Tentative Board Decisions

Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.

Wednesday, March 28, 2018 FASB Board Meeting

Agenda prioritization. The Board discussed the results of staff research on the following five potential projects:

Determining a Highly Inflationary Economy

The Board decided not to add a project on determining a highly inflationary economy to its agenda.

Interest Rate Lock Commitments

The Board decided not to add a project on the fair value measurement of interest rate lock commitments to its agenda.

Misalignment of Collections Definition

The Board decided to add a project to its agenda to update the definition of collections in the Master Glossary of the Codification.  The Board also completed deliberations and decided:
  1. To add the concept of direct care to the definition of collections in order to align the definitions in the Master Glossary and in the American Alliance of Museums’ Code of Ethics for Museums
  2. That the change in definition should be applied on a prospective basis.
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot and decided that the comment period will be 45 days.

Cost Capitalization for Episodic Television Series

The Board decided to add a narrow-scope project to the agenda to amend the cost capitalization guidance for episodic television series in Subtopic 926-20, Entertainment—Films—Other Assets—Film Costs, and the amortization, impairment, and disclosure guidance in that Subtopic considering the change in business environment in the media industry since the guidance was established. The Board decided that the project would be addressed by the Emerging Issues Task Force and supports the use of a Working Group to provide industry knowledge and expertise.

Recognition under Topic 805 for an Assumed Liability in a Revenue Contract

The Board decided to add a project to the agenda on the recognition under Topic 805, Business Combinations, of an assumed liability in a revenue contract acquired in a business combination after the effective date of Topic 606, Revenue from Contracts with Customers. The Board decided that the project would be addressed by the Emerging Issues Task Force. The Board also indicated that the Task Force could provide feedback on areas where educational materials or additional clarity on measurement would be beneficial.


Financial instruments—hedging implementation. The Board discussed the status of and issues arising from implementation activities related to Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The Board discussed the staff’s response to:
  1. Technical inquiries received related to designating the hedged risk as the variability of a contractually specified component in the forecasted purchase or sale of a nonfinancial asset in a cash flow hedge. Specifically, the staff presented its interpretation of the guidance on the contractually specified components model, noting the following:
    1. All contracts must be analyzed under the guidance in paragraphs 815-20-25-22A through 25-22B for an entity to be able to designate the variability in a contractually specified component as the hedged risk in a cash flow hedge. Paragraph 815-20-25-22B states that an entity may designate the variability of a contractually specified component in a not-yet-existing contract if at hedge inception the entity expects that the contract will meet the requirements in paragraph 815-20-25-22A when the contract is issued. When the contract is entered into, the entity must then perform the analysis required by paragraph 815-20-25-22A. The guidance in those paragraphs also applies when the contractually specified component is explicitly referenced in documents other than a contract (for example, supporting agreements to a contract or purchases or sales receipts in spot purchase).  
    2. If an entity does not have a contract at hedge inception, it must develop an expectation (for example, through previous experience) that when the transaction is entered into:
      1. The written agreement for a forecasted purchase or sale will contain an explicitly referenced contractually specified component.
      2. The pricing formula that references the explicitly referenced contractually specified component will determine the price of the nonfinancial item.
      3. The requirements for cash flow hedge accounting will be met.
      4. The agreement will be substantive.
The staff noted that setting those expectations will require judgment. However, for transactions in which an entity has previous experience, it may be easier to set those expectations than for transactions in which the entity does not have previous experience.

The Board agreed with the staff’s conclusions. The staff will form a project resource group to monitor implementation in this area, and other areas if needed.
  1. Technical inquiries received on multiple partial-term hedges of a single financial instrument. The staff presented its interpretation of the guidance related to the partial-term hedging election. Specifically, the staff noted that the partial-term fair value hedging guidance in 815-20-25-12(b)(2)(ii), as amended by Update 2017-12, should be applicable to simultaneous multiple partial-term hedging relationships for a single debt instrument (for example, consecutive interest cash flows in Years 1-3 and consecutive cash flows in Years 5-7 of a 10-year bond). However, this conclusion should not be analogized to the last-of-layer method until further research is conducted on hedging multiple layers. The Board agreed with the staff’s conclusions.
  2. Technical inquiries received related to accounting for basis adjustments and hedging multiple layers under the last-of-layer method. The Board decided to add a narrow-scope project to the agenda to address issues related to accounting for basis adjustments and multiple-layer hedging strategies. The Board decided at this time not to include in that project an expansion of the last-of-layer method to include prepayable liabilities and nonprepayable financial instruments.
  3. Technical inquiries received related to the change in hedged risk concept in paragraph 815-30-35-37A. That paragraph allows an entity to retain hedge accounting when the hedged risk in a cash flow hedge changes and the derivative designated as the hedging instrument remains highly effective. The staff presented feedback from those inquiries and potential Codification improvements to address the issues raised. Those improvements could include clarifications that:
    1. The hedged forecasted transaction and hedged risk are distinct.
    2. The hedged risk may change, and an entity may retain hedge accounting if the revised hedging relationship is highly effective even if a distinction is not made between the hedged forecasted transaction and the hedged risk in an entity’s hedge documentation.   
    3. The hedged forecasted transaction may not be documented so broadly such that if a change in hedged risk occurs, it does not share the same risk exposure as the originally designated hedged forecasted transaction.
    4. If the hedging relationship based on the revised hedged risk is not highly effective, the entity must cease hedge accounting but amounts previously recorded in accumulated other comprehensive income remain until the hedged forecasted transaction affects earnings if the forecasted transaction is still probable of occurring. That wording already is included in Example 9 of Subtopic 815-30 but may be added to other sections of that Subtopic.
    5. Hindsight may be applied in identifying transactions as hedged transactions. However, an entity must first identify transactions as hedged transactions based on the originally documented hedged risk. Only when there are no transactions or insufficient transactions based on the originally documented hedged risk may the entity consider transactions based on other risks. If a transaction occurred in a prior reporting period, it may be retrospectively identified as a hedged transaction if it has not yet affected reported earnings.
The Board directed the staff to get external review feedback on these potential Codification improvements.

Next Steps

See next steps discussed above.


Leases—targeted improvements to Topic 842. The Board discussed feedback received on proposed Accounting Standards Update, Leases (Topic 842): Targeted Improvements, specific to the proposed practical expedient related to the requirement for lessors to separate lease and nonlease components. The practical expedient in the proposed Update stated:

842-10-15-42A As a practical expedient, a lessor may, as an accounting policy election, by class of underlying asset, choose to not separate nonlease components from lease components and, instead, to account for each separate lease component and the nonlease components associated with that lease component as a single lease component if both of the following are met:

a.    The timing and pattern of revenue recognition for the lease component and
        nonlease components associated with that lease component are the same.
        [Criterion A]
b.    The combined single lease component is classified as an operating lease in
       accordance with paragraphs 842-10-25-2 through 25-3. [Criterion B]

The Board decided:
1.    To amend Criterion A to require the timing and pattern of transfer for the lease
        component and nonlease component(s) associated with that lease component to
        be the same (instead of the timing and pattern of revenue recognition, as
        proposed).
2.    To amend Criterion B to require an assessment of the lease component (instead of
       the combined component, as proposed). Criterion B will require the lease
       component, if accounted for separately, to be classified as an operating lease in
       accordance with paragraphs 842-10-25-2 through 25-3.
3.    For arrangements that qualify for the practical expedient, a lessor will account for
       the combined component as a single performance obligation in accordance with
       Topic 606, Revenue from Contracts with Customers, when the nonlease
       component(s) associated with the lease component is the predominant component
       of the combined component. Otherwise, the lessor would account for the combined
       component as an operating lease in accordance with Topic 842.

The Board directed the staff to include language in the final Update clarifying that the existence of nonlease components that are not eligible for the practical expedient does not preclude an entity from electing the practical expedient for the lease component and other nonlease component(s) that qualify for the practical expedient.

Transition Guidance and Effective Date

The Board decided:
 
1.    An entity electing the practical expedient must apply the expedient to all existing
       lease transactions that qualify for the expedient at the date elected.
2.    Except for early adopters of Topic 842, the effective date and transition
       requirements for the final amendments should be the same as the effective date
       and transition requirements of Topic 842.
3.    The lessor practical expedient may be elected by early adopters of Topic 842 either
       (a) in the first reporting period following the issuance of a final Update containing
       the practical expedient or (b) at the original effective date of Topic 842 for that
       entity. Early adopters electing the lessor practical expedient are permitted to apply
       the practical expedient either retrospectively or prospectively.

Analysis of Costs and Benefits

The Board concluded that it has received sufficient information and analysis to make an informed decision on the issues presented and that the expected benefits of the amendments justify the expected costs.

Next Steps

The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot. The final Update will reflect decisions reached at this meeting, in addition to the decisions reached at the Board’s March 7, 2018 meeting on the proposed additional (and optional) transition method for adoption of Topic 842.

Leases—Implementation Requests
The Board discussed additional implementation issues raised by stakeholders. Specifically, the Board discussed accounting for certain lessor costs, such as sales taxes and property taxes and insurance, and agreed with the staff recommendation to permit lessors to analogize to:
 
1.    The guidance in paragraph 606-10-32-2A that allows an entity to make an
       accounting policy election to exclude from the transaction price sales taxes
       imposed on and concurrent with a specific revenue-producing transaction that are  
       collected by the entity from a customer.
2.    The reasoning included in paragraph BC38(c) of the basis for conclusions in
       Accounting Standards Update No. 2016-08, Revenue from Contracts with
       Customers (Topic 606): Principal versus Agent Considerations (Reporting
       Revenue Gross versus Net)
, and exclude certain lessor costs from variable
       consideration in the lease contract when those lessor costs are paid by the lessee
       and the uncertainty in the amount paid is not expected to ultimately be resolved.

The Board decided to add a separate project to its technical agenda to add specific guidance to the Codification to address these two issues.

Next Steps

The Board directed the staff to begin drafting proposed amendments for external review to bring back to the Board for discussion.


Financial performance reporting—disaggregation of performance information.

Identifying the Lines to Be Disaggregated

The Board discussed the staff’s suggested terminology to describe the lines from the income statement to be the focus of the disaggregation, in particular lines that represent the cost of revenue and selling, general, and administrative expenses.  The Board decided to continue to focus on these lines for disaggregation and directed the staff to develop a principles-based approach to describing these lines. 

How the Lines Would Be Disaggregated

The Board then discussed different approaches for describing the basis for disaggregating those lines. A number of Board members suggested basing the disaggregation on the way an entity internally reviews the components and the accounting system information that maps and allocates the components into those lines.

Next Steps

The Board directed the staff to perform additional outreach with public business entities to understand what lines on their income statements typically represent the following activities:
  1. Activities associated with the cost of revenue or fulfillment of performance obligations
  2. Activities associated with marketing, selling, and general and administrative expenses. 
The outreach will seek feedback on the following issues: (1) if, and how, an entity reviews the components of these lines for internal reporting purposes, (2) on what level the accounting information systems track the components, and (3) how the components are rolled up into consolidated lines.