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 a final standard.
September 23, 2009 Board MeetingFinancial statement presentation. The Board began deliberating the proposals in the October 2008 Discussion Paper, Preliminary Views on Financial Statement Presentation, making the tentative decisions described below.
- An entity would be required to present financial statement items in sections that distinguish between business activities (value creating activities) and financing activities (funding of that value creation) in each of the financial statements, as proposed in the Discussion Paper.
- In a change from the Discussion Paper, the Board agreed to be more specific in defining the financing section. The Board directed the staff to draft a definition of the financing section that includes at least two components: treasury assets and financing liabilities. That draft definition will be considered at a future meeting.
- The Board decided to retain an approach to classification within the business section that is based on how a reporting entity organizes its activities and how it uses its assets and liabilities. In a change from the Discussion Paper, the Board decided that there would not be an operating or investing category within the business section. Rather, additional groupings of information within the business section (that is, categories) would reflect the facts and circumstances of that entity and would be left to management’s discretion. At a future meeting, the Board will discuss application guidance to help management determine meaningful groupings of information within an entity’s business section.
- As proposed in the Discussion Paper, the Board would require an entity to present information about discontinued operations in a separate section in each of its primary financial statements (except the statement of changes in equity).
- The Board decided that an entity would not be required to present information about net debt in its financial statements. The Discussion Paper did not address presentation of net debt information.
- The relationship between the proposed model and receivables accounting
- The definition of control for determining when goods and services are transferred to a customer
- Options to acquire additional goods and services.
The Proposed Model and Receivables Accounting
The proposed revenue recognition model focuses on contracts with customers. A contract comprises rights and performance obligations. The Board affirmed its preliminary view in the Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers, that unperformed rights and performance obligations of a contract should be reported on a net basis as either a contract asset or a contract liability.
The Board then considered the relationship between accounts receivable and a contract asset or contract liability. The Board decided that an entity should account for an unconditional right to consideration in accordance with existing guidance on receivables. A right to consideration is unconditional when nothing other than the passage of time makes payment of that consideration due.
The Discussion Paper proposed that an entity should recognize revenue when it satisfies its performance obligations to a customer by transferring goods or services to the customer. An entity has transferred a good or a service when the customer obtains control of it.
The Board decided that the proposed standard would require an entity to assess whether control has been transferred from the perspective of the customer. The proposed standard also would provide a definition of control and accompanying indicators to help entities assess the transfer of control from a customer perspective.
The Board considered the following working definition of control and related indicators:
- The customer has an unconditional obligation to pay for the asset (and the payment is nonrefundable).
- The customer has legal title to the asset.
- The customer can sell the asset to (or exchange the asset with) another party.
- The customer has physical possession of the asset.
- The customer has the practical ability to take possession of the asset.
- The customer specifies the design or function of the asset.
- The customer has continuing managerial involvement with the asset.
- The customer can secure or settle debt with the asset.
Control of a good or a service is an entity’s present ability to direct the use of and receive the benefit from that good or service.
The staff will continue to refine the definition of control and the indicators for discussion at future meetings.
Options to Acquire Additional Goods and Services
The Board considered how an entity would determine whether options to acquire additional goods and services are part of a present contract with a customer, and, if so, how the entity would account for them.
The Board decided that an option to acquire additional goods and services in a contract with a customer would be recognized as a performance obligation only if the option provides a material right to the customer that the customer would not receive without entering into that contract. An entity would account for that performance obligation by allocating to it a portion of the transaction price.
The Board decided that an entity can use various methods to allocate consideration to those optional goods and services. In some cases, an entity can estimate the standalone selling price of an option as a basis for allocation. That estimate would reflect the discount the customer would obtain when exercising the option, adjusted for the following:
- The discount that the customer could receive without exercising the option
- The likelihood that the option would be exercised.
The Board decided that with renewal and cancellation options, an entity could allocate the transaction price to the optional goods and services by reference to the goods and services expected to be provided and the corresponding expected consideration.
FASB ratification of EITF consensuses and tentative conclusions. The Board considered and ratified the following consensuses reached at the September 9-10, 2009 EITF meeting.
- Issue No. 08-1, "Revenue Arrangements with Multiple Deliverables."
This Issue applies to multiple-deliverable revenue arrangements that are currently within the scope of Subtopic 605-25 (previously included in EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"). The Issue also:
- Provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated.
- Requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price.
- Eliminates the use of the residual method and requires an entity to allocate revenue using the relative selling price method.
The consensus significantly expands the disclosure requirements for multiple-deliverable revenue arrangements.
This Issue should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this Issue on a retrospective basis.
- Issue No. 09-3, “Certain Revenue Arrangements That Include Software Elements.”
This Issue focuses on determining which arrangements are within the scope of the software revenue guidance in Topic 985 (previously included in AICPA Statement of Position 97-2, Software Revenue Recognition) and which are not. This Issue removes tangible products from the scope of the software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance.
The disclosure requirements, effective date, and transition methods for this Issue are the same as those for Issue 08-1. An entity must adopt both Issue 08-1 and Issue 09-3 in the same period using the same transition method.
The Board also considered and ratified the following consensuses-for-exposure reached at the September 9-10, 2009 EITF meeting.
- Issue No. 09-2, "Research and Development Assets Acquired in an Asset Acquisition." The Board agreed to a comment period that commences no later than September 30, 2009, and ends no later than October 26, 2009.
The consensus-for-exposure would require that all tangible and intangible research and development assets acquired in an asset acquisition be capitalized regardless of whether those assets have a future alternative use. Any contingent consideration in an asset acquisition would be accounted for in accordance with existing U.S. GAAP. An entity would be required to differentiate between contingent consideration that relates to the acquisition of the assets and contingent consideration that relates to the performance of future services from the seller.
- Issue No. 09-B, "Consideration of an Insurer’s Accounting for Majority-Owned Investments When Ownership Is through a Separate Account." The Board agreed to a comment period that commences no later than September 30, 2009, and ends no later than October 26, 2009.
The consensus-for-exposure would not require an insurer to consolidate a mutual fund if the insurer holds a majority-owned investment in the mutual fund through its separate account. The insurer also would not be required to consolidate a mutual fund if the insurer holds a majority-owned investment through a combination of interests held by its separate and general accounts, but neither the separate account nor the general account individually has a majority interest.
- Issue No. 09-E, "Accounting for Stock Dividends, Including Distributions to Shareholders with Components of Stock and Cash." The Board agreed to a comment period that commences no later than September 30, 2009, and ends no later than October 26, 2009.
The consensus-for-exposure would require that the stock portion of a distribution to shareholders that contains components of cash and stock and allows shareholders to select their preferred form of the distribution (with a limit on the minimum amount of cash that will be distributed in total) be considered a stock dividend for purposes of determining earnings per share. Only the minimum portion of the distribution that will be issued in shares would be accounted for as a stock dividend.
The consensus-for-exposure states that all stock dividends (not just those that provide the shareholder with the distribution option) should be reflected in earnings per share on the later of the ex-dividend date or the date the number of shares to be issued is known.
Accounting for financial instruments. The staff provided the Board with a summary of the feedback received during the FASB and IASB’s financial instrument roundtable meetings in Tokyo, London, and Norwalk and the FASB’s discussion of core deposit liabilities with U.S. investors. The Board did not make a decision on which measurement attribute should be used to measure core deposit liabilities. However, the Board did decide on an approach for remeasurement if the Board were to decide at a future date that such information would be useful to investors.
The Board agreed to a remeasurement approach that has the following characteristics:
- A present value of the average core deposit liability amount discounted by the difference between the alternative funds rate and the all-in-cost-to-service rate over the implied maturity.
- The core deposit liability amount that would be subject to the remeasurement would be determined as an average amount over the implied maturity time period, which would result in the consideration of future deposits. Considering and valuing future deposits would result in an intangible asset being reflected in the valuation.