Welcome to IASB Update
This IASB Update is a staff summary of the tentative decisions reached by the Board at a public meeting. As a project progresses, the Board can, and sometimes does, modify its earlier tentative decisions. Tentative decisions do not change existing requirements until those decisions are incorporated in a new or amended standard.
The IASB met in the offices of the US-based FASB, in Norwalk Connecticut, from Monday 21 March to Wednesday 23 March. The meeting was held jointly with the FASB.
The discussions focused on four projects: revenue recognition, leases, insurance contracts and impairment of financial assets.
For revenue recognition, leases and insurance contracts the boards continued to consider in detail the feedback from comment letters and outreach activities on specific aspects of the projects. For the insurance project, the sessions included two presentations by external visitors.
In January the boards had published a supplementary document relating to impairment of financial instruments. Because that document is still open for public comment, the discussions on impairment focused on matters that were outside the scope of that document.
All IASB members were present for the session on Monday 21 March and Tuesday 22 March. Unfortunately, because of illness and other unforeseen circumstances, four Board members were not able to attend the sessions on the afternoon (GMT) of Wednesday 23 March which focused on revenue recognition.
The topics discussed at the joint IASB/FASB board meeting were:
The IASB and the FASB discussed cross-cutting issues on the proposed disclosures in the revenue recognition, leases, and insurance contracts due process documents. The discussion focused on several observations and recommendations for the project teams as they finalise their disclosure requirements.
The boards agreed to align the wording of the disclosure objectives of each project. The boards decided that an entity would be required to present in tabular format any roll forward retained by or added to any of the disclosure requirements of the three projects.
The boards discussed methods for estimating expected losses and the impairment accounting for purchased debt instruments.
At a previous meeting, the boards had tentatively decided that an entity should use the best available and supportable information at the date of estimation (historical, current, and forecast) to estimate expected losses. At this meeting, the boards tentatively decided that expected losses should be estimated with the objective of an expected value. They tentatively decided that the final standard will explain that an expected value identifies possible outcomes (or a representative sample of the possible outcomes), makes an estimate of the likelihood of each outcome and calculates a probability-weighted average.
However, the final standard will acknowledge that other appropriate methods could be used as a reasonable way to achieve the objective of an expected value. An example of a suitable method would be a loss rate method and the use of probabilities of default, loss given default and exposure at default data. In performing this calculation, an entity must not ignore observations and possibilities that are known. The boards directed the staff to draft language that will be clear to constituents who are applying this objective.
Regarding purchased debt instruments subject to impairment accounting, the boards discussed interest revenue recognition and impairment accounting. The discussion included making comparisons with the accounting proposed for originated instruments. The boards did not reach a decision on this question and asked the staff to prepare examples for further discussion.
The boards will discuss these examples at next week's joint board meeting.
The IASB and FASB continued their discussions on insurance contracts by considering the following topics: unbundling, objective of the risk adjustment, discount rate for ultra-long contracts, practical implementation of the risk adjustment and the contract boundary for insurance contracts.
The boards discussed the objectives for separating insurance contracts into non-insurance components and insurance components. This is referred to as 'unbundling'. The boards were not asked to make any decisions about the objectives of unbundling.
The boards confirmed the proposal in the IASB's exposure draft (ED) Insurance contracts and the FASB's discussion paper (DP) Preliminary views on insurance contracts that an insurer should account separately for embedded derivatives that are contained in a host insurance contract that is not closely related to the embedded derivative.
Thirteen of the fourteen IASB members present supported this decision. One IASB member was not available. The majority of FASB members present supported this decision.
The boards will discuss other aspects of unbundling at future meetings.
Objective of the risk adjustment
The boards tentatively decided:
Discount rate for ultra-long duration contracts
The boards discussed the effects of changes in discount rate where the yield curve is extended beyond observable market prices-so-called 'ultra long duration' contracts. The boards indicated that they did not want the staff to develop a separate approach that deals solely with changes in discount rate for this particular type of contract.
Risk adjustment education session
The IASB and FASB invited guest speakers to continue the education session from 15 March 2011 on explicit risk adjustment. The purpose of this education session was to give the boards information on how a risk margin is calculated in practice, by using a probability of sufficiency approach (akin to a confidence interval) for financial reporting in Australia and a cost of capital approach to report under Economic Value Management (EVM).
The external presenters were Tony Coleman from Lonergan, Edwards and Associates, and Mark Swallow and Leopoldo Camara from Swiss Re. Because this was an education session the boards were not asked to make any decisions.
The boards tentatively decided that:
The boards will continue their discussion on this project at their joint meeting in the week of 28 March 2011.
The IASB and the FASB discussed inception versus commencement, discount rate, initial direct costs, separating lease and non-lease components of a contract and sale and leaseback transactions.
Inception versus commencement
The boards discussed the accounting for elements of a lease contract at the date of inception versus the date of commencement from both the lessee's and lessor's perspective.
The boards tentatively decided that the Leases standard would:
Initial direct costs
The boards discussed the definition of initial direct costs and the accounting by lessees and lessors for initial direct costs.
The boards tentatively defined initial direct costs as follows:
Costs that are directly attributable to negotiating and arranging a lease that would not have been incurred had the lease transaction not been made.The boards affirmed the decision in the Leases exposure draft that lessees and lessors should capitalise initial direct costs by adding them to the carrying amount of the right-of-use asset and the right to receive lease payments, respectively. Six FASB members and 14 IASB members supported this decision (1 FASB member and 1 IASB member voted against).
The boards discussed how lessees and lessors would determine the discount rate to use to initially measure lease payments at present value.
The boards tentatively reaffirmed the proposals in the Leases exposure draft, but clarified the following (all board members supported this decision):
Separating lease and non-lease components of a contract
The boards tentatively decided that an entity should be required to identify and separately account for the lease and the non-lease components of a contract. Four FASB members and 13 IASB members supported this decision (3 FASB members and 2 IASB members voted against).
The boards tentatively decided that in allocating payments in a contract between the lease and non-lease components of the contract:
Sale and leaseback transactions
The boards affirmed the decision in the Leases exposure draft that when a sale has occurred, the transaction will be accounted for as a sale and then a leaseback. If a sale has not occurred, the entire transaction will be accounted for as a financing. All board members supported this decision.
The boards tentatively decided that an entity should apply the control criteria described in the revenue recognition project to determine whether a sale has occurred. Six FASB members and 12 IASB members supported this decision (1 FASB member and 3 IASB members voted against).
The boards affirmed the decision in the Leases exposure draft (all board members supported this decision) that in a transaction accounted for as a sale and leaseback:
The boards tentatively decided that the leases guidance would not prescribe a particular type of lessee accounting model for entities that are accounting for the leaseback part of a sale and leaseback transaction. All board members supported this decision.
The boards will continue their redeliberations of the Leases exposure draft in April 2011.
The boards discussed when and how an entity should adjust the promised amount of consideration in a contract to reflect the effects of the time value of money, collectability and uncertain consideration.
Promised amount of consideration
The boards tentatively decided that an entity should adjust the promised amount of consideration to reflect the time value of money if the contract includes a financing component that is significant to that contract. In assessing whether a contract has a significant financing component, an entity should consider various factors including:
The boards also tentatively decided that, as a practical expedient, an entity should not be required to assess whether a contract has a significant financing component if the period between payment by the customer and the transfer of the promised goods or services to the customer is one year or less.
That decision was supported by 11 members of the IASB and 4 members of the FASB.
The boards discussed how an entity should account for the effects of a customer's credit risk, and changes in that risk, in a contract with a customer.
The boards tentatively decided that:
The boards will discuss the interaction between the revenue model and the impairment model at a future meeting.
The boards discussed how an entity would determine the transaction price and recognise revenue when the promised amount of consideration is uncertain. No decisions were reached.
In April, the boards will discuss the following topics: