of-use asset to
the extent those changes relate to future periods. The allocation for changes
in estimates of residual value guarantees should reflect the pattern in which
the economic benefits of the right-of-use asset will be consumed or were
consumed. If that pattern cannot be reliably determined, an entity should
allocate changes in estimates of residual value guarantees to future periods.