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.

May 21, 2012 FASB/IASB Joint Board Meeting

Accounting for financial instruments: classification and measurement.

Fair Value through Other Comprehensive Income (FVOCI) Category for Eligible Debt Instruments (IASB-only Discussion)

The IASB discussed whether a FVOCI category for eligible debt instruments should be added to IFRS 9, Financial Instruments (the meaning of eligible debt instruments is discussed further in the following section) and, if so, how the mechanics of this category should work. Refer to IASB’s website for discussion of this topic.

FVOCI and Fair Value through Net Income (FVNI) Business Model Assessment for Financial Assets

The FASB and the IASB discussed the business model assessment for FVOCI and FVNI, including which measurement category should be defined and which should be a residual category.

The Boards tentatively decided that the FVOCI category should be defined, and FVNI should be the residual category.

The Boards tentatively decided that financial assets should be measured at FVOCI if they are eligible debt instruments (that is, they pass the contractual cash flow characteristics assessment) and are managed within a business model whose objective is both to hold the financial assets to collect contractual cash flows and to sell the financial assets. The Boards tentatively decided to provide application guidance on the types of business activities that would qualify for the FVOCI business model.

Reclassification of Financial Assets

The Boards also discussed whether, and in what circumstances, financial assets should be reclassified.

The IASB tentatively decided to extend the existing reclassification requirements in IFRS 9 to the FVOCI category.

The FASB tentatively decided to prospectively require financial assets to be reclassified when (and only when) the business model changes, which should be very infrequent. Changes in business model that require reclassifications must be (1) determined by an entity’s senior management as a result of external or internal changes, (2) significant to an entity’s operations, and (3) demonstrable to external parties. The FASB will discuss at a future meeting whether to account for reclassification of financial assets prospectively as of the first day of an entity’s next reporting period or as of the last date of an entity’s reporting period in which the business model changes.

At a future meeting, the Boards will further consider how to account for reclassifications.


Accounting for financial instruments: impairment. The FASB and the IASB discussed the application of the proposed expected credit loss model to lease receivables.

For lease receivables recognized as a result of the joint leases project, the Boards tentatively decided that an entity could elect either to fully apply the proposed “three-bucket” model or to apply a simplified approach in which those lease receivables would have an impairment allowance measurement objective of lifetime expected credit losses at initial recognition and throughout the lease receivables’ life.

The simplified approach would reduce complexity in practice because an entity would not be required to track credit deterioration through the buckets of the three-bucket model.

The cash flows and the discount rate used in the measurement of the lease receivables would be used as the contractual cash flows and effective interest rate when assessing the lease receivables’ impairment allowance.

To address potential timing differences between the finalization of the proposed leases and impairment standards, the Boards tentatively decided that the same approach described above would apply for lease receivables recognized by a lessor under the existing guidance in IAS 17, Leases, and FASB Accounting Standards Codification® Topic 840, Leases.


Investment companies. The FASB and the IASB discussed the overall approach to providing guidance for determining whether an entity is an investment company and the related implementation guidance.

The Boards decided that an entity would not be required to meet a list of strict criteria to be an investment company. Rather, an entity would be required to meet a definition and also consider additional factors to determine whether it is an investment company. The Boards decided that an entity would consider its purpose and design when making the assessment of whether it is an investment company.

Definition of an Investment Company

FASB Decisions

The FASB decided that the definition of an investment company would be as follows:
  1. An investment company is an entity that does both of the following

    1. Obtains funds from an investor or investors and provides the
      investor(s) with professional investment management services
       
    2. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns from capital appreciation, investment income, or both.
       
  2. An investment company and its affiliates do not obtain, or have the objective of obtaining, returns or benefits from their investments that are either of the following:

    1. Other than capital appreciation or investment income
       
    2. Not available to other noninvestors or are not normally attributable to ownership interests.
The FASB also decided that the concept of managing on a fair value basis as described in the FASB’s Exposure Draft would be a factor that an entity would consider to determine whether it is an investment company. That assessment would consider how the entity manages and evaluates the performance of its investments, how the entity transacts with its investors, and how asset-based fees are calculated to determine whether the entity manages its investments on a fair value basis.

IASB Decisions

The IASB decided that the definition of an investment company would be as follows:
  1. An investment company is an entity that does all of the following:

    1. Obtains funds from an investor or investors and provides the
      investor(s) with professional investment management services
       
    2. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns from capital appreciation or capital appreciation and investment income.
       
    3. Manages and evaluates the performance of substantially all of its investments on a fair value basis.
       
  2. An investment company and its affiliates do not obtain, or have the objective of obtaining, returns or benefits from their investments that are either of the following:

    1. Other than capital appreciation or capital appreciation and investment income
       
    2. Not available to other noninvestors or are not normally attributable to ownership interests.
The IASB also decided that an entity that has more than an insignificant amount of investments that are not managed on a fair value basis or held for investment income only would not be an investment company.

Implementation Guidance

The Boards decided that relevant implementation guidance that was included in the Exposure Drafts would be included in the final guidance issued. The Boards made the following additional decisions regarding implementation guidance:
  1. Transactions between controlled investees would be permitted.
     
  2. An entity can be but does not need to be a legal entity to be an investment company.
     
  3. Investment companies are not required to be set up at the same time to apply the guidance relating to when they are formed in conjunction with each other.
     
  4. An entity is permitted to set up single investor or single investment funds alongside a main fund for various business reasons other than legal, regulatory, or tax reasons provided the funds meet the definition of an investment company.
The IASB made the following additional decisions regarding implementation guidance:
  1. An investment company would be allowed to provide investment-related services to third parties only if those services are not substantive.
     
  2. Involvement in the day-to-day management of investees would not disqualify an entity from investment company status.
     
  3. An investment company would be required to have an exit strategy for substantially all of its investments. The exit strategy assessment would be performed at a portfolio level.
     
  4. In a master-feeder structure when determining whether a feeder fund meets the exit strategy requirement to be an investment company, the master fund would be required to have an exit strategy for substantially all of its investments.
     
  5. An entity is not required to measure its financial liabilities at fair value and manage those financial liabilities on a fair value basis to be an investment company.
In addition, the IASB decided that it would not include guidance regarding consideration of how an entity transacts with its investors and how asset-based fees are calculated in determining whether the entity manages its investments on a fair value basis.

Next Steps

The Boards also discussed whether an entity should consider the number of investments held, the number of investors, whether the investors are related parties, and the concept of ownership interests to be an investment company. The Boards asked the staff to explore further how these factors would interact with the definitions decided by each Board, to be confirmed at a future joint meeting.

The IASB noted that it was important for them to complete redeliberations expeditiously given the effective date of IFRS 10, Consolidated Financial Statements.



May 22, 2012 FASB/IASB Board Meeting

Insurance contracts. The FASB and the IASB continued their discussions on insurance contracts by considering the separation of investment components from the insurance contract, the use of other comprehensive income (OCI), and the accounting for acquisition costs. In addition, the IASB considered its previous decisions on risk adjustment and residual margin.

Separation of Investment Components from the Insurance Contract

The Boards tentatively decided that:
  1.  If the investment component is distinct, an insurer should unbundle the investment component and apply the applicable IFRSs or U.S. GAAP in accounting for the investment component.
     
  2. An investment component is distinct if the investment component and the insurance component are not highly interrelated.
     
  3. Indicators that an investment component is highly interrelated with an insurance component are:
     
    1. A lack of possibility for one of the components to lapse or mature without the other component also lapsing or maturing,
       
    2. If the products are not sold in the same market or jurisdiction, or
       
    3. If the value of the insurance component depends on the value of the investment component or if the value of the investment component depends on the value of the insurance component.
       
  4. An insurer should account for investment components that are not distinct from the insurance contract together with the insurance component under the insurance contracts standard.
The Boards affirmed their previous tentative decisions regarding separation from insurance contracts, as follows:
  1. Embedded derivatives: unbundled when the embedded derivative is not closely related (for the IASB) or clearly and closely related (for the FASB) to the insurance component.
     
  2. Noninsurance goods and services: unbundled when the performance obligation to provide the goods or services is distinct, as previously defined by the Boards.
     
  3. Investment components: exclude from the premium presented in the statement of comprehensive income an amount for an investment component as previously defined by the Boards. The Boards previously tentatively decided this should be the amount the insurer is obligated to pay to policyholders or to their beneficiaries regardless of whether an insured event occurs. The FASB will vote in a future meeting on how to determine the amount excluded from the premium presented in the statement of comprehensive income.
The Boards tentatively decided that insurers should be prohibited from applying revenue recognition or financial instrument standards to components of an insurance contract when unbundling is not required.

Use of Other Comprehensive Income (OCI)

The Boards tentatively decided that an insurer should:
  1. Present in OCI changes in the insurance liability arising from changes in the discount rate. The Boards tentatively decided to require the presentation of those changes in OCI in all cases, subject to a future discussion on the treatment of participating insurance contracts (see below).
     
  2. Not present in OCI changes in the insurance liability arising from changes in interest-sensitive cash flow assumptions.
     
  3. Present in profit or loss interest expense using the discount rate locked in at inception of the insurance contract.
The Boards also tentatively decided:
  1. That the discount rate locked in at inception of the insurance contract should be applied to changes in expected cash flows.
     
  2. Not to include a loss recognition test in their proposed requirements.
The Boards will consider at a future meeting how the above decisions will apply to participating insurance contracts including the interaction with previous tentative decisions for participating insurance contracts.

Acquisition Costs in the Building-Block Approach

The FASB tentatively decided against an approach that would require an insurer to expense the acquisition costs and recognize income equal to, and offsetting, those costs when the acquisition costs are incurred.

At a future meeting, the FASB will consider the following two approaches:
  1. An approach that recognizes the right to recover acquisition costs as an asset.
     
  2. An approach that requires an insurer to recognize a reduction in the margin when the acquisition costs are incurred, with no effect in the statement of comprehensive income. The acquisition costs would be shown net against the single margin and allocated to profit or loss in the same way as the single margin.
The FASB will consider acquisition costs in the premium allocation approach at a future meeting.

The IASB tentatively affirmed that an insurer should include acquisition costs in the cash flows used to determine the margin (and hence the insurance contract liability), rather than account for them as a separate deferred acquisition cost asset.

Risk Adjustment and Residual Margin

The IASB tentatively decided to affirm its previous decisions on the risk adjustment and residual margin, namely that:
  1. The measurement of an insurance contract should include an updated, explicit risk adjustment.
     
  2. Changes in estimates of future cash flows should be offset in the residual margin.
The IASB also decided it would not explore whether other changes in estimates should be offset in the residual margin.

Next Steps

The Boards will continue their discussion on insurance contracts in the week commencing June 11, 2012.


Revenue recognition. The FASB and the IASB considered a summary of the feedback received from outreach activities undertaken between September 2011 and May 2012 and the comment letters on the revised Exposure Draft, Revenue from Contracts with Customers.

These summaries will be posted on the revenue recognition project page on the IASB and FASB websites.

The Boards also approved a project plan for completing their redeliberations on the revenue recognition project and, thereby, finalizing a common revenue standard for entities that apply either IFRSs or U.S. GAAP. No other decisions were made.



May 24, 2012 FASB/IASB Board Meeting

Leases. The FASB and the IASB discussed the feedback received during the April and May 2012 outreach meetings with auditors, preparers, and users of financial statements regarding the lessee accounting model. The outreach discussions had focused on different methods of amortizing the right-of-use asset as well as 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.


Insurance contracts. [See the summary for the May 22, 2012 FASB/IASB Joint Board Meeting.]