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.

June 12, 2012 FASB/IASB Joint Board Meeting

Insurance contracts. The FASB and the IASB continued their discussions on insurance contracts by exploring a method of measuring earned premiums for presentation in the statement of comprehensive income and considering how to attribute cash flows to the unbundled components of bundled insurance contracts in order to measure those unbundled components.

Method of Measuring Earned Premiums

The Boards discussed an approach to derive a measure of earned premiums. The Boards agreed to explore further the usefulness of the information and the extent of any operational difficulties. In particular, the Boards would seek feedback from users and preparers. No decisions were made at this meeting.

How to Attribute Cash Flows to Unbundled Components

The Boards tentatively decided that:
  1. An insurer should attribute cash flows to an investment component and to an embedded derivative on a standalone basis. This means that an insurer would measure an investment component or embedded derivative as if it had issued that item as a separate contract. The insurer would thus not include the effect of any cross-subsidies or discounts/supplements in the investment component.
     
  2. After excluding the cash flows related to unbundled investment components and embedded derivatives:
     
    1. The amount of consideration and discounts/supplements should be attributed to the insurance component and/or service component in accordance with proposals in paragraphs 70-80 of the Exposure Draft, Revenue from Contracts with Customers.
       
    2. Cash outflows (including expenses and acquisition costs) that relate directly to one component should be attributed to that component. Cash outflows related to more than one component should be allocated to those components on a rational and consistent basis, reflecting the costs that the insurer would expect to incur if it issued that component as a separate contract. Once cash outflows are attributed to components, the insurer would account for those costs in accordance with the recognition and measurement requirements that apply to that component.
Next Steps

The Boards will continue their discussion on insurance contracts in the week commencing July 16, 2012.



June 13, 2012 FASB/IASB Joint Board Meeting

Leases.

Lessee Accounting

The IASB and the FASB discussed lessee accounting and whether there should be different lease expense recognition patterns for different leases. The Boards tentatively decided that a lessee should account for:
  1. Some leases using an approach similar to that proposed in the 2010 leases Exposure Draft; and
     
  2. Some leases using an approach that results in a straight-line lease expense (straight-line approach).
The Boards also tentatively decided that a lessee should distinguish between those different leases based on whether the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term. That principle should be applied by using a practical expedient based on the nature of the underlying asset as follows:
  1. Leases of property (land or a building—or part of a building—or both) should be accounted for using the straight-line approach unless:
     
    1. The lease term is for the major part of the economic life of the underlying asset; or
       
    2. The present value of fixed lease payments accounts for substantially all of the fair value of the underlying asset.
       
  2. Leases of assets other than property should be accounted for using an approach similar to that proposed in the 2010 leases Exposure Draft unless:
     
    1. The lease term is an insignificant portion of the economic life of the underlying asset; or
       
    2. The present value of the fixed lease payments is insignificant relative to the fair value of the underlying asset.
Lessor Accounting

The Boards discussed lessor accounting and tentatively decided to change the tentative decisions on the lessor accounting model that is used to determine when the receivable and residual approach would apply.

The Boards tentatively decided that a lessor should distinguish between leases to which the receivable and residual approach applies and leases to which an approach similar to operating lease accounting applies using the same criteria as noted above for lessee accounting. Consequently, a lessor would apply the receivable and residual approach to leases for which the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term.


Accounting for financial instruments: classification and measurement.

The Scope of the Fair Value through Other Comprehensive Income (FVOCI) Category for Debt Instruments (Joint FASB and IASB Discussion)

The FASB and the IASB discussed the scope of the FVOCI measurement category for debt instruments and reaffirmed that a debt instrument will be measured at FVOCI only if:
  1. The debt instrument passes the contractual cash flow characteristics assessment (as discussed by the Boards at the February 2012 joint Board meeting); and
     
  2. The debt instrument is managed within the relevant business model (as discussed by the Boards at the May 2012 joint Board meeting).
Fair Value Option (FASB-only Discussion)

The FASB discussed the fair value option for financial assets and financial liabilities. The FASB tentatively decided that an entity may, at initial recognition, irrevocably elect a fair value option for the following financial instruments:
  1. A hybrid financial liability may be designated at fair value through net income (FVNI) unless:
     
    1. The embedded derivative or derivatives do not significantly modify the cash flows that otherwise would be required by the contract; or
       
    2. It is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative or derivatives is prohibited.
       
  2. A group of financial assets and financial liabilities may be designated at FVNI if both of the following conditions are met:
     
    1. The entity manages the net exposure relating to those financial assets and financial liabilities (which may be derivative instruments) on a fair value basis; and
       
    2. The entity provides information on that basis to the reporting entity’s management.
Fair Value Option (IASB-only Discussion)

The IASB discussed the fair value option for debt investments measured at FVOCI and tentatively decided to extend the current eligibility condition in IFRS 9, Financial Instruments, for designating financial assets under the “accounting mismatch” fair value option to debt investments that would otherwise be measured at FVOCI. Thus these debt instruments may be measured at FVNI if doing so would eliminate or significantly reduce an accounting mismatch.


Investment companies.

The FASB and the IASB discussed:
  1. Accounting by an investment company for an investment company subsidiary
     
  2. Accounting by a noninvestment company parent for an investment company subsidiary.
Accounting by an Investment Company for an Investment Company Subsidiary

The Boards decided that an investment company should measure all controlling financial interests in another investment company at fair value (including in both master-feeder and fund-of-funds structures), rather than consolidating those subsidiaries. However, the FASB will discuss at a future FASB meeting whether an investment company parent entity that is regulated under the SEC’s Investment Company Act of 1940 should be required to consolidate its wholly owned investment company subsidiaries.

The FASB additionally decided to require a feeder fund to attach its master fund’s financial statements along with its financial statements in a master-feeder structure. The FASB will discuss at a future FASB meeting whether a master-feeder structure should be defined.

The IASB decided not to require an investment company to attach the financial statements of its investees in any circumstances.

Accounting by a Noninvestment Company Parent for an Investment Company Subsidiary

The FASB decided to retain the requirement in current U.S. GAAP that a parent entity should retain the specialized accounting used by an investment company subsidiary.

The IASB decided that a noninvestment company parent should not retain the exception from consolidation used for the controlled investees of an investment company subsidiary.