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.
Liability for Future Policyholder Benefits
The Board decided that at the beginning of the earliest period presented (that is, “the transition date”), an insurance entity should apply the guidance on the liability for future policyholder benefits retrospectively to all prior periods for each level at which reserves are calculated. The Board decided to require alternative transition provisions for circumstances in which the historical information is unavailable or the application would be impracticable.
Specifically, an insurance entity would be required to apply the following transition methods:
- Retrospectively to all prior periods using actual historical information at the level at which reserves are calculated.
- If actual historical information covering the entire contract period is not available at the level at which reserves are calculated, an insurance entity would be required to use estimates for those periods in which actual historical information is not available. The historical information should be derived from objective information that is reasonably available.
- An insurance entity should recognize in accumulated other comprehensive income the cumulative effect of changes in discount rates between the contract inception date and transition date.
- If it is impracticable to apply the guidance retrospectively to all prior periods at the level at which reserves are calculated, an insurance entity should apply the guidance to in-force contracts on the basis of their existing carrying amounts at the transition date and updated future assumptions. The opening retained earnings balance should be adjusted to the extent that the net premium ratio exceeds 100 percent. The transition date should be considered the contract inception date for purposes of subsequent adjustments.
The Board decided that at the transition date, an insurance entity should measure market risk benefits at fair value in accordance with the guidance. The transition adjustment should be recorded as follows:
- The cumulative effect of changes in an entity’s own credit risk between contract inception date and transition date should be recognized in accumulated other comprehensive income.
- The difference between fair value and carrying value at the transition date, excluding the amount in (1), should be adjusted to opening retained earnings.
The Board decided that the guidance on deferred acquisition costs should be applied as of the transition date on the basis of the existing carrying amounts at that date, adjusted for the removal of any related amounts in accumulated other comprehensive income.
The Board decided that the following disclosures should be required in the year of adoption:
- Information required in paragraphs 250-10-50-1 through 50-3 on a disaggregated basis consistent with that which will be used for recurring disclosures
- If retrospective application is impracticable, the portion of the liability for future policy benefits not subject to retrospective application
- Qualitative and quantitative information about transition adjustments related to (a) a net premium ratio exceeding 100 percent or (b) the establishment of an additional liability for a nontraditional contract.
The staff updated the Board on feedback received on the Board’s tentative decision on the accounting for deferred acquisition costs.
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot.
Financial statements of not-for-profit entities (phase 1). The Board continued its redeliberations on the proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, focusing on the following topics:
- Current requirement for not-for-profit entities (NFPs) to report expenses by their functional classification
- Proposed requirement for NFPs to report all expenses in one location, with an analysis of operating expenses by their function and nature.
The Board decided to retain the current requirement for NFPs to report expenses by their functional classification either on the statement of activities or in the notes to the financial statements.
Expenses by Their Functional and Natural Classification
The Board decided to require NFPs to report all expenses (other than netted investment expenses) by function and nature in one location. That information can be reported on the face of the statement of activities, in a separate statement, or in the notes to the financial statements. In reporting its expenses, an NFP would be required to show the relationship between its functional and natural classification by disaggregating its functional categories by their natural classification. The Board directed the staff to explore, in Phase 2 of the project or in a future project, whether business-oriented health care NFPs should provide disaggregated information by segments instead.
Accounting for financial instruments—hedging. The Board discussed transition alternatives and related disclosures, transition elections, and additional transition considerations at the adoption date.
The Board decided that an entity would apply either a modified retrospective approach or a retrospective approach as of the adoption date to hedging relationships existing at that date.
If an entity elects to apply a modified retrospective approach for cash flow and net investment hedges, the entity would record the cumulative effect of the application of the recognition requirements in accumulated other comprehensive income with an offsetting adjustment through the opening balance of retained earnings as of the adoption date. An entity would continue to be required to provide the tabular disclosures resulting from the application of current guidance for comparative periods before the date of adoption. An entity would be required to provide the new tabular disclosures for the periods after the date of adoption.
If an entity elects to apply a retrospective approach for all hedges, the entity would be required to provide the new tabular disclosures for all periods presented.
The Board decided that upon adoption, an entity would be required to provide the following transition disclosures within Topic 250 on accounting changes and error corrections:
- The nature of and reason for the change in accounting principle
- The cumulative effect of the change on the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the date of adoption
- The disclosure in (1) and (2) should be provided in each interim and the annual financial statement period in the year of the change.
- A description of the prior-period information that has been retrospectively adjusted
- The cumulative effect of the change on the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the earliest period presented.
The Board decided to allow an entity to make the following one-time elections upon adoption:
- An entity could amend hedge documentation for existing hedging relationships to incorporate whether subsequent assessments of effectiveness would be performed qualitatively. An entity could make this election by the end of the first fiscal year after the adoption date.
- An entity could amend hedge documentation for existing shortcut method hedging relationships to incorporate how quantitative assessments of effectiveness would be performed if it is determined at a later date that use of the shortcut method is no longer appropriate. An entity could make this election by the end of the first fiscal year after the adoption date.
- An entity could set the terms of the hypothetical derivative to be at-market (that is, a fair value of zero) as of the original hedge inception date (that is, before the adoption date) for hedging relationships that meet the criteria to designate the variability in a contractually specified component as the hedged risk. An entity could make this election on or before the first quarterly hedge effectiveness assessment date after the adoption date.
Measurement Methodology for Hedged Items in Fair Value Hedges of Interest Rate Risk
The Board decided that if an entity elects to de-designate and immediately re-designate a fair value hedge of interest rate risk upon adoption and change its measurement methodology for the hedged item in accordance with the adoption of the amendments, the basis adjustment of the hedged item from the de-designated hedging relationship would be incorporated into the new hedging relationship. That is, an entity would adjust the cumulative basis adjustment recorded for the hedged item in the de-designated hedging relationship to reflect the basis adjustment that would have been recorded if the revised measurement methodology in the re-designated relationship had been used throughout the hedging relationship’s life. Entities would adjust the basis of the hedged item through the opening balance of retained earnings upon adoption of the proposed amendments.
Incorporating Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index into the Definition of Benchmark Interest Rate for Fair Value Hedges
The Board considered the transition for hedges of a tax-exempt security where the hedged risk was the total price of the security before adoption. The Board decided that if upon adoption of the proposed amendments, an entity were hedging a tax-exempt security where the hedged risk was the total price of the security, and it de-designated and simultaneously re-designated the hedging relationship with the hedged risk defined as fluctuations in SIFMA, the basis adjustment from the de-designated hedging relationship would be “frozen” at the time of de-designation and manually amortized over the remaining life of the hedged item.
Partial-Term Fair Value Hedging
The Board decided that there would be no transition guidance for partial-term fair value hedges existing at adoption for which the hedge is designated in accordance with paragraph 815-20-25-12(b)(2)(ii). The Board plans to include a question in the proposed Update about whether entities apply the current partial-term hedging guidance and, if so, whether transition guidance for those hedging relationships is needed.
The Board decided that an entity would be exempt from providing the following disclosures for periods before the adoption date that are presented in the financial statements:
- The basis adjustment amounts for fair value hedges
- Qualitative information about quantitative goals.
Early adoption would be permitted at the beginning of any fiscal period before the effective date. An entity would be required to adopt all of the amendments at one date.
The staff plans to:
- Develop a draft of a proposed Accounting Standards Update
- Discuss the following with the Board: (a) feedback from external reviewers on the draft proposed Update; (b) the anticipated costs, benefits, and complexity resulting from the proposed Update; and (c) the comment period.
Disclosure framework: disclosure review—income taxes. The Board continued its initial deliberations on the disclosure requirements for income taxes.
The Board affirmed its prior decisions to require all entities to disclose the following:
- That a change in tax law that is probable to have an effect on the entity in a future period has been enacted
- Income (loss) before income tax expense (benefit) disaggregated between domestic and foreign
- Income taxes paid disaggregated between domestic and foreign.
- Income tax expense (benefit) between domestic and foreign
- Foreign income taxes paid to any country that are significant relative to total income taxes paid.
- The amount of and explanation for a change in assertion about the temporary difference for the cumulative amount of investments associated with undistributed earnings that are asserted to be essentially permanent in duration
- The amount of and explanation for a change in assertion about the temporary difference for the cumulative amount of investments associated with undistributed earnings that are no longer asserted to be essentially permanent in duration.
- The line item(s) on the balance sheet in which the amount of deferred taxes are presented
- Domestic income tax expense (benefit) on foreign sourced earnings.
- The rate reconciliation that is currently required for public companies
- An explanation of the nature and amounts of the valuation allowance recorded and/or released during the reporting period
- The amounts and expiration dates of operating loss and tax credit carryforwards recorded on the tax return basis, the amounts and expiration dates of carryforwards that will give rise to a deferred tax asset (tax effected), and the total amount of the unrecognized tax benefit that offsets the tax-effected carryforwards.
The Board directed the staff to perform further outreach on the operability of disclosing the aggregate of cash, cash equivalents, marketable securities, and loans related to the temporary difference for the cumulative amount of investments associated with undistributed earnings that are essentially permanent in duration.