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.

December 14, 2011 FASB/IASB Joint Board Meeting

Leases. The IASB and the FASB discussed cancellable leases, and revenue recognition and disclosure requirements for lessors with leases of investment property not within the scope of the receivable and residual approach.

Cancellable Leases

The Boards discussed the accounting treatment for leases that (1) are cancellable by both the lessee and lessor with minimal termination payments or (2) include renewal options that must be agreed to by both the lessee and the lessor. The Boards tentatively decided that the lease proposals should be applied only to periods for which enforceable rights and obligations arise. Therefore, such cancellable leases would meet the definition of short-term leases if the initial noncancellable period, together with any notice period, is less than one year. In reaching that decision, the Boards also tentatively decided not to change their previous decisions on the definitions of short-term leases and lease term.

Revenue Recognition for Lessors with Leases of Investment Property

The IASB tentatively decided that, for leases of investment property, a lessor should recognize rental income on a straight-line basis or another systematic basis if that basis is more representative of the pattern in which rentals are earned from the investment property.

The FASB tentatively decided that, for leases of investment property, a lessor that is not an investment property entity or investment company should recognize rental income on a straight-line basis or another systematic basis if that basis is more representative of the pattern in which rentals are earned from the investment property.

The Boards also tentatively decided that a lessor with leases of investment property not within the scope of the receivable and residual approach should recognize only the underlying investment property on its statement of financial position (as well as any accrued or prepaid rental income).

Disclosure Requirements for Lessors with Leases of Investment Property

The Boards discussed the disclosure requirements for lessors with leases of investment property not within the scope of the receivable and residual approach. The Boards tentatively decided to require disclosure of the following:
  1. A maturity analysis of the undiscounted future noncancellable lease payments. The maturity analysis should show, at a minimum, the undiscounted cash flows to be received in each of the first five years after the reporting date and a total of the amounts in the years thereafter. That maturity analysis would be separate from the maturity analysis of the payments related to the right to receive lease payments under the receivable and residual approach.
     
  2. Both minimum contractual lease income and variable lease payment income within the table of lease income.
     
  3. The cost and carrying amount of property on lease or held for leasing by major classes of property according to nature or function, and the amount of accumulated depreciation in total.
     
  4. Information about leases that are not within the scope of the receivable and residual approach consistent with paragraph 73 of the 2010 Exposure Draft, updated for decisions the Boards have reached to date. That information would include the following:
     
    1. A general description of those lease arrangements
       
    2. Information about the basis and terms on which variable lease payments are determined
       
    3. Information about the existence and terms of options, including for renewal and termination
       
    4. A qualitative description of purchase options, including information about the percentage of assets subject to such agreements
       
    5. Any restrictions imposed by lease arrangements.

Accounting for financial instruments: impairment. The IASB and the FASB discussed the “three-bucket” impairment model being developed, most notably the measurement of the allowance balance in Bucket 1, the transfer principle out of Bucket 1 (that is, when a financial asset would qualify for recognition of lifetime expected losses), a few pervasive issues, and the application of the model to loans and publicly traded debt instruments (for example, debt securities).

Bucket 1

The Boards had previously decided that all financial assets would begin in Bucket 1. At this meeting, the Boards decided that the objective and measurement in Bucket 1 would be to capture the losses on financial assets expected in the next twelve months. The losses being measured are not just the cash shortfalls over the next twelve months; rather, they are the lifetime expected losses on the portion of financial assets on which a loss event is expected over the next twelve months. The losses expected to occur in the next twelve months will be determined using all reasonable and supportable information, including forward-looking data, which will reflect updated estimates as expectations change.

Recognition of Lifetime Losses

The Boards had previously decided that financial assets would move out of Bucket 1 based on deterioration in credit quality, and that lifetime expected losses would be recognized for financial assets in Bucket 2 and Bucket 3. At this meeting, the Boards decided that recognition of lifetime losses would be appropriate (that is, financial assets would move out of Bucket 1) when there has been a more than insignificant deterioration in credit quality since initial recognition and the likelihood of default is such that it is at least reasonably possible that the contractual cash flows may not be recoverable. The Boards asked the staff to develop examples to illustrate that the “reasonably possible” criterion differs from how it may currently be interpreted in GAAP (particularly in the U.S.), and primarily refers to when the likelihood of cash shortfalls begins to increase at an accelerated rate as an asset deteriorates.

Regarding the recognition of lifetime expected losses, the Boards also decided that the assessment of whether recognition of lifetime expected credit losses is required should be based on the likelihood of not collecting all the cash flows as opposed to incorporating the “loss given default” in the assessment.

In addition, the Boards decided to include within the model indicators (including those presented at the meeting) for when the recognition of lifetime expected losses may be appropriate.

Pervasive Issues—Grouping of Assets

The Boards decided that the following principles should be utilized for aggregating financial assets into groups for purposes of evaluating whether transfer out of Bucket 1 is appropriate:
  1. Assets are to be grouped on the basis of “shared risk characteristics.”
     
  2. An entity may not group financial assets at a more aggregated level if there are shared risk characteristics for a subgroup that would indicate whether recognition of lifetime losses is appropriate.
     
  3. If a financial asset cannot be included in a group because the entity does not have a group of similar assets, or if a financial asset is individually significant, an entity is required to evaluate that asset individually.
     
  4. If a financial asset shares risk characteristics with other assets held by the entity, an entity is permitted to evaluate those assets individually or within a group of financial assets with shared risk characteristics.
Pervasive Issues—Bucket 2 and Bucket 3

The Boards discussed the difference between Bucket 2 and Bucket 3. The Boards decided that the difference between the two buckets would be based on the unit of evaluation. Bucket 2 will contain financial assets evaluated on a group basis, while Bucket 3 will contain financial assets evaluated on an individual basis.

Application of the Credit Deterioration Model to Publicly Traded Debt Instruments (for example, Debt Securities) and Loans

In applying the credit deterioration model to debt securities, the Boards decided against a bright-line presumption resulting in recognition of lifetime expected losses (for example, when the fair value of a security is less than a specified percentage of the amortized cost basis for some specified time period). In applying the credit deterioration model to commercial and consumer loans, the Boards decided against a presumption resulting in recognition of lifetime expected losses based on an explicit bright line (for example, reaching a particular delinquency status).

Next Steps

The Boards directed the staff to consider whether application of the principle for recognition of lifetime expected losses and the indicators could be applied to financial assets that may improve in credit quality such that a move from Bucket 2 to Bucket 1 would be appropriate (that is, whether the model would be symmetrical). The Boards also directed the staff to further analyze the practical application of the expected value objective.


December 15, 2011 FASB/IASB Joint Board Meeting

Accounting for financial instruments: impairment. [See the summary for the December 14, 2011 FASB/IASB Joint Board Meeting.]


Insurance contracts. The IASB and the FASB continued their discussions on the following topics relating to insurance contracts: participating contracts, discounting of the liability for claims incurred, unit of account, and onerous contracts.

Participating Contracts

The FASB reported to the IASB their November 30 discussions about the measurement of the obligation from any nondiscretionary performance-linked participating features that both (1) contractually depend wholly or partly on the performance of other assets or liabilities of the insurer, or the performance of the insurer itself, and (2) are a component of an insurance contract's obligations. For those contracts, some or all of the cash flows to policyholders depend on cash flows generated by the underlying item. An underlying item is defined as the asset or liability (or group of assets or liabilities) on which the cash flows resulting from the participation feature depend.

Both the IASB and the FASB noted that their previous tentative decision meant they would measure the obligation for the performance-linked participation feature in a way that reflects how those underlying items are measured in U.S. GAAP/IFRS financial statements. That could be achieved by two methods, both of which lead to the same measurement:
  1. Eliminating from the building-block approach changes in value not reflected in the measurement of the underlying items; or
     
  2. Adjusting the insurer's current liability (that is, the contractual obligation incurred to date) to eliminate accounting mismatches that reflect timing differences (between the current liability and the measurement of the underlying items in the U.S. GAAP/IFRS statement of financial position) that are expected to reverse within the boundary of the insurance contract.
The Boards tentatively:
  1. Confirmed that options and guarantees embedded in insurance contracts that are not separately accounted for as derivatives when applying the financial instrument requirements should be measured within the overall insurance contract obligation, using a current, market-consistent, expected value approach.
     
  2. Agreed that, when an insurer measures an obligation, which was created by an insurance contract liability, that requires payment depending wholly or partly on the performance of specified assets and liabilities of the insurer, that measurement should include all such payments that result from that contract, whether paid to current or future policyholders.
Discounting of the Liability for Claims Incurred

The Boards tentatively confirmed their earlier decision to require insurers to discount the liability for incurred claims (for contracts accounted for using the premium allocation approach) when the effects of discounting would be material. In addition, for contracts accounted for using the premium allocation approach, the Boards tentatively decided not to provide additional guidance on determining when the effect of discounting the liability for incurred claims would be material. However, the Boards tentatively decided to provide a practical expedient that would permit insurers not to discount portfolios where the incurred claims are expected to be paid within 12 months of the insured event, unless facts and circumstances indicate that payments will no longer occur within 12 months.

Unit of Account

The IASB noted that the objective of the risk adjustment is to reflect the compensation the insurer requires for bearing the uncertainty inherent in the cash flows of a portfolio that arise as the insurer fulfills the contract. The IASB tentatively decided that it would not specify further guidance on the unit of account for the risk adjustment.

The IASB and the FASB also discussed the definition of a portfolio and the unit of account that should be used to determine and allocate the residual/single margin. No decision was made.

Onerous Contracts

The Boards tentatively decided that:
  1. An insurance contract is onerous if the expected present value of the future cash outflows from that contract [plus, for the IASB, the risk adjustment] exceeds:
     
    1. The expected present value of the future cash inflows from that contract (for the pre-coverage period)
       
    2. The carrying amount of the liability for the remaining coverage (for the premium allocation approach).
       
  2. Insurers should perform an onerous contract test when facts and circumstances indicate that the contract might be onerous. The Boards also tentatively decided that they would provide application guidance about the facts and circumstances that could indicate that a contract is onerous.
     
  3. Onerous contracts identified in the pre-coverage period should be measured on a basis that is consistent with the measurement of the liability recognized at the start of the coverage period. Similarly, onerous contracts identified under the premium allocation approach should be measured on a basis that is consistent with the measurement of the liability for claims incurred. The Boards noted that these decisions require further consideration in view of the Boards' tentative decision to introduce a practical expedient that would permit insurers not to discount claims incurred that are expected to be paid within 12 months of the insured event.
Next Steps

Both Boards will continue their discussion on insurance contracts in January 2012.


December 16, 2011 FASB/IASB Joint Board Meeting

Insurance contracts. [See the summary for the December 15, 2011 FASB/IASB Joint Board Meeting.]