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.
October 15, 2012 Joint FASB/IASB Videoconference Board MeetingInsurance contracts. The FASB and IASB continued their joint discussions of the proposed insurance contracts standard. The Boards discussed the time value of money in the premium allocation approach and the presentation of changes in the liability for participating contracts.
Time Value of Money in the Premium Allocation Approach
The Boards tentatively decided that the discount rate at inception of the contract should be used to measure the liability for remaining coverage, when it is accreted or discounted.
The Boards discussed how the decision to present changes in the insurance liability arising from changes in discount rates in other comprehensive income would apply to the presentation of the liability for incurred claims for contracts to which the premium allocation approach is applied. The Boards tentatively decided that when the liability for incurred claims is discounted, an insurer should use the rate at the inception of the contract to determine the amount of the claims and interest expense in profit or loss. That rate is subsequently locked in.
The Boards considered a review of previous tentative decisions that apply to contracts with participating features for which the mirroring approach would apply. In particular, they noted that the mirroring decision would take precedence over the tentative decision that an insurer should present in other comprehensive income changes in the insurance contract liability arising from the effect of changes in the discount rate. As a result, for contracts with participating features where the mirroring decision applies, an insurer would present changes in the insurance contract liability in the statement of comprehensive income consistently with the presentation of changes in the directly linked underlying items. No decisions were made.
The FASB tentatively decided that for contracts to which the mirroring decisions do not apply and where the contractual obligation to the policyholder is directly linked to the fair value of the underlying items, changes in the insurance liability should be presented in profit or loss.
The FASB and the IASB will continue joint discussions at their October 17 meeting.
October 17, 2012 Joint FASB/IASB Videoconference Board Meeting
Insurance contracts. The FASB and the IASB continued their joint discussions of the accounting for insurance contracts, focusing on how an entity would present premiums, claims, non-claims fulfilment costs, and acquisition costs in the statement of comprehensive income.
Presentation in the Statement of Comprehensive Income
Premiums and Claims
The Boards tentatively decided that premiums and claims presented in an insurer’s statement of comprehensive income should be measured by applying an earned premium presentation, whereby premiums are allocated to periods in proportion to the value of coverage (and any other services) that the insurer has provided in the period, and claims are presented when incurred.
The FASB asked the FASB staff when drafting to consider the inclusion of application guidance about other approaches that may meet the earned premium principle, noting that the description of the approach within the Agenda Papers was too prescriptive.
Non-Claims Fulfillment Costs
The Boards tentatively decided that in an earned premium presentation:
- The portion of premium allocated to cover non-claims fulfillment costs should be equal to the originally expected non-claims fulfillment costs included in the measure of the building block liability.
- The premium allocated to cover non-claims fulfillment costs should be included in earned premium in the periods in which the costs are expected to be released from the liability for remaining coverage, that is, when it is expected that they will be either incurred or added to the liability for incurred claims.
- The amounts presented as expenses should be the actual costs incurred or added to the liability for incurred claims in the period.
The IASB tentatively decided that the cash flows relating to acquisition costs should be recognized in the statement of comprehensive income over the coverage period. (This decision is consistent with a decision previously made by the FASB.)
The FASB tentatively decided that an insurer would present an insurance contract liability on the face of the financial statements in two separate pieces---one piece representing the cash flows expected to fulfill the insurance obligation and a second piece representing the expected contract margin. Acquisition costs would be reported as part of the margin (that is, the margin includes the acquisition costs expected to be paid and is reduced when those acquisition costs are paid).
The Boards tentatively decided that acquisition costs should be recognized in the statement of comprehensive income in a way that is consistent with the proposed allocation of the residual/single margin, in other words:
- For the IASB, in a way that is consistent with the pattern of transfer of services provided under the contract.
- For the FASB, as the insurer satisfies its performance obligations to stand ready to compensate the policyholder if a specified uncertain future event adversely affects the policyholder, which is when the insurer is released from exposure to risk as evidenced by a reduction in the variability of cash outflows. Therefore, the margin recognized should be grossed up for the amount of acquisition costs recognized.
The Board will continue its discussion on the insurance contracts project at an FASB-only meeting on November 7, 2012. The Boards will continue their joint discussions on the project at their joint meeting in November 2012.
October 18, 2012 Joint FASB/IASB Videoconference Board Meeting
Revenue recognition. The FASB and the IASB discussed the following topics as they continued their redeliberations on the revised Exposure Draft, Revenue from Contracts with Customers (the 2011 ED):
- Contract modifications
- Measuring progress toward complete satisfaction of a performance obligation.
The Boards discussed the application of the proposed contract modifications requirements in the 2011 ED. Specifically, the Boards discussed how those proposals would apply to modifications that current guidance on contracts in U.S. GAAP (Topic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts) and IFRSs (IAS 11, Construction Contracts) describes as contract claims in which changes in scope and price are unapproved or in dispute. The Boards tentatively decided that an entity should account for those contract claims in accordance with the proposed contract modifications requirements. The Boards also tentatively decided to clarify that a contract modification, including a contract claim, would be approved when the modification creates or changes the enforceable rights and obligations of the parties to the contract. The Boards noted that, consistent with the proposals on identifying the contract, a contract modification could be approved in writing or orally or the approval could be implied by customary business practice.
The Boards also tentatively decided:
- To require an entity to account for contract modifications that result only in a change to the transaction price in accordance with paragraph 22 of the 2011 ED, which is consistent with the accounting for contract modifications that result in a change in scope. Consequently, the revenue standard would not include the proposal in paragraph 20 of the 2011 ED, which would have required a modification that results only in a change to the transaction price to be treated consistently with changes in transaction price (paragraphs 77–80 of the 2011 ED).
- To clarify that, for modifications within the scope of paragraph 22(a) of the 2011 ED, the transaction price available for allocation to the remaining separate performance obligations should be the amount of consideration received from the customer but not yet recognized as revenue plus the amount of any remaining consideration that the customer has promised to pay that has not been recognized as revenue.
- To clarify that, for modifications within the scope of paragraph 22(a) of the 2011 ED and for which there is a subsequent change in the estimate of the transaction price, an entity should account for the modification prospectively unless the change in the transaction price relates to satisfied performance obligations, in which case the entity should account for that change in accordance with the proposed requirements in paragraphs 77–80 of the 2011 ED. A similar approach would apply to accounting for revenue that had previously been constrained.
The Boards discussed the following topics related to measuring progress toward complete satisfaction of a performance obligation that is satisfied over time:
- The use of methods such as units produced or units delivered; and
- Adjustments that should be made to input methods, such as costs incurred, in order to meet the objective for measuring progress that is proposed in paragraph 38 of the 2011 ED.
- A units produced method could provide a reasonable proxy for the entity’s performance if the value of any work in progress at the end of the reporting period is immaterial.
- A units delivered method could provide a reasonable proxy for the entity’s performance if:
- The value of any work in progress at the end of the reporting period is immaterial; and
- The value of any units produced but not yet delivered to the customer at the end of the reporting period is immaterial.
- The value of any work in progress at the end of the reporting period is immaterial; and