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 an Accounting Standards Update.

February 16, 2011 FASB/IASB Joint Board Meeting

Revenue recognition. [See the summary for the February 17, 2011 FASB/IASB Joint Board Meeting.]


Insurance contracts. The IASB and the FASB invited guest speakers from PricewaterhouseCoopers and MetLife to provide an education session on separating insurance contracts into insurance and noninsurance components, which is referred to as unbundling. The IASB's Exposure Draft, Insurance Contracts and the FASB's Discussion Paper, Preliminary Views on Insurance Contracts, proposed that an insurer should account separately for the investment or service components of an insurance contract that are not closely related to the insurance coverage. The purpose of this education session was to give the Boards information on the effect, costs, and benefits of unbundling. Because this was an education session, the Boards were not asked to make any decisions.


Leases.

Lease term

The FASB and the IASB tentatively decided that the lease term should be defined, for both lessees and lessors, as follows:

The lease term is the non-cancellable period for which the lessee has contracted with the lessor to lease the underlying asset, together with any options to extend or terminate the lease when there is a significant economic incentive for an entity to exercise an option to extend the lease, or for an entity not to exercise an option to terminate the lease.

The Boards tentatively decided that a lessee and a lessor should reassess the lease term only when there is a significant change in relevant factors such that the lessee would then either have, or no longer have, a significant economic incentive to exercise any options to extend or terminate the lease.



February 17, 2011 FASB/IASB Joint Board Meeting

Leases.

Types of Leases and the Definition of a Lease

The FASB and the IASB discussed types of leases and the definition of a lease and directed the staff to seek input through targeted outreach on the approaches detailed below. The purpose of the outreach is to:

  1. Obtain a better understanding of the implications of any proposed changes to the Leases Exposure Draft
     
  2. Understand whether a principle for identifying two types of leases for both lessees and lessors would provide more useful information
     
  3. Test whether the proposed changes would provide a better basis on which to determine whether a contract contains a lease.

The feedback received will provide the Boards with input to help make final decisions at a future meeting about the definition of a lease and about types of leases.

Types of Leases

The Boards tentatively decided to identify a principle for identifying two types of leases for both lessees and lessors, with different profit and loss effects, as follows:

  1. A finance lease with a profit or loss recognition pattern consistent with the proposals in the Exposure Draft
     
  2. An other-than-finance lease with a profit or loss recognition pattern consistent with an operating lease under existing IFRSs/U.S. GAAP.

The Boards tentatively decided to establish indicators to distinguish a finance lease from an other than finance lease.

The Boards asked the staff to use these tentative decisions to perform targeted outreach to determine if stakeholders’ concerns about the profit and loss recognition pattern proposed in the Exposure Draft would be addressed.

Definition of a Lease

A lease is defined as a contract in which the right to use a specified asset is conveyed, for a period of time, in exchange for consideration. The Leases Exposure Draft included two principles relating to that definition to help to assess whether a contract contains a lease:

  1. The fulfilment of the contract depends on providing a specified asset or assets.
     
  2. The contract conveys the right to control the use of a specified asset for an agreed period of time.

At this meeting, the Boards discussed how those principles might be clarified to address comments received from respondents to the Exposure Draft and through other outreach activities.

Definition of specified asset
The Boards expressed support for defining a specified asset as an asset of a particular specification. The Boards also discussed an alternative approach that defines a specified asset as a uniquely identified or identifiable asset, which is closer to the application of current requirements in IFRSs and U.S. GAAP. The Boards will seek input on both of those approaches.

Assets that are incidental to the delivery of specified services
The Boards expressed support for specifying that a contract would not contain a lease if an asset is incidental to the delivery of specified services.

A portion of a larger asset
The Boards expressed support for clarifying that both physical and nonphysical portions of a larger asset can be specified assets. The Boards tentatively decided that such a clarification would be made only in conjunction with revising the definition of the right to control the use of an asset. This is to maintain consistency with how control is articulated in the revenue recognition Exposure Draft, Revenue from Contracts with Customers. The Boards also discussed an alternative approach of clarifying only that physically distinct portions of a larger asset can be specified assets. The Boards will seek input on both approaches.

Right to control the use of a specified asset
The Exposure Draft proposed that the right to control the use of an asset is conveyed if any one of three particular conditions is met. Comments received from respondents suggested that the third condition (set out in paragraph B4(c) of the Leases Exposure Draft) raised a number of questions about its application. Some respondents also questioned why control was defined differently in the Leases Exposure Draft than in other publications. The Boards expressed support for an approach that defines the right to control the use of an asset consistently with how control is articulated in the revenue recognition Exposure Draft. This approach would state that a customer has the right to control the use of a specified asset if it has the ability to direct the use, and receive the benefit from use, of the asset throughout the lease term. The Boards also discussed an alternative approach to retain the three conditions in paragraph B4 of the Exposure Draft but to clarify the principle underlying condition (c) of paragraph B4. The Boards will seek input on both approaches.

Variable Lease Payments and Other Lease Payment Considerations

Variable Lease Payments

The Boards considered which variable lease payments should be included in the lessee’s liability to make lease payments and the lessor’s right to receive lease payments. Variable lease payments include any lease payments that arise under the contractual terms of a lease because of changes in facts or circumstances occurring after the date of inception of the lease, other than the passage of time.

The Boards tentatively decided that:

  1. The lessee’s liability and lessor’s receivable should include:
     
    1. Lease payments that depend on an index or rate
       
    2. Lease payments for which the variability lacks commercial substance
       
    3. Lease payments that meet a high recognition threshold (such as reasonably certain).
       
  2. Variable lease payments that depend on an index or a rate should be measured initially based on the spot rate.
     
  3. Recognition of variable lease payments by a lessee and lessor should be subject to the same reliable measurement threshold. However, the need for such a threshold will depend on the basis for recognizing variable lease payments.

The Boards will continue their discussion of initial and subsequent measurement of variable lease payments at a future meeting.

Residual Value Guarantees

The Boards tentatively decided to clarify that the lease payments should include amounts expected to be payable under residual value guarantees, except for amounts payable under guarantees provided by an unrelated third party.

Term Option Penalties

The Boards tentatively decided that the accounting for term option penalties should be consistent with the accounting for options to extend or terminate a lease. That is, if a lessee would be required to pay a penalty if it does not renew the lease and the renewal period has not been included in the lease term, then that penalty should be included in the recognized lease payments.


Accounting for financial instruments: impairment. The IASB and the FASB discussed the definition of write-off and tentatively decided that it will be defined as “a direct reduction of the amortized cost of a financial asset resulting from uncollectibility.”

In addition, guidance will be included in the standard to indicate that:

“A financial asset is considered uncollectible if the entity has no reasonable expectation of recovery. Therefore, an entity shall write off a financial asset or part of a financial asset in the period in which the entity has no reasonable expectation of recovery of the financial asset (or part of the financial asset).”

All IASB and FASB members supported the decision.

Next Steps

In March, the Boards will continue to discuss issues from their original Exposure Drafts that are not integral to the supplementary document, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Impairment.


Revenue recognition. The FASB and the IASB discussed the following topics:

  1. Identification of separate performance obligations
     
  2. Revenue recognition for services
     
  3. Combining contracts
     
  4. Contract modifications
     
  5. Definition of a performance obligation
     
  6. Breakage and prepayments for future goods or services
     
  7. Onerous performance obligations.

Identification of Separate Performance Obligations

The Boards continued their discussions from January 2011 on identifying the separate performance obligations in a contract with a customer. The Boards tentatively decided that:

  1. An entity should account for a bundle of promised goods or services as one performance obligation if the entity provides a service of integrating those goods or services into a single item that the entity provides to the customer.
     
  2. An entity should account for a promised good or service as a separate performance obligation if:
     
    1. The pattern of transfer of the good or service is different from the pattern of transfer of other promised goods or services in the contract, and
       
    2. The good or service has a distinct function.
       
  3. A good or service has a distinct function if either:
     
    1. The entity regularly sells the good or service separately, or
       
    2. The customer can use the good or service either on its own or together with resources that are readily available to the customer.

Revenue Recognition for Services

The Boards continued their discussions from January 2011 on how an entity would recognize revenue for services. The Boards tentatively decided that to recognize revenue for a service, an entity must determine that a performance obligation is satisfied continuously and then must select a method of measuring progress toward complete satisfaction of that performance obligation.

The Boards tentatively decided that an entity satisfies a performance obligation continuously if at least one of the following two criteria is met:

  1. The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
     
  2. The entity’s performance does not create an asset with alternative use to the entity and at least one of the following is met:
     
    1. The customer receives a benefit as the entity performs each task, or
       
    2. Another entity would not need to reperform the task(s) performed to date if that other entity were to fulfil the remaining obligation to the customer, or
       
    3. The entity has a right to payment for performance to date even if the customer could cancel the contract for convenience.

To clarify how an entity should measure progress toward complete satisfaction of a performance obligation, the Boards tentatively decided that the final revenue standard should:

  1. Emphasize that the objective of measuring progress is to faithfully depict the entity’s performance (that is, the pattern of transfer of goods or services to a customer).
     
  2. Clarify the descriptions in the Exposure Draft of output and input methods.

The Boards also discussed some issues that arise when an entity uses an input method of measuring progress toward complete satisfaction of a single performance obligation. In some cases, an entity merely procures goods that are transferred at a different time from related services (for example, materials that the customer controls before the entity installs the materials). The Boards tentatively decided that in those cases an entity should measure progress by recognizing revenue for the transfer of those goods in an amount equal to the costs of the transferred goods.

Combining Contracts

The Boards tentatively decided that an entity should combine, and account for as a single contract, two or more contracts that are entered into at or near the same time with the same customer (or related entities) if one or more of the following criteria are met:

  1. The contracts are negotiated as a package with a single commercial objective.
     
  2. The amount of consideration in one contract depends on the other contract.
     
  3. The goods and services in the contracts are interrelated in terms of design, technology, or function.

The staff will consider further the implications of limiting the combination of contracts to contracts with the same customer (or related entities).

Contract Modifications

The Boards tentatively decided that if a contract modification results only in the addition of a separate performance obligation at a price that is commensurate with that additional performance obligation, the entity should account for the contract modification as a separate contract. Otherwise, the entity should reevaluate the performance obligation and reallocate the transaction price to each separate performance obligation.

Definition of a Performance Obligation

The Boards decided to amend the definition of a performance obligation by deleting the word enforceable.

Breakage and Prepayments for Future Goods or Services

The Boards discussed the accounting for a customer’s nonrefundable prepayment for future goods or services and the portion of the customer’s rights that is not exercised (often referred to as breakage). The Boards tentatively decided that if an entity can reasonably estimate the amount of expected breakage, the entity should recognize the effects of the expected breakage as revenue in proportion to the pattern of rights exercised by the customer. Otherwise, the entity should recognize the effects of the expected breakage when the likelihood of the customer exercising its remaining rights becomes remote.

Onerous Performance Obligations

The Boards began discussing issues in applying the test to assess whether performance obligations are onerous. The Boards tentatively decided that the unit of account for the onerous test should be the contract, specifically the remaining performance obligations in the contract.

Next Steps

At their meetings in March, the Boards will discuss the following topics:

  1. Onerous contracts
     
  2. Determining the transaction price (including variable consideration, collectibility, and the time value of money)
     
  3. Allocating the transaction price
     
  4. Contract fulfillment costs.


Measurement of liabilities with uncertain cash flows. The FASB and the IASB discussed different ways of using estimates of uncertain cash flows as a basis for measurement, but did not attempt to reach any decisions about measurement methods in specific projects.


Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by considering project axioms and assumptions and the discount rate for nonparticipating contracts.

Project Axioms and Assumptions

The Boards tentatively confirmed the axioms and assumptions (listed below) that will underlie the development of the project's future direction. Those axioms and assumptions will provide a common understanding of the factors that will influence the staff in their analysis and will be a starting point for further decisions. In addition, the IASB noted that the model would be developed on the assumption that the financial assets backing the insurance contracts would be measured in accordance with IFRS 9, Financial Instruments. The IASB has no current plans to change the classification and measurement requirements in IFRS 9.

Axioms

  1. An ideal measurement model would report all economic mismatches (including duration mismatches) that exist and would not cause any accounting mismatches.
     
  2. An ideal accounting model should reflect both the intrinsic value and the time value of options and guarantees embedded in insurance contracts.
     
  3. Money has a time value, and an entity more faithfully represents its position when it measures its liabilities in a way that includes the time value of money.

Assumptions

  1. The Boards will develop a standard specifically for insurance contracts, rather than requiring current or proposed generic guidance that might otherwise apply (for example, revenue recognition or financial instruments guidance). That standard would apply to insurance contracts rather than a particular class of entities considered to be an insurance company.
     
  2. The standard will deal with the accounting for insurance contracts from the perspective of the insurer, and not for the assets backing the contracts. For the IASB, the financial assets backing the contracts would be measured in accordance with IFRS 9.
     
  3. The Boards will develop a standard based on an accounting model that regards insurance contracts as creating a bundle of rights and obligations that work together to generate a package of cash inflows and outflows.
     
  4. In general, the final standard will measure insurance contracts at the portfolio level.
     
  5. The accounting model should be based on current estimates, rather than carrying forward estimates made at contract inception and inputs that are consistent with observable market data, where available.
     
  6. The cash flows incorporated in the measurement of the insurance liability are those that will arise as the insurer fulfils the insurance contract.
     
  7. The model will use the expected value of future cash flows rather than a single, most likely outcome.
     
  8. The measurement of the liability will not reflect changes in the insurer's own credit standing.

All IASB and FASB members supported these axioms and assumptions, noting that the axioms and assumptions will be revised if necessary.

Discount Rate for Nonparticipating Contracts

The Boards did not complete their discussion on the discount rate for nonparticipating insurance contracts. The Boards will continue that discussion at a future meeting.



February 18, 2011 FASB/IASB Joint Board Meeting

Insurance contracts.

Discount Rate for Nonparticipating Contracts

The Boards tentatively decided to confirm the approach in the IASB's Exposure Draft, Insurance Contracts, and the FASB's Discussion Paper, Preliminary Views on Insurance Contracts, that the objective of the discount rate is to adjust the future cash flows for the time value of money and to reflect the characteristics of the insurance contract liability.

The Boards tentatively decided not to prescribe a method for determining the discount rate and that the discount rate should:

  1. Be consistent with observable current market prices for instruments with cash flows whose characteristics reflect those of the insurance contract liability, including timing, currency, and liquidity, but excluding the effect of the insurer's nonperformance risk
     
  2. Exclude any factors that influence the observed rates but that are not relevant to the insurance contract liability (for example, risks not present in the liability but present in the instrument for which the market prices are observed, such as any investment risk taken by the insurer that cannot be passed to the policyholder)
     
  3. Reflect only the effect of risks and uncertainties that are not reflected elsewhere in the measurement of the insurance contract liability.

The Boards plan to explore in a future meeting whether a practical expedient should be allowed for determining the discount rate in specific circumstances.

Cash Flows Included in Contract Measurement

The Boards discussed the proposed requirement that an insurer should measure an insurance contract using an explicit, unbiased, and probability weighted estimate (that is, expected value) of the future cash outflows, less future cash inflows that will arise as the insurer fulfils the insurance contract.

In relation to expected value, the Boards tentatively decided to clarify that:

  1. The measurement objective of expected value refers to the mean that considers all relevant information.
     
  2. Not all possible scenarios need to be identified and quantified, provided that the estimate is consistent with the measurement objective of determining the mean.

In relation to costs included in fulfillment cash flows, the Boards tentatively decided:

  1. To clarify that all costs that an insurer will incur directly in fulfilling a portfolio of insurance contracts should be included in the cash flows used to determine the insurance liability, including:
     
    1. Costs that relate directly to the fulfillment of the contracts in the portfolio, such as payments to policyholders, claims handling, etc. (described in paragraph B61 of the Exposure Draft)
       
    2. Costs that are directly attributable to contract activity as part of fulfilling that portfolio of contracts and that can be allocated to those portfolios
       
    3. Such other costs as are specifically chargeable to the policyholder under the terms of the contract
       
  2. To confirm that costs that do not relate directly to the insurance contracts or contract activities should be recognized as expenses in the period in which they are incurred
     
  3. To provide application guidance based on IAS 2, Inventories, and IAS 11, Construction Contracts
     
  4. To eliminate the term incremental from the discussion of fulfillment cash flows that was proposed in the Exposure Draft and the Discussion Paper (that is, paragraph B61 of the Exposure Draft).
Explicit Risk Adjustment

The Exposure Draft proposed to include an explicit risk adjustment in the measurement of an insurance liability. The Discussion Paper did not propose to include an explicit risk adjustment in the measurement of an insurance liability.

The Boards tentatively decided that if there are techniques that could faithfully represent the risk inherent in insurance liabilities, the inclusion of an explicit risk adjustment in the measurement of those liabilities would provide relevant information to users.

The Boards plan to consider in a future meeting: 
  1. How insurers have determined a risk adjustment in practice
     
  2. Whether to recognize an explicit risk adjustment
     
  3. Whether the residual or composite margin should be unlocked in a way that reflects changes in the insurance risk assumed by an insurer.

The Recognition of Gain and Loss at Inception

The Boards tentatively confirmed the proposal in the Exposure Draft and the Discussion Paper that an insurer should not recognize any gain at inception of an insurance contract. The Boards tentatively confirmed the proposal in the Exposure Draft and the Discussion Paper that an insurer should recognize any loss on day one immediately when it occurs, in earnings.

Unlocking the Residual or Composite Margin

The Exposure Draft and the Discussion Paper proposed that the residual or composite margin would be locked in at inception and recognized in earnings over time. The Boards considered whether and how the residual or composite margin might be unlocked.

The Boards were not asked to make any decisions on this topic.

Refresher on Presentation Models

The Boards considered a refresher on the approaches to presentation that were considered when the Exposure Draft and the Discussion Paper were being developed, in order to provide background information for future Board discussion.

The Boards were not asked to make any decisions on this topic.