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.

March 21, 2011 FASB/IASB Joint Board Meeting

Revenue recognition. The Boards discussed when and how an entity should adjust the promised amount of consideration in a contract to reflect the effects of the time value of money.

The Boards tentatively decided that an entity should adjust the promised amount of consideration to reflect the time value of money if the contract includes a financing component that is significant to that contract. In assessing whether a contract has a significant financing component, an entity should consider various factors, including the following:

  1. Whether the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods or service
     
  2. Whether there is a significant timing difference between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services
     
  3. Whether the interest rate that is explicit or implicit within the contract is significant. 

The Boards also tentatively decided that, as a practical expedient, an entity should not be required to assess whether a contract has a significant financing component if the period between payment by the customer and the transfer of the promised goods or services to the customer is one year or less.


Disclosure: cross-cutting issues. The IASB and the FASB discussed cross-cutting issues on the proposed disclosures in the revenue recognition, leases, and insurance contracts due process documents. The discussion focused on several observations and recommendations for the project teams as they finalize their disclosure requirements.

The Boards agreed to align the wording of the disclosure objectives of each project.

The Boards decided that an entity would be required to present in tabular format any roll forward retained by or added to any of the disclosure requirements of the three projects.


Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by considering the following topics:

  1. Unbundling
     
  2. Objective of the risk adjustment
     
  3. Discount rate for ultra-long duration contracts.

Unbundling

The Boards discussed the objectives for separating insurance contracts into noninsurance components and insurance components. This is referred to as unbundling. The Boards were not asked to make any decisions about the objectives of unbundling.

The Boards affirmed the proposal in the IASB's Exposure Draft, Insurance Contracts, and the FASB's Discussion Paper, Preliminary Views on Insurance Contracts, that an insurer should account separately for embedded derivatives that are contained in a host insurance contract that is not closely related to the embedded derivative.

The Boards will discuss other aspects of unbundling at future meetings.

Objective of the Risk Adjustment

The Boards tentatively decided:

  1. To remove references in the objective of the risk adjustment proposed in paragraph 35 of the Exposure Draft to “the amount the insurer would rationally pay to be relieved of the risk” and to a “maximum amount.” As a result, the objective of the risk adjustment would be “the compensation the insurer requires to bear the risk that the ultimate cash flows could exceed those expected.”
     
  2. To provide application guidance that this amount would reflect both favorable changes and unfavorable changes in the amount and timing of fulfillment cash flows.

The staff will consider how to capture in the application guidance the notion that the risk adjustment reflects the point at which the insurer is indifferent between holding the insurance liability and a similar liability that is not subject to uncertainty.

Discount Rate for Ultra-Long Duration Contracts

The Boards discussed the effects of changes in discount rate where the yield curve is extended beyond observable market prices (that is, ultra-long duration contracts). The Boards indicated that they did not want the staff to develop a separate approach for changes in the discount rate for only this particular type of contract.


Leases. The IASB and the FASB discussed three issues related to initial measurement: inception versus commencement, initial direct costs, and discount rate.

Inception versus Commencement

The Boards discussed the accounting for elements of a lease contract at the date of inception versus the date of commencement from both the lessee’s and lessor’s perspective.

The Boards tentatively decided that the leases standard would:

  1. Require a lessee and a lessor to recognize and initially measure lease assets and lease liabilities (and derecognize any corresponding assets and liabilities) at the date of commencement of the lease.
     
  2. Require a lessee and a lessor to use a discount rate calculated at the date of commencement when initially measuring lease assets and lease liabilities.
     
  3. Include application guidance on the accounting for costs incurred by the lessee before the date of commencement of a lease.
     
  4. Include application guidance on the accounting for lease payments made by the lessee before the date of commencement of a lease.
     
  5. Include application guidance on the accounting for incentives provided by the lessor to the lessee. This would clarify that a lessee will deduct all lease incentives from the initial measurement of the right-of-use asset.

The Boards also discussed the accounting for a lease contract between the date of inception and the date of commencement of a lease when the contract meets the definition of an onerous contract. The IASB affirmed the leases Exposure Draft proposal to exclude from the scope of the leases standard leases between the date of inception and the date of commencement if they meet the definition of an onerous contract. Such leases would be accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, until the date of commencement. The FASB also indicated support for applying Topic 450, Contingencies, to those contracts that meet the definition of an onerous contract before the date of commencement but noted that this issue would be reviewed when the Board considers impairment at a future meeting.

Initial Direct Costs

The Boards discussed the definition of initial direct costs and the accounting by lessees and lessors for initial direct costs.

The Boards tentatively defined initial direct costs as follows:

Costs that are directly attributable to negotiating and arranging a lease that would not have been incurred had the lease transaction not been made.

The Boards affirmed the decision in the leases Exposure Draft that lessees and lessors should capitalize initial direct costs by adding them to the carrying amount of the right-of-use asset and the right to receive lease payments, respectively.

Discount Rate

The Boards discussed how lessees and lessors would determine the discount rate to use to initially measure lease payments at present value.

The Boards tentatively affirmed the proposals in the leases Exposure Draft, but clarified the following:

  1. The lessee would use the rate the lessor charges the lessee when that rate is available; otherwise, the lessee would use its incremental borrowing rate.
     
  2. The lessor would use the rate the lessor charges the lessee.
     
  3. The rate the lessor charges the lessee could be the lessee’s incremental borrowing rate, the rate implicit in the lease, or, for property leases, the yield on the property. When more than one indicator of the rate that the lessor charges the lessee is available, the rate implicit in the lease should be used.

The Boards also tentatively decided to provide application guidance for the determination of the discount rate when considering the use of a group discount rate and determining the yield on property.

Next Steps

The Boards will continue their redeliberations of the leases Exposure Draft in April 2011.



March 22, 2011 FASB/IASB Joint Board Meeting

Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by considering the following topics:

  1. Risk adjustment
     
  2. Contract boundary.

Risk Adjustment

The Boards invited guest speakers to continue the education session from March 15, 2011 on risk adjustments. The purpose of this education session was to give the Boards information on how a risk adjustment is calculated in practice, by using a probability of sufficiency approach (akin to a confidence interval) for financial reporting in Australia and a cost of capital approach to report under Economic Value Management.

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

Contract Boundary

The Boards tentatively decided that:

  1. Contract renewals should be treated as a new contract:
     
    1. When the insurer is no longer required to provide coverage; or
       
    2. When the existing contract does not confer any substantive rights on the policyholder.
       

  2. A contract does not confer on the policyholder any substantive rights when the insurer has the right or the practical ability to reassess the risk of the particular policyholder and, as a result, can set a price that fully reflects that risk.
     
  3. For contracts for which the pricing of the premiums does not include risks relating to future periods, a contract does not confer on the policyholder any substantive rights when the insurer has the right or the practical ability to reassess the risk of the portfolio that the contract belongs to and, as a result, can set a price that fully reflects the risk of that portfolio.
     
  4. All renewal rights should be considered in determining the contract boundary whether arising from a contract, from law, or from regulation.

Accounting for financial instruments: impairment. The IASB and the FASB discussed methods for estimating expected losses and the impairment accounting for purchased debt instruments.

At a previous meeting, the Boards tentatively decided that an entity should use the best available and supportable information at the date of estimation (historical, current, and forecasted) to estimate expected losses. At this meeting, the Boards tentatively decided that expected losses should be estimated with the objective of an expected value. They tentatively decided that the final standard will explain that an expected value identifies possible outcomes (or a representative sample of the possible outcomes), estimates the likelihood of each outcome, and calculates a probability-weighted average.

However, the final standard will acknowledge that other appropriate methods could be used as a reasonable way to achieve the objective of an expected value. An example of a suitable method would be a loss rate method and the use of probabilities of default, loss given default, and exposure at default data. In performing this calculation, an entity must not ignore observations and possibilities that are known. The Boards directed the staff to draft language that will be transparent to constituents to apply this objective.

Regarding purchased debt instruments subject to impairment accounting, the Boards discussed interest revenue recognition and impairment accounting including making comparisons with the accounting proposed for originated instruments. The Boards did not reach a decision on this question and asked the staff to prepare examples for further discussion.

The Boards will discuss these examples at next week’s joint Board meeting.



Leases. The FASB and the IASB discussed separating lease and non-lease components of a contract and sale and leaseback transactions.

Separating Lease and Non-lease Components of a Contract

The Boards tentatively decided that an entity should be required to identify and separately account for the lease and the non-lease components of a contract.

The Boards tentatively decided that in allocating payments in a contract between the lease and non-lease components of the contract:

 

  1. The lessor should allocate payments in accordance with the guidance on revenue recognition.
     
  2. The lessee should allocate payments as follows:
     
    1. If the purchase price of each component is observable, the lessee would allocate the payments on the basis of the relative purchase prices of individual components;
       
    2. If the purchase price of one or more, but not all, of the components is observable, the lessee would allocate the payments on the basis of a residual method; or
       
    3. If there are no observable purchase prices, the lessee would account for all the payments required by the contract as a lease.
The Boards directed the staff to include application guidance on how a lessee should determine what would be an observable price, considering the relevance of guidance in other projects such as revenue recognition.

Sale and Leaseback Transactions

The Boards affirmed the decision in the leases Exposure Draft that when a sale has occurred, the transaction would be accounted for as a sale and then a leaseback. If a sale has not occurred, the entire transaction would be accounted for as a financing.

The Boards tentatively decided that an entity should apply the control criteria described in the revenue recognition project to determine whether a sale has occurred.

The Boards affirmed the decision in the leases Exposure Draft that in a transaction accounted for as a sale and leaseback: 
  1. When the consideration is at fair value, the gains and losses arising from the transaction should be recognized when the sale occurs.
     
  2. When the consideration is not established at fair value, the assets, liabilities, gains and losses recognized should be adjusted to reflect current market rentals.

The Boards affirmed the decision in the leases Exposure Draft that the seller/lessee would adopt the “whole asset” approach in a sale and leaseback transaction. The “whole asset” approach deems that in a sale and leaseback transaction, the seller/lessee sells the entire underlying asset and leases back a right-of-use asset relating to part of the underlying asset.

The Boards tentatively decided that the leases guidance would not prescribe a particular type of lessee accounting model for entities that are accounting for the leaseback part of a sale and leaseback transaction.



March 23, 2011 FASB/IASB Joint Board Meeting

Revenue recognition. The IASB and the FASB discussed collectibility and uncertain consideration.

Collectibility

The Boards discussed how an entity should account for the effects of a customer’s credit risk, and changes in that risk, in a contract with a customer.

The Boards tentatively decided that:

  1. An entity should not reflect the effects of a customer’s credit risk in the measurement of the transaction price and, hence, revenue upon transfer of a good or service to the customer. Consequently, an entity would recognize revenue at the promised amount of consideration (that is, at the stated contract price). That decision is a change from the Boards’ proposals in the Exposure Draft.
     
  2. The final revenue standard should not include a revenue recognition criterion that requires an assessment of the customer’s ability to pay the promised amount of consideration.
     
  3. An entity should recognize an allowance for any expected impairment loss from contracts with customers. The corresponding amounts in profit or loss should be presented as a separate line item adjacent to the revenue line item (as contra revenue).

The Boards will discuss the interaction between the revenue model and the impairment model at a future meeting.

Uncertain Consideration

The Boards discussed how an entity would determine the transaction price and recognize revenue when the promised amount of consideration is uncertain. No decisions were reached.

Next Steps

In April, the Boards will discuss the following topics:

  1. Uncertain consideration
     
  2. Allocation of the transaction price
     
  3. Costs
     
  4. Licenses and rights to use
     
  5. Disclosures
     
  6. Scope.