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.

April 17, 2012 FASB/IASB Joint Board Meeting

Investment companies.The IASB and the FASB discussed summaries of the feedback received on the IASB exposure draft, Investment Entities, and the FASB Proposed Accounting Standards Update, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The meeting was educational in nature, and the Boards were not asked to make any decisions.


Accounting for financial instruments: classification and measurement. The IASB and the FASB discussed the business model assessment for classifying financial assets at amortized cost and bifurcation of financial assets and financial liabilities.

Business Model Assessment for Amortized Cost Classification for Financial Assets

The Boards tentatively decided that financial assets would qualify for amortized cost if the assets are held within a business model whose objective is to hold the assets in order to collect contractual cash flows. The Boards tentatively decided to clarify the primary objective of hold to collect by providing additional implementation guidance on the types of business activities and the frequency and nature of sales that would prohibit financial assets from qualifying for amortized cost measurement.

Bifurcation of Financial Assets and Financial Liabilities

The Boards tentatively decided that financial assets that contain cash flows that are not solely principal and interest would not be eligible for bifurcation. Rather, they would be classified and measured in their entirety at fair value through net income. The Boards tentatively decided that financial liabilities would be bifurcated using the existing bifurcation requirements in IFRS 9, Financial Instruments, and U.S. GAAP. The IASB also affirmed that the “own credit” guidance in IFRS 9 would be retained. The FASB will discuss “own credit” presentation requirements at a future FASB-only meeting.



April 18, 2012 FASB/IASB Joint Board Meeting

Accounting for financial instruments: impairment. The IASB and the FASB clarified the attributes of an expected credit loss estimate to address concerns raised about the use of the term expected value.

The Boards clarified that an estimate of expected credit losses should reflect the following:
  1. All reasonable and supportable information considered relevant in making the forward-looking estimate
     
  2. A range of possible outcomes and the likelihood and reasonableness of those outcomes (that is, it is not merely an estimate of the “most likely outcome”)
     
  3. The time value of money.
The Boards clarified that an entity should consider information that is reasonably available without undue cost and effort in estimating expected credit losses.

The Boards clarified that the Bucket 1 measurement approach would be explained as “expected losses for those financial assets on which a loss event is expected in the next 12 months.”

In further explaining the Bucket 1 approach, the Boards also indicated that:
  1. Expected losses are all cash shortfalls expected over the lifetime (that is, the full loss content) that are associated with the likelihood of a loss event in the next 12 months; that is, the losses being measured are not only the cash shortfalls over the next 12 months.
     
  2. Estimating lifetime losses should not require a detailed estimate for periods far in the future, but the degree of detail necessary in forecasting estimated losses decreases as the forecast period increases.
     
  3. Various approaches can be used to estimate the expected losses, including approaches that do not include an explicit “12-month probability of a loss event” as an input.
Trade Receivables

In February 2012 and at this meeting, the Boards discussed whether an expected credit loss model should be applied to trade receivables without a significant financing component, as defined in Proposed Accounting Standards Update, Revenue Recognition (Topic 605): Revenue from Contracts with Customers. In February, subject to deciding whether an expected loss model should be applied to these trade receivables, the Boards had tentatively decided how an expected loss approach would be applied. In February, they also requested that the staff evaluate whether an expected loss model would be operational for those trade receivables, which was the basis for the discussions at this meeting. On the basis of both discussions, the Boards tentatively agreed that an expected loss model should be applied to trade receivables without a significant financing component, including a practical expedient that a provision matrix can be used.

Next Steps

The Boards asked the staff for an update on the project, including what topics still needed to be addressed jointly. The staff noted that, with the decisions reached at this meeting, the general framework of the model was now complete. However, the staff will prepare joint papers for discussions related to off-balance-sheet items, disclosures, transition, and any follow-on issues resulting from future decisions in the classification and measurement project. Each Board may have separate issues to individually consider in order to address their respective constituents’ needs.


Insurance contracts. The IASB and the FASB continued their discussions on insurance contracts by considering reinsurance and issues related to policy loans and contract modifications (including riders).

Reinsurance

The Boards tentatively decided that:
  1. For retroactive reinsurance contracts, the residual or single margin included in a cedant's reinsurance recoverable and a reinsurer's insurance contract liability should be amortized over the remaining settlement period in the same manner as the release of the single/residual margin, that is, in line with the pattern of services (for the IASB) or release from risk (for the FASB).
     
  2. An insurer should treat cash flows resulting from contractual features affecting the amount of premiums and ceding commissions that are contingent on claims or benefits experience (often referred to as “loss sensitive features”) as part of the claims and benefits cash flows (rather than as part of the premiums) if they are not accounted for as investment components. An insurer should treat any premium adjustments that are not loss sensitive in the same way as other changes in estimates of premiums arising from the contract. Any features that provide cedants with a unilateral right (but not an obligation) to pay a premium and reinstate a reinsurance contract should not be considered to be loss sensitive features for purpose of applying this guidance.
The IASB tentatively decided that both the cedant and the reinsurer should evaluate whether to account for the reinsurance contract using the building-block approach or the premium allocation approach in the same manner in which an insurer should evaluate a direct insurance contract. In other words, the premium allocation approach would be permitted if it would produce measurements that are a reasonable proxy to those that are produced by the building-block approach.

The FASB tentatively decided that:
  1. A reinsurer should evaluate whether to account for the reinsurance contract under the building-block approach or premium allocation approach in the same manner in which an insurer should evaluate a direct insurance contract. In another words, an insurer 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 the 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.
       
  2. A cedant should account for a reinsurance contract using the same approach (building-block approach or premium allocation approach) that the cedant uses to account for the underlying direct insurance contracts. Reinsurance contracts that reinsure both insurance contracts measured using the building-block approach and insurance contracts measured using the premium allocation approach should be separated on the basis of the underlying contract measurement model, with each component being accounted for using the same approach used to account for the underlying direct insurance contracts.
Policy Loans and Contract Modifications (including Riders)

The Boards tentatively decided that in applying the general decisions on unbundling and disaggregation, policy loans should be considered in determining the amount of the investment component to which they relate. The Boards noted they would consider disclosures about the amount of policy loans taken out at a future meeting.

The Boards also tentatively decided that:
  1. An insurer should account for contract modifications (including riders) that are part of the insurance contract at inception as part of the contractual terms of the contract. Thus, the general decisions on unbundling and disaggregation should apply to riders.
     
  2. An insurer should derecognize an existing contract and recognize a new contract (under the applicable guidance for the new contract) if it amends the contract in a way that would have resulted in a different assessment of either of the following items had the amended terms been in place at the inception of the contract:
     
    1. Whether the contract is within the scope of the insurance contract standard; or
       
    2. Whether to use the premium allocation approach or the building-block approach to account for the insurance contract.
       
  3. In addition, the IASB tentatively decided that an insurer should derecognize an existing contract and recognize a new contract if it amends the contract in a way that would have resulted in the contract being included in a different portfolio than the one in which it was included in at initial recognition. The FASB plans to consider which additional circumstances will result in derecognition and whether there needs to be application guidance.
     
  4. When an insurer makes a substantial modification to an insurance contract, the gain or loss on extinguishment of the original contract should be determined by measuring the existing insurance contract using the current entity-specific price that the insurer would hypothetically charge the policyholder for a contract equivalent to the newly recognized insurance contract.
     
  5. An insurer should account for nonsubstantial modifications as follows:
     
    1. If the modification eliminates the insurer's obligation to provide some of the benefits that the contract would previously have required it to provide, the insurer should derecognize that portion of its obligation (including any related portion of the residual/single margin).
       
    2. If the modification entitles the policyholder to further benefits, the insurer should treat the modification as if the amendment was a new standalone contract (for example, the margin is determined in the same way as for a new standalone contract with no effect on the measurement of the original contract).
       
  6. A reinsurer and a cedant should present any gains or losses on commutations as an adjustment to claims or benefits and should not gross up the premiums, claims, or benefits in recognizing the transaction on the statement of comprehensive income. The Boards noted that they would consider disclosures about commutations at a future meeting.
Next Steps

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



April 19, 2012 FASB/IASB Joint Board Meeting

Insurance contracts. [See the summary for the April 18, 2012 FASB/IASB Joint Board Meeting.]