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 27, 2012 FASB/IASB Joint Board Meeting

Insurance contracts. The IASB and the FASB continued their discussions on the insurance contracts project by considering the following topics: eligibility criteria and mechanics for the premium allocation approach; measurement of liabilities for infrequent, high-severity events; onerous contracts; unbundling goods and services components; and financial instruments with discretionary participation features.

Eligibility Criteria for the Premium Allocation Approach

The IASB tentatively decided that:
  1. Contracts should be eligible for the premium allocation approach if that approach would produce measurements that are a reasonable approximation to those that would be produced by the building-block approach.
     
  2. A contract should be deemed to meet the condition in (1) without further work if the coverage period is one year or less.
     
  3. To provide application guidance that contracts would not produce measurements that are a reasonable approximation to those that would be produced by the building-block approach if, at the contract inception date:
     
    1. It is likely that, during the period before a claim is incurred, there will be a significant change in the expectations of net cash flows required to fulfill the contract; or
       
    2. Significant judgment is required to allocate the premium to the insurer's performance obligations for each reporting period. This may be the case if, for example, significant uncertainty exists about:
       
      1. The premium that would reflect the exposure and risk that the insurer has for each reporting period; or
         
      2. The length of the coverage period.
         
    3. The IASB noted that it would review whether it will need to update these criteria after its future discussions on the building-block approach.
       
  4. An insurer should be permitted but not required to apply the premium allocation approach to contracts that are eligible for that approach.
The FASB tentatively decided that:
  1. Insurers should apply the building-block approach rather than the premium allocation approach if, at the contract inception date, either of the following conditions is met:
     
    1. It is likely that, during the period before a claim is incurred, there will be a significant change in the expectations of net cash flows required to fulfill the contract; or
       
    2. Significant judgment is required to allocate the premium to the insurer's obligation to each reporting period. This may be the case if, for example, significant uncertainty exists about:
       
      1. The premium that would reflect the exposure and risk that the insurer has for each reporting period; or
         
      2. The length of the coverage period.
         
  2. A contract should fall within the scope of the premium allocation approach without further evaluation if the coverage period is one year or less.
     
  3. The premium allocation approach should be required for contracts that qualify for that approach.
Mechanics for the Premium Allocation Approach

The Boards tentatively decided that discounting and interest accretion to reflect the time value of money should be required in measuring the liability for remaining coverage for contracts that have a significant financing component, as defined according to the characteristics of a significant financing component under the revenue recognition proposals. However, as a practical expedient, insurers need not apply discounting or interest accretion in measuring the liability for remaining coverage if the insurer expects at contract inception that the period of time between payment by the policyholder of all or substantially all of the premium and the satisfaction of the insurer's corresponding obligation to provide insurance coverage will be one year or less.

The Boards also tentatively decided that:
  1. The measurement of acquisition costs should include directly attributable costs (for the FASB, limited to successful acquisition efforts only); this is consistent with the decision made for the building-block approach.
     
  2. Insurers should be permitted to recognize all acquisition costs as an expense if the contract coverage period is one year or less.
The Boards also agreed to explore an approach in which acquisition costs would be netted against the single/residual margin applying the building-block approach, and netted against the liability for remaining coverage applying the premium allocation approach. That amount could be separately presented from the present value of expected cash flows (plus a risk margin, for the IASB).

Measurement of Liabilities for Infrequent, High-Severity Events

The Boards tentatively confirmed that insurers should measure both an insurance contract liability by applying the building-block approach and an onerous contract liability by applying the premium allocation approach, taking into account estimates of expected cash flows at the balance sheet date.

The Boards tentatively decided to provide application guidance to clarify that an insured event (for example an infrequent, high-severity event such as a hurricane) that was impending at the end of the reporting period does not constitute evidence of a condition that existed at the end of the reporting period when it occurs or does not occur after that date. Consequently, such an event is a non-adjusting event, to which IAS 10, Events after the Reporting Period, applies, and a non-recognized event to which FASB Accounting Standards Codification® Topic 855, Subsequent Events, applies.

Onerous Contracts

The Boards tentatively decided that the measurement of the liability for onerous contracts should be updated at the end of each reporting period.

The IASB tentatively decided that risk adjustment should be considered when identifying onerous contracts and that the measurement of an onerous contract liability should include a risk adjustment.

The Boards tentatively decided that if an insurer elects not to discount the liability for incurred claims that are expected to be paid within 12 months, the insurer should use an undiscounted basis in identifying whether contracts are onerous and in measuring the liability for onerous contracts.

Unbundling Goods and Services Components

The Boards tentatively decided on the following criteria for unbundling goods and services:
  1. An insurer shall identify whether any promises to provide goods or services in an insurance contract would be performance obligations as defined in the Exposure Draft, Revenue from Contracts with Customers. If a performance obligation to provide goods or services is distinct, an insurer shall apply the applicable IFRSs or U.S. GAAP in accounting for that performance obligation.
     
  2. A performance obligation is a promise in a contract with a policyholder to transfer a good or service to the policyholder. Performance obligations include promises that are implied by an insurer's customary business practices, published policies, or specific statements if those promises create a valid expectation by the policyholder that the insurer will transfer a good or service. Performance obligations do not include activities that an insurer must undertake to fulfill a contract unless the insurer transfers a good or service to a policyholder as those activities occur. For example, an insurer may need to perform various administrative tasks to set up a contract. The performance of those tasks does not transfer a service to the policyholder as the services are performed. Hence, those promised setup activities are not a performance obligation.
     
  3. Except as specified in the following paragraph, a good or service is distinct if either of the following criteria is met:
     
    1. The insurer regularly sells the good or service separately.
       
    2. The policyholder can benefit from the good or service either on its own or together with other resources that are readily available to the policyholder. Readily available resources are goods or services that are sold separately (by the insurer or another entity), or resources that the policyholder has already obtained (from the insurer or from other transactions or events).
       
  4. Notwithstanding the requirements in the previous paragraph, a good or service in an insurance contract is not distinct and the insurer shall therefore account for the good or service together with the insurance component under the insurance contracts standard if both of the following criteria are met:
     
    1. The good or service is highly interrelated with the insurance component and transferring them to the policyholder requires the insurer also to provide a significant service of integrating the good or service into the combined insurance contract that the insurer has entered into with the policyholder.
       
    2. The good or service is significantly modified or customized in order to fulfill the contract.
Financial Instruments with Discretionary Participation Features

The IASB considered the applicable standard for financial instruments that are not insurance contracts but that have discretionary participation features similar to those found in many insurance contracts. The discussion was not held jointly with the FASB because of the different considerations for the Boards.

The IASB tentatively decided that the forthcoming insurance contracts standard should apply to financial instruments with discretionary participation features that are issued by insurers. It should not apply to any financial instruments issued by entities other than insurers.

Next Steps

The FASB intends to discuss the applicable standard for financial instruments with discretionary participation features at its meeting on March 7, 2012. Both Boards will continue their discussion on insurance contracts in March 2012.


February 28, 2012 FASB/IASB Joint Board Meeting

Accounting for financial instruments: impairment. In continuing to develop the "three-bucket” impairment model, the FASB and the IASB discussed whether financial assets categorized in Bucket 2 or Bucket 3 (either by deterioration or, in the case of purchased financial assets with an explicit expectation of loss, upon acquisition) would be required to be subsequently transferred to Bucket 1, and, if so, under which circumstances. That is, the Boards discussed whether the measurement of financial assets’ expected credit losses should subsequently change from a lifetime expected loss (for financial assets in Bucket 2 or Bucket 3) to a 12 months’ expected loss (for financial assets in Bucket 1). In addition, the Boards discussed how the impairment model would be applied to trade receivables.

Direction of Movement between Buckets

Purchased Financial Assets with an Explicit Expectation of Loss

The Boards tentatively decided that purchased financial assets with an explicit expectation of loss would always be categorized outside Bucket 1, even if there are improvements in credit quality after purchase. As a result, the impairment allowance for such assets would always be based on changes in lifetime expected credit losses since initial recognition.

Originated and Other Purchased Financial Assets

The scope of this part of the discussion included financial assets other than (1) purchased financial assets with an explicit expectation of loss, (2) trade receivables that use lifetime expected credit losses as the impairment measure upon initial recognition, and (3) restructured debt.

The Boards tentatively decided that these financial assets would subsequently transfer to Bucket 1 (after previously deteriorating and transferring to Bucket 2 or Bucket 3) if the initial transfer notion from Bucket 1 is no longer met.

Trade Receivables

In this session, the Boards discussed whether an incurred loss impairment approach or an expected loss impairment approach should apply to trade receivables. Furthermore, they discussed whether, if an expected loss impairment approach were to be used, the “three bucket” model or a simplified approach should be applied.

The scope of the discussion was limited to trade receivables with (and without) a significant financing component that result from revenue transactions within the scope of Proposed Accounting Standards Update, Revenue Recognition (Topic 605): Revenue from Contracts with Customers (the Revenue Exposure Draft).

Trade Receivables without a Significant Financing Component

The Boards asked the staff to further analyze whether an incurred loss impairment model or an expected loss impairment model should be applied to trade receivables without a significant financing component, in particular to assess the change in practice necessary to apply an expected loss impairment model.

Subject to that decision, the Boards discussed how an expected loss approach would be applied to trade receivables without a significant financing component. In particular, the Boards discussed whether the “three-bucket” model or a simplified approach should be applied. This discussion was not joint because of the different initial measurement requirements for financial instruments in accordance with IFRSs and those in accordance with U.S. GAAP—nevertheless, the Boards’ decisions (as outlined below) were consistent.

The IASB tentatively decided that a simplified form of the “three-bucket” model would be applied. The approach for trade receivables accounted for as not having a significant financing component in accordance with the Revenue Exposure Draft would be twofold (affecting both initial measurement of the receivable and the general “three-bucket” model):
  1. The receivable would be measured at the transaction price as defined in the Revenue Exposure Draft (that is, the invoice amount in many cases) on initial recognition in IFRS 9, Financial Instruments.
     
  2. Those receivables would be included in Bucket 2 or Bucket 3 on initial recognition, thus recognizing lifetime expected losses on initial recognition and throughout the life of the asset.
If an expected loss impairment model were to be applied, the FASB tentatively decided that the credit impairment measurement objective for all trade receivables that do not have a significant financing component would be lifetime expected losses throughout their life.

Trade Receivables with a Significant Financing Component

The Boards tentatively decided that an expected loss impairment model would be applied to trade receivables with a significant financing component.

The Boards tentatively decided that an entity could apply a policy election either to fully apply the “three-bucket” impairment model to trade receivables accounted for as having a significant financing component or to apply a simplified model in which those trade receivables would have an allowance measurement objective of lifetime expected credit losses at initial recognition and throughout the trade receivables’ life. The simplified model provides relief because an entity would not be required to track credit deterioration through the buckets of the “three-bucket” model for disclosure purposes.


Accounting for financial instruments: classification and measurement. The FASB and the IASB discussed the cash flow characteristics assessment and held an informational session on the business model assessment in their respective classification and measurement models for financial instruments.

Cash Flow Characteristics Assessment

Solely Principal and Interest

The Boards tentatively decided that a financial asset could be eligible for a measurement category other than fair value through profit or loss (FVPL) (depending on the business model within which it is held) if the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (P&I). Interest is consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time. Principal is understood as the amount transferred by the holder on initial recognition.
  1. If the financial asset contains a component other than principal and the consideration for the time value of money and the credit risk of the instrument, the financial asset must be measured at FVPL.
     
  2. If the financial asset only contains components that are principal and the consideration for the time value of money and the credit risk of the instrument but the relationship between them is modified (for example, the interest rate is reset and the frequency of reset does not match the tenor of the interest rate), an entity must consider the effect of the modification when assessing whether the cash flows on the financial asset are still consistent with the notion of solely P&I.
     
  3. If the financial asset only contains components that are principal and the consideration for the time value of money and the credit risk of the instrument and the relationship between them is not modified, the financial asset could be eligible for a measurement category other than FVPL (depending on the business model within which it is held).
For the IASB, this is a minor amendment to the application guidance in IFRS 9, Financial Instruments. For the FASB, this is an amendment to the cash flow characteristics assessment in the tentative classification and measurement model.

Contingent Cash Flows

The Boards tentatively decided that a contractual term that changes the timing or amount of payments of principal and interest would not preclude the financial asset from a measurement category other than FVPL as long as any variability only reflects changes in the time value of money and the credit risk of the instrument.

In addition, the Boards tentatively decided that the probability of contingent cash flows that are not solely P&I should not be considered. Financial assets that contain contingent cash flows that are not solely P&I must be measured at FVPL. An exception, however, will be made for extremely rare scenarios.

For the IASB, this does not represent a change to IFRS 9. For the FASB, the guidance will be included as part of the contractual cash flow characteristics assessment.

Assessment of Economic Relationship between P&I

The Boards tentatively decided that an entity would need to compare the financial asset under assessment to a benchmark instrument that contains cash flows that are solely P&I to assess the effect of the modification in the economic relationship between P&I. An appropriate benchmark instrument would be a contract of the same credit quality and with the same terms, except for the contractual term under evaluation.

The Boards tentatively decided that if the difference between the cash flows of the benchmark instrument and the instrument under assessment is more than insignificant, the instrument must be measured at FVPL because its contractual cash flows are not solely P&I.

For the IASB, this is a minor amendment to the application guidance in IFRS 9. However, the IASB believes that this change will address application issues that have arisen in the application of IFRS 9. For the FASB, the guidance will be included as part of the contractual cash flow characteristics assessment.

Prepayment and Extension Options

The Boards tentatively decided that a prepayment or extension option, including those that are contingent, does not preclude a financial asset from a measurement category other than FVPL as long as these features are consistent with the notions of solely P&I.

For the IASB, this does not represent a change to IFRS 9. For the FASB, the guidance will be included as part of the contractual cash flow characteristics assessment.

Business Model Assessment

In an informational session, the FASB and the IASB discussed the business model assessment in their respective classification and measurement models for financial instruments. No decisions were made.

At a future meeting, the Boards will discuss whether and how they may be able to reduce differences between their business model assessments.


Leases. The FASB and the IASB discussed lessee accounting and, in particular, different methods of amortizing the right-of-use asset. They also discussed any consequences that a change to the lessee accounting model would have on the tentative decisions for lessor accounting. The Boards were not asked to make any decisions.

More specifically, the Boards discussed the following two approaches to amortizing the right-of-use asset:
  1. The underlying asset approach described in agenda paper 2C/227. Under this approach, the lessee would amortize the right-of-use asset based on the estimated consumption of the underlying leased asset over the lease term. Consequently, the higher the consumption rate, the more the income statement effects would resemble those that would arise from purchasing the underlying asset and financing it separately. The lower the rate of consumption, the more the income statement effects would resemble the rental expense pattern under current operating lease accounting. Although the Boards did not make any formal decision, the IASB indicated an initial leaning toward this approach, if it is confirmed that it is operational and decision useful.
     
  2. The interest-based amortization approach described in agenda paper 2C/227. Under this approach, the lessee would amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of expected future economic benefits (consistent with the 2010 Leases Exposure Draft) for those leases for which substantially all of the risks and rewards of the underlying leased asset have been transferred to the lessee. For leases that do not transfer substantially all of the risks and rewards of the underlying leased asset, the lessee would use an amortization approach that would result in recognizing total lease expense in a pattern that would typically resemble the rental expense pattern under current operating lease accounting. Although the Boards did not make any formal decision, the FASB indicated an initial leaning toward this approach.
The Boards directed the staff to undertake further outreach and research on those two approaches before they reach a tentative decision on which approach to propose in the reexposure document.


February 29, 2012 FASB/IASB Joint Board Meeting

Leases. [See the summary for the February 28, 2012 FASB/IASB Joint Board Meeting.]