Tentative Board Decisions
Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.
Insurance—Targeted Improvements to the Accounting for Long-Duration Contracts. The Board decided to require insurance entities to measure benefits with other-than-nominal capital market risk associated with nontraditional contracts at fair value. At a future meeting, the Board will discuss whether the change in fair value that is attributable to an entity’s own credit risk should be recognized in other comprehensive income.
The Board also discussed the accounting for participating life insurance contracts. No technical decisions were made.
Disclosures about Interest Income on Purchased Debt Securities and Loans. The Board discussed whether to amend the scope of the project to include the amortization period for purchased callable debt securities. The Board decided to amortize all premiums to the first call date and all discounts to the maturity date.
The Board directed the staff to research the disclosure requirements related to the accounting for interest income on callable debt securities and callable loans. The Board also directed the staff to consider whether and how to limit the scope of the instruments subject to the change.
Liabilities and Equity—Targeted Improvements. The Board discussed the accounting for (1) equity-linked financial instruments containing “down round” features and (2) the indefinite deferral of Topic 480, Distinguishing Liabilities from Equity, for mandatorily redeemable financial instruments for certain nonpublic entities and certain mandatorily redeemable noncontrolling interests.
Accounting for Instruments with Down-Round Features
The Board decided to change the accounting for an equity-linked financial instrument with a down-round feature. A down-round feature is a provision in an equity-linked financial instrument, such as a warrant or a convertible instrument, that provides for a downward adjustment of the exercise price specified in the contract in certain circumstances. The Board decided that in determining whether the instrument should be classified as a liability or equity instrument, an entity would not consider the down-round feature when assessing whether the instrument is indexed to its own stock. However, the effect of the feature would be recognized when the feature is triggered, as follows:
- For a financial instrument classified as equity, the fair value of the effect of the down-round feature would be recognized in equity as a deemed dividend.
- For a financial instrument classified as a liability, the fair value of the effect of the down-round feature, when triggered, would be recognized through a charge to net income.
For financial instruments with down-round features that have been triggered during the reporting period, the Board decided that an entity would disclose that the feature has been triggered and where the effect of the down-round feature is recorded (that is, retained earnings or earnings).
The Board decided to require entities to transition to the proposed guidance by applying the proposed guidance to outstanding instruments as of the effective date of the change, with no adjustments to prior periods presented (a cumulative-effect approach). The cumulative effect of the change would be recognized as an adjustment of the opening balance of retained earnings in the annual or interim period of adoption. The Board decided that entities would not be required to provide the transition disclosures in paragraphs 250-10-50-1(b)(2) and 50-3 of Topic 250, Accounting for Changes and Error Corrections, in the period of adoption.
Indefinite Deferral in Topic 480 Related to Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
The Board decided to replace the indefinite deferral in Topic 480 with a scope exception in order to improve the readability of the Accounting Standards Codification. The scope exception will be defined using the current scope of the deferral, based on a “nonpublic entity that is not an SEC registrant” and the SEC registrant definition in Topic 480.
The Board decided to expose these proposed changes for at least 60 days, providing a comment period ending no earlier than February 16, 2016.
The Board directed the staff to draft a proposed Accounting Standards Update for a vote by written ballot.