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.
September 17, 2013 Joint FASB/IASB Board Meeting
Accounting for Financial Instruments: Impairment. The FASB and the IASB each began re-deliberations of their respective expected credit loss models. Both Boards participated in the discussions, but each Board only made decisions on their respective papers.
The FASB discussed an entity’s estimate of expected credit losses under its proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15), and decided to clarify the following:
- An entity should revert to a historical average loss experience for the future periods beyond which the entity is able to make or obtain reasonable and supportable forecasts.
- An entity should consider all contractual cash flows over the life of the related financial assets. When determining the contractual cash flows and the life of the related financial assets, an entity should consider expected prepayments but should not consider expected extensions, renewals, and modifications unless the entity reasonably expects that it will execute a troubled debt restructuring with a borrower.
- An estimate of expected credit losses should always reflect the risk of loss, even when that risk is remote. However, an entity would not be required to recognize a loss on a financial asset in which the risk of nonpayment is greater than zero yet the amount of loss would be zero.
- In addition to using a discounted cash flow model to estimate expected credit losses, an entity would not be prohibited from developing an estimate of credit losses using loss-rate methods, probability-of-default methods, or a provision matrix using loss factors.
In addition, the FASB decided that the final guidance on expected credit losses should include implementation guidance describing the factors that an entity should consider to adjust historical loss experience for current conditions and reasonable and supportable forecasts.
The IASB considered the following clarifications and enhancements to the proposals in its Exposure Draft (ED), Financial Instruments: Expected Credit Losses:
- The responsiveness of the general model (that is, where financial instruments start in Stage 1) in recognizing lifetime expected credit losses
- The measurement objective for Stage 1 of the model
- The definition of “default.”
The IASB staff also reported on the fieldwork performed during the comment period.
Agenda Paper 5A: Financial Instruments: Impairment: Responsiveness of the General Model
The IASB discussed the responsiveness of the general model, in particular the concern raised by some respondents that the impairment model, as articulated in the ED, may not capture significant increases in credit risk on a timely basis.
The IASB tentatively decided to clarify that the objective of the model is to recognize lifetime expected credit losses on all financial instruments for which there has been a significant increase in credit risk—whether on an individual or portfolio basis—and that all reasonable and supportable information, including forward looking information that is available without undue cost or effort, needs to be considered. In addition, the IASB tentatively decided to include illustrative examples to reflect the intention of the proposals.
Agenda Paper 5C: Financial Instruments: Impairment: Stage 1 Measurement Objective
The IASB discussed the measurement objective for financial instruments for which there has not been a significant increase in credit risk since initial recognition (Stage 1), including the feedback received on the 12-month expected credit loss allowance and alternative suggestions.
The IASB tentatively decided to confirm 12-month expected credit losses as the measurement objective for instruments in Stage 1.
Agenda Paper 5D: Financial Instruments: Impairment: Definition of Default
The IASB discussed the feedback received on the notion of default and whether a definition of default should be provided.
The IASB tentatively decided to require a default definition to be applied that is consistent with credit risk management practices and to emphasize that qualitative indicators of default should be considered when appropriate (such as for financial instruments that contain covenants). The IASB also tentatively agreed to include a rebuttable presumption that default does not occur later than 90 days past due unless an entity has reasonable and supportable information to support a more lagging default criterion.
Agenda Paper 5E: Impairment: Report on the Fieldwork
The staff reported on the fieldwork performed during the comment period as a follow up to the discussions held during the July 2013 joint IASB and FASB meeting (Agenda Paper 5B of the July meeting). The staff presented in more detail the feedback from fieldwork participants on the operability of the proposals.
The IASB was not asked to make any decisions on this paper.
Revenue Recognition. The IASB and the FASB met and discussed the following topics raised in the drafting of the final standard on Revenue from Contracts with Customers.
The Boards directed the staff to complete further analysis on each topic. The Boards also asked the staff to focus their analysis on each topic as follows:
The Boards asked the staff to focus on (1) improving the current drafting and (2) evaluating the alternative of including a collectibility threshold in the criteria for identifying a contract (that is, “Step 1” of the revenue model).
The Boards asked the staff to focus on evaluating:
- Whether to provide more specificity about the level of confidence to be used in the application of the constraint;
- Whether to reinstate specific guidance that would address the accounting for a usage-based royalty on licenses of intellectual property; and
- An alternative approach that refocuses the objective of the constraint on the quality of an entity’s estimate and whether or not the entity should reassess that estimate.
The Boards asked the staff to focus on improving the drafting of the criteria for distinguishing between a license that provides access to an entity’s intellectual property and a license that provides a right.
The staff will present further analysis on the topics at the October Board meeting. In addition, the staff are in the process of drafting the final revenue standard.
September 18, 2013 Joint FASB/IASB Board Meeting
Accounting for Financial Instruments: Classification and Measurement. The IASB and the FASB discussed clarifications and improvements to the solely principal and interest (P&I) condition in the Boards’ recent Exposure Drafts.
Agenda Paper 6B
The staff presented the key observations on amortized cost as a measurement basis. The discussion was for educational purposes. No tentative decisions were made.
Agenda Paper 6C
The IASB and the FASB discussed the meaning of “principal” for the purposes of the application of the solely P&I condition. The Boards tentatively decided that principal should be described as the amount transferred by the holder for the financial asset on initial recognition.
Agenda Paper 6D
The IASB and the FASB discussed the meaning of “interest” for the purposes of the application of the solely P&I condition, including the meaning of “time value of money” and the application of that concept to regulated interest rates, and tentatively decided to clarify the meaning of interest.
Specifically, the Boards tentatively decided:
- To clarify that de minimis features should be disregarded for classification;
- To emphasize the underlying conceptual basis for the solely P&I condition—that is, the notion of a basic lending-type return;
- To confirm that time value of money and credit risk are typically the most significant components of a basic lending-type return, however, not the only possible components;
- To clarify that a basic lending-type return also generally includes consideration for liquidity risk and profit margin and consideration for costs associated with holding the financial asset over time (such as servicing costs);
- To emphasize what are not the components of a basic lending-type return and why (for example, indexation to equity prices); and
- To clarify the meaning of the time value of money, specifically:
- To clarify the objective of the consideration for the time value of money—that is, to provide consideration for just the passage of time, absent return for other risks and costs associated with holding the financial asset over time
- To articulate the factors relevant to providing consideration for the passage of time—notably, the tenor of the interest rate and the currency of the instrument
- To clarify that both qualitative and quantitative approaches could be used to determine whether the interest rate provides consideration for just the passage of time, if the time value of money component of the interest rate is modified (for example, by an interest rate tenor mismatch feature) but do not prescribe when each approach should be used
- To not allow a fair value option in lieu of the quantitative assessment.
The Boards also tentatively decided to accept regulated interest rates as a proxy for the consideration for the time value of money if those rates provide consideration that is broadly consistent with consideration for the passage of time and do not introduce exposure to risks or volatility in cash flows that are inconsistent with the basic lending-type relationship.
The IASB also tentatively decided to provide guidance on how the quantitative assessment of a financial asset with a modified time value of money component should be performed—that is, by considering the contractual (undiscounted) cash flows of the instrument relative to the benchmark instrument—and to replace the “not more than insignificant” threshold in the Boards’ proposals with the “not significant” threshold (that is, a financial asset with the modified time value of money component of the interest rate would meet the solely P&I condition if its contractual cash flows could not be significantly different from the benchmark instrument’s cash flows).
The FASB directed the staff to perform further analysis of the operational aspects of this assessment.
Agenda Paper 6E
The IASB and the FASB discussed the application of the solely P&I condition to financial assets with contingent features.
The Boards tentatively decided to clarify that the nature of the contingent trigger event in itself does not determine the classification of the financial asset. In addition, the Boards tentatively decided that in clarifying the guidance on contingent features no distinction should be made between contingent prepayment and extension features and other types of contingent features.
The IASB also tentatively decided to confirm that a contingent feature that results in contractual cash flows that are not solely P&I is inconsistent with the solely P&I condition unless the feature is non-genuine.
The FASB tentatively decided that if a contingent feature results in contractual cash flows that are not solely P&I but those non-P&I cash flows have a remote probability of occurrence, such a feature is consistent with the solely P&I condition. If the occurrence of non-P&I cash flows no longer remains remote, an entity will be required to reclassify the financial asset into the fair value through profit or loss (FVPL) category. However, reclassifications out of the FVPL category will be prohibited.
The FASB directed the staff to perform further analysis of contingent features that provide protective rights to the holder.
Agenda Paper 6F
The IASB and the FASB discussed the application of the solely P&I condition to financial assets with prepayment and extension features.
For contingent prepayment features, the Boards tentatively decided to clarify that the nature of the contingent trigger event in itself does not determine the classification of the financial asset. The Boards tentatively decided that no distinction should be made between contingent prepayment and extension features and other types of contingent features.
With one exception (see the following tentative decision), the IASB also tentatively decided to confirm that a prepayment feature that results in contractual cash flows that are not solely P&I is inconsistent with the solely P&I condition unless the feature is non-genuine.
Notwithstanding the previous tentative decision, the IASB tentatively decided to provide an exception for financial assets that meet the following conditions:
- The financial asset is acquired or originated with a significant premium or discount.
- The financial asset is prepayable at the amount that represents par and accrued and unpaid interest (and may include reasonable additional compensation for the early termination of the contract).
- The fair value of the prepayment feature on initial recognition of the financial asset is insignificant.
Such financial assets will be eligible for classification at other than FVPL (subject to the business model assessment).
The FASB tentatively decided that if a prepayment feature results in contractual cash flows that are not solely P&I but those non-P&I cash flows have a remote probability of occurrence, such a feature is consistent with the solely P&I condition. If the occurrence of non-P&I cash flows no longer remains remote, an entity will be required to reclassify the financial asset into the fair value through profit or loss (FVPL) category. However, reclassifications out of the FVPL category will be prohibited.
The FASB’s tentative decision is subject to further analysis of contingent features that provide protective rights to the holder, as discussed above.
At a future meeting, the Boards will consider additional matters related to the solely P&I condition including items raised at today’s meeting. After the Boards make decisions on clarifying the solely P&I condition, the staff will ask the FASB whether the FASB would like to retain that condition for classifying financial assets or to pursue a different approach. The Boards will also discuss the business model criteria at a subsequent meeting.
Revenue Recognition. [See the summary for the September 17, 2013 Joint FASB/IASB Board Meeting.]