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.
Simplifying the Equity Method of Accounting. The Board began redeliberations of the June 2015 proposed Accounting Standards Update, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Equity Method of Accounting, by discussing a summary of comments received and next steps.
The Board directed the staff to research additional alternatives for improving the equity method of accounting.
Increase in the Level of Ownership Interest or Degree of Influence
The Board affirmed the proposal to eliminate the requirement that entities retroactively adopt the equity method of accounting if an investment that was previously accounted for on other than the equity method becomes qualified for use of the equity method by an increase in the level of ownership interest or degree of influence. The Board decided to require entities that have an available-for-sale equity security that becomes eligible for the equity method of accounting to recognize the unrealized holding gain or loss in accumulated other comprehensive income through earnings at the date in which the investment qualifies for use of the equity method.
The Board affirmed the proposal to apply the changes prospectively to increases in ownership level or degree of influence occurring after the effective date of the change. The Board affirmed the proposal not to require that entities provide disclosures in the period this change is adopted.
The Board decided that all entities should apply this change in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Entities will have the option of early application.
The Board directed the staff to draft an Accounting Standards Update eliminating the requirement for entities to retroactively adopt the equity method of accounting for vote by written ballot.
Insurance—Targeted Improvements to the Accounting for Long-Duration Contracts.
Market Risk Benefits
The Board continued discussing the accounting for market risk benefits measured at fair value and decided to require that an insurance entity recognize in other comprehensive income the portion of a fair value change attributable to a change in an entity’s own credit risk. This decision applies to contracts and benefits that meet both of the following criteria:
- Contract: The contract holder has the ability to direct funds to one or more separate account investment alternatives, and investment performance, net of contract fees and assessments, is passed through to the contract holder.
- Benefit: The insurance entity provides a benefit protecting the contract holder from adverse capital market performance, exposing the insurance entity to other than nominal capital market risk.
- A benefit is presumed to have other than nominal capital market risk if the net amount at risk would vary significantly in response to capital market volatility.
- Capital market risk includes equity, interest rate, and foreign exchange risk.
Periodic Assumption Update
The Board also decided to require that an insurance entity update all cash flow assumptions on an annual basis, at the same time every year, or more frequently if actual experience or other evidence indicates that earlier assumptions should be revised. The Board also decided to require that an insurance entity update on a quarterly basis discount rate assumptions and market risk benefits measured at fair value. This decision applies to traditional long-duration contracts, limited-payment contracts, participating life insurance contracts, and nontraditional contracts.
The Board will continue to deliberate other targeted improvements to the accounting for long-duration contracts.