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.
Accounting for Financial Instruments—Hedging. The Board continued deliberations on the accounting for hedging activities, specifically discussing net investment hedges, excluded components for net investment and cash flow hedges, use of total coupon cash flows in fair value hedges of benchmark interest rate risk, sub-benchmark hedges, and contract features that limit exposure to hedged risks. A description of Board decisions follows.
Net Investment Hedges
For qualifying net investment hedges, entities would record the entire change in the fair value of the hedging instrument that is included in the assessment of hedge effectiveness in the cumulative translation adjustment section of other comprehensive income (OCI). In the period(s) the hedged item affects earnings, entities would reclassify changes in fair value of the hedging instrument recorded in OCI to the same income statement line item where the earnings effect of the hedged item is presented. This decision would effectively eliminate the recognition of hedge ineffectiveness for net investment underhedges.
Net Investment Hedges—Excluded Components
The current guidance in Topic 815 as it relates to the treatment of the portion (if any) of the hedging instrument’s change in fair value that is excluded from the assessment of hedge effectiveness in net investment hedges will be retained without change. Entities would continue to recognize the portion of the hedging instrument’s change in fair value that is excluded from the assessment of hedge effectiveness immediately in earnings. The Board decided not to provide guidance on how such changes would be presented.
Cash Flow Hedges—Excluded Components
As under current GAAP, entities must recognize immediately in net income the portion (if any) of the hedging instrument’s change in the fair value that is excluded from the assessment of hedge effectiveness in a cash flow hedge. However, entities would be required to present recognized amounts in the same income statement line item where the earnings effect of the hedged item is presented.
Use of Total Coupon Cash Flows in Fair Value Hedges of Benchmark Interest Rate Risk and Sub-Benchmark Hedges
An entity would have the choice to use either the cash flows associated with the benchmark interest rate or the total coupon cash flows in calculating the change in the fair value of the hedged item attributable to interest rate risk in a fair value hedge of benchmark interest rate risk. If the effective interest rate of the financial instrument is less than the benchmark interest rate on the date of hedge designation (“sub-benchmark” hedge), however, an entity would be required to use the total coupon cash flows.
Cash Flow Hedges of Nonfinancial Items—Contract Features That Limit Exposure
A cap, floor, or negative basis associated with the price of a contractually specified component of a nonfinancial item would not prohibit an entity from designating that contractually specified component as the hedged risk but would potentially affect the assessment of effectiveness should the price of the contractually specified component move above or below the exposure limit.
Based on the Board’s decisions, the staff plans to:
- Discuss with the Board documentation requirements for entities that are other than public business entities
- Develop a staff draft of a proposed Accounting Standards Update to amend Topic 815 reflecting the Board’s decisions
- Prepare an analysis of the costs, benefits, and complexity of the proposed Update, including any additional consideration of the effect the Board’s decisions may have on entities that are other than public business entities, and discuss external comments on the staff draft from the external review process
- Determine the transition approach
- Discuss the comment period with the Board.
Disclosure Framework: Disclosure Review—Fair Value Measurement. The Board discussed disclosures about the uncertainty inherent in Level 3 fair value measurements and made the following decisions.
- The disclosure required by paragraph 820-10-50-2(g) will be retained, but the Board will clarify that the purpose of the disclosure is to communicate information about the uncertainty in measurement at the reporting date and not to provide information about sensitivity to future changes.
- The quantitative information about significant unobservable inputs used in the fair value measurement required by paragraph 820-10-50-2(bbb) should include both (1) the range of the unobservable inputs used and (2) the weighted average of the unobservable inputs used, as depicted by the illustration in paragraph 820-10-55-103.
- Disclosure of the time period used to develop any significant unobservable inputs that are based on historical data would be required.
The Board discussed a proposed method of transition, deciding that proposed changes to disclosures about changes in unrealized gains and losses and the changes described in items 2 and 3 above would be applied prospectively beginning in the period of adoption. Entities would apply all other changes in disclosures retrospectively to all periods presented.
The Board also discussed comment period, deciding that the proposed changes would be exposed 75 days or until February 29, 2016, whichever is longer.
Leases. The Board continued redeliberating the proposals in the May 2013 Exposure Draft, Leases, specifically discussing the following topics:
- Summary of external review comments
- Recognition of initial direct costs in sales-type leases
- Lessor presentation of its net investment in the lease
- Lease modifications that extend the term of a lease
- Private Company Council considerations.
The Board agreed with the staff’s analysis of the external review comments and the approach taken by the staff for each area of significant comment.
Recognition of Initial Direct Costs in Sales-Type Leases
The Board decided to require that initial direct costs arising from a sales-type lease be deferred and recognized over the lease term if the lease does not give rise to selling profit or selling loss.
Lessor Presentation of Its Net Investment in the Lease
The Board decided that a lessor should present its net investment in sales-type and direct financing leases separately from other assets on the statement of financial position. A lessor also should disclose in the notes to the financial statements the components of its net investment in sales-type and direct financing leases (that is, its lease receivables, its unguaranteed residual assets, and any deferred selling profit on direct financing leases).
Lease Modifications That Extend the Term of a Lease
The Board decided that a modification that extends a lease term changes the right of use the lessee already controls; it does not grant the lessee an additional right of use. A lease term modification that solely extends the term of a lease would, therefore, never be accounted for as a separate contract (that is, separate from the contract that is, or contains, the original lease).
The Board also decided:
- Not to make any revisions to the lessor modification guidance as a result of the lessee lease modification decisions.
- That lessees should reassess the classification of a lease when there is a change in the lease term or a change in the assessment of a lessee option to purchase the underlying asset.
The Board affirmed its decision that the requirements for recognition and presentation of lease assets and lease liabilities will apply to all entities; it considered but decided to not provide differential requirements for private companies and not-for-profit organizations.
The staff is currently drafting the final leases standard based on the Board’s decisions. The staff plans to bring the following topics to the Board in November for discussion before issuing a final leases standard:
- Consideration of benefits and costs
- Effective date
- Permission to ballot.