IASB Update

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 London on Tuesday 29 March. The US-based FASB joined the IASB for some of the sessions, via video from its offices in Norwalk. The boards discussed impairment of financial assets, focusing on impairment for purchased and originated loans. They also discussed insurance contracts, focusing on unlocking the margin. The boards were not asked to make any decisions in the insurance contracts session. In a separate session the IASB considered whether to proceed now with a minor amendment to IFRS 5 Discontinued Operations, or to delay exposure until the second half of 2011. The topics discussed at the joint IASB/FASB board meeting were: Financial instruments: impairment Insurance contracts The topics discussed at the IASB Board meeting were: IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations - Discontinued Operations Contact us International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411 E-mail: info@ifrs.org Website: www.ifrs.org Future Board meetings The IASB meets at least once a month for up to five days. The next Board meetings in 2011 are: 5-6 April (tentative) 11-15 April 27 April (tentative) 4 May (tentative) To see all Board meetings for 2011, click here. Archive of IASB Update Newsletter Click here for archived copies of past issues of IASB Update on the IASB website. Podcast summaries To listen to a short Board meeting audio summary (podcast) or previous Board meetings, click here. Sessions held jointly with the FASB

Financial instruments: impairment 

The IASB and the FASB discussed impairment accounting for purchased financial assets, including whether an impairment allowance should be established upon acquisition and the subsequent interest income recognition for purchased financial assets.
At the 22 March meeting, the boards discussed whether or not originated instruments and purchased instruments subject to impairment accounting should have consistent accounting models for interest income recognition and impairment. The boards did not reach a decision on this question and asked the staff to prepare examples for further discussion.
The boards continued their discussion on these issues using examples provided by the staff. The boards tentatively decided that for purchased financial assets that do not have an explicit expectation of losses (that is, loans recognised in the 'good book' upon acquisition) when analysed at the individual asset level, even when acquired as part of a portfolio, an entity should account for impairment in the same way as for originated loans. Interest income for these assets would be recognised on the basis of contractual cash flows. This decision effectively aligns impairment accounting and interest income recognition for originated loans and 'good' purchased financial assets (those that do not have an explicit expectation of losses at the individual asset level at acquisition). The boards will determine the appropriate impairment accounting model for these loans in redeliberating the Supplementary Document, which is currently open for comment.
The boards also discussed impairment accounting, including interest income recognition, for financial assets purchased where an explicit expectation of loss exists at the individual financial asset level (that is, where the loan goes into a 'bad book' at acquisition). The boards tentatively decided that interest income recognised should be based on expected collectible cash flows estimated at the date of acquisition (that is, to accrete purchase price to expected cash flows). As a result of limiting the recognition of interest income for these credit-deteriorated assets, a separate impairment expense would not be recognised at the date of acquisition.
The boards noted that their decisions at this meeting were subject to future discussions on pending issues. These issues include (1) determining how to differentiate purchased portfolios of financial assets into 'good books' and 'bad books' and what the underlying accounting should be and (2) whether 'nonaccrual' guidance is necessary, and, if so, how to apply it.

Insurance contracts 

The IASB and FASB continued their discussions on insurance contracts by considering unlocking the margin and an oral report on the Insurance Working Group Meeting held on 24 March 2011.
Unlocking the margin
The boards discussed:

• whether the residual or composite margin should be locked-in at inception (as proposed in the exposure draftInsurance Contracts and the FASB's Discussion Paper Preliminary Views on Insurance Contracts); and
• if not, how the margin might be unlocked.

The boards were not asked to make any decisions on this topic.
Insurance Working Group Meeting
The board received an oral update on the 24 March 2011 Insurance Working Group meeting.
No decisions were made.
Next steps
The boards will continue their discussion on this project in April.

IASB-only sessions

IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations - Discontinued Operations

The Board tentatively decided that the proposed changes to discontinued operations do not meet the criteria for inclusion in the Annual Improvements Process. The Board expressed reservations about how urgent the need is to make those changes. It noted that the FASB has still to discuss this matter as well as discussing other changes to its discontinued operations requirements. The Board tentatively decided that it would not publish any exposure draft to amend IFRS 5 before the third quarter.

IASB Update

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: Disclosure - Cross-cutting issues Financial instruments: impairment Insurance contracts Leases Revenue recognition		Contact us International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411 E-mail: info@ifrs.org Website: www.ifrs.org Future Board meetings The IASB meets at least once a month for up to five days. The next Board meetings in 2011 are: 28-29 March 5-6 April (tentative) 11-15 April To see all Board meetings for 2011, click here. Archive of IASB Update Newsletter Click here for archived copies of past issues of IASB Update on the IASB website. Podcast summaries To listen to a short Board meeting audio summary (podcast) or previous Board meetings, click here.
Disclosure - cross-cutting issues  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.  Financial instruments: impairment 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. Next steps The boards will discuss these examples at next week's joint board meeting. Insurance contracts  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. Unbundling 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: to remove references in the objective of the risk adjustment proposed in paragraph 35 of the ED to 'the amount the insurer would rationally pay to be relieved of the risk' and to a 'maximum amount'. As a result, the objective of the risk adjustment would be as follows: 'The risk adjustment shall be the compensation the insurer requires to bear the risk that the ultimate cash flows could exceed those expected." to provide application guidance that this amount would reflect both favourable and unfavourable changes in the amount and timing of fulfilment cash flows. The staff will consider how to capture in the application guidance the notion that the risk adjustment reflects the point at which the insurer is indifferent between holding the insurance liability and a similar liability that is not subject to uncertainty. 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. Contract boundary The boards tentatively decided that: Contract renewals should be treated as a new contract: when the insurer is no longer required to provide coverage; or when the existing contract does not confer any substantive rights on the policyholder. All IASB and FASB members supported this decision. A contract does not confer on the policyholder any substantive rights when the insurer has the right or the practical ability to reassess the risk of the particular policyholder and, as a result, can set a price that fully reflects that risk. In addition, for contracts for which the pricing of the premiums does not include risks relating to future periods, a contract does not confer on the policyholder any substantive rights when the insurer has the right or the practical ability to reassess the risk of the portfolio the contract belongs to and, as a result, can set a price that fully reflects the risk of that portfolio. All FASB members and 10 IASB members supported decisions (b) and (c). Five IASB members preferred that the assessment should instead take place at an individual policyholder level. All renewal rights should be considered in determining the contract boundary whether arising from a contract, from law or from regulation. All IASB and FASB members supported this decision. Next steps The boards will continue their discussion on this project at their joint meeting in the week of 28 March 2011. Leases  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: Require a lessee and a lessor to recognise and initially measure lease assets and lease liabilities (and derecognise any corresponding assets and liabilities) at the date of commencement of the lease. All board members supported this decision. Require a lessee and a lessor to use a discount rate calculated at the date of commencement when initially measuring lease assets and lease liabilities. Four FASB members and 11 IASB members supported this decision (3 FASB members and 4 IASB members voted against). Include application guidance on the accounting for costs incurred by the lessee before the date of commencement of a lease. All board members supported this decision. Include application guidance on the accounting for lease payments made by the lessee before the date of commencement of a lease. All board members supported this decision. Include application guidance on the accounting for incentives provided by the lessor to the lessee. This would clarify that a lessee will deduct all lease incentives from the initial measurement of the right-of-use asset. Six FASB members and 13 IASB members supported this decision (1 FASB member and 2 IASB members voted against). The boards also discussed the accounting for a lease contract between the date of inception and the date of commencement of a lease when the contract meets the definition of an onerous contract. The IASB affirmed the proposal in the Leases exposure draft proposal to exclude lease contracts that meet the definition of an onerous contract from the scope of the Leases standard between the date of inception and the date of commencement. Such leases would be accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, until the date of commencement. The FASB also indicated support for applying Topic 450 Contingencies to those contracts that meet the definition of an onerous contract before the date of commencement, but noted that this issue would be reviewed when the boards consider impairment at a future meeting. 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. All board members supported this decision for lessees. Seven FASB members and 9 IASB members supported this decision for lessors (6 IASB members voted against). 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). Discount rate 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): The lessee would use the rate the lessor charges the lessee when that rate is available; otherwise the lessee would use its incremental borrowing rate. The lessor would use the rate the lessor charges the lessee. The rate the lessor charges the lessee could be the lessee's incremental borrowing rate, the rate implicit in the lease, or, for property leases, the yield on the property. When more than one indicator of the rate that the lessor charges the lessee is available, the rate implicit in the lease should be used. The boards also tentatively decided to provide application guidance for the determination of the discount rate when considering the use of a group discount rate and determining the yield on property. 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: The lessor should allocate payments in accordance with the guidance on revenue recognition. All board members supported this decision. The lessee should allocate payments as follows: If the purchase price of each component is observable, the lessee would allocate the payments on the basis of the relative purchase prices of individual components. Six FASB members and 14 IASB members supported this decision (1 FASB member and 1 IASB member voted against); If the purchase price of one or more, but not all, of the components is observable, the lessee would allocate the payments on the basis of a residual method. Six FASB members and all IASB members supported this decision (1 FASB member voted against) ; or If there are no observable purchase prices, the lessee would account for all the payments required by the contract as a lease. All FASB members and 13 IASB members supported this decision (2 IASB members voted against). The boards directed the staff to include application guidance on how a lessee should determine what would be an observable price, taking into consideration the relevance of guidance in other projects such as revenue recognition. 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: When the consideration is at fair value, the gains and losses arising from the transaction should be recognised when the sale occurs. When the consideration is not established at fair value, the assets, liabilities, gains and losses recognised should be adjusted to reflect current market rentals. The boards affirmed the decision in the Leases exposure draft that the seller/lessee would adopt the 'whole asset' approach in a sale and leaseback transaction. The 'whole asset' approach deems that in a sale and leaseback transaction, the seller/lessee sells the entire underlying asset and leases back a right-of-use asset relating to part of the underlying asset. All FASB members and 11 IASB members supported this decision (4 IASB members voted against). 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. Next steps The boards will continue their redeliberations of the Leases exposure draft in April 2011. Revenue recognition 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: whether the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods or service; whether there is a significant timing difference between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services; and whether the interest rate that is explicit or implicit within the contract is significant. The decision was supported by all members of both boards. 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. Collectibility 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: An entity should not reflect the effects of a customer's credit risk in the measurement of the transaction price and, hence, revenue upon transfer of a good or service to the customer. Consequently, an entity would recognise revenue at the promised amount of consideration (ie at the stated contract price). That decision is a change from the boards' proposals in the exposure draft, Revenue from Contracts with Customers. The final revenue standard should not include a revenue recognition criterion that requires an assessment of the customer's ability to pay the promised amount of consideration. An entity should recognise an allowance for any expected impairment loss from contracts with customers. The corresponding amounts in profit or loss should be presented as a separate line item adjacent to the revenue line item (as contra revenue). The first two decisions were supported unanimously by the members of both boards. Nine members of the IASB and six members of the FASB supported the third decision (with two members of the IASB and one member of the FASB voting against it). The boards will discuss the interaction between the revenue model and the impairment model at a future meeting. Uncertain consideration 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. Next steps In April, the boards will discuss the following topics: Uncertain consideration Allocation of the transaction price Costs Licences and rights to use Disclosures Scope

IASB Update

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 London on Monday 14 March to Friday 18 March. The FASB joined the IASB for many of the sessions, via video from its offices in Norwalk. Most of the discussions focused on their three major MoU projects: revenue recognition, leases and insurance contracts. The sessions included two presentations on insurance contracts presented by external visitors. The IASB also finalised effective dates for three of its new standards and held non-decision making discussions about impairment of financial assets. Members of the Board met with representatives of the EFRAG Technical Expert Group (TEG) in a public meeting. They discussed revenue recognition, leases, financial instruments, insurance contracts, European outreach and EFRAG's pro-active agenda. The IASB is holding a joint meeting with the FASB in the week beginning 21 March at the FASB's offices in Norwalk, Connecticut. The meeting will be webcast in the normal manner. The topics discussed at the joint IASB/FASB board meeting were: Fair value measurement - effective dates Financial instruments: hedge accounting Insurance contracts Leases The topics discussed at the IASB Board meeting were: Impairment - education session Effective dates - post-employment benefits and other comprehensive income Sweep issues - forthcoming IFRS 12 Disclosure of Interests in Other Entities Contact us International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411 E-mail: info@ifrs.org Website: www.ifrs.org Future Board meetings The IASB meets at least once a month for up to five days. The next Board meetings in 2011 are: 21-23 March (joint meeting in Norwalk, US) 28-29 March 5-6 April (tentative) 11-15 April To see all Board meetings for 2011, click here. Archive of IASB Update Newsletter Click here for archived copies of past issues of IASB Update on the IASB website. Podcast summaries To listen to a short Board meeting audio summary (podcast) or previous Board meetings, click here. Sessions held jointly with the FASB Fair value measurement - effective dates  The IASB discussed the effective date of an IFRS on fair value measurement in the light of the feedback received on the Request for Views Effective Date and Transition Methods. The IASB tentatively decided that the effective date of an IFRS on fair value measurement should be 1 January 2013. That effective date would give entities (including those in emerging and transition economies) enough time to analyse the requirements and to make any necessary systems changes. It would also allow enough time for translation and for introducing the mandatory requirements into law. Tweleve Board members supported the proposed date, one preferred an earlier date, one a later date and one Board member was not present when the vote was taken. The IASB also tentatively decided that early application should be permitted, in conformity with the proposal in the exposure draft. That would allow entities to apply the measurement and disclosure requirements as soon as practicable, thereby improving comparability in measurement and transparency in disclosures. It would also improve comparability with entities applying US GAAP. The decision was supported by all Board members present. The IASB plans to issue an IFRS on fair value measurement in April 2011. Financial instruments: hedge accounting  Hedge accounting is the third phase of the IASB's comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement. In December 2010 the Board published the exposure draft (ED) Hedge Accounting. The comment period for the ED ended on 9 March. At this meeting the Board resumed this project phase following the public consultation period and discussed the: outreach summary comment letter summary The Board received 233 comment letters. There was strong support for the proposals, with respondents welcoming the Board's approach of addressing hedge accounting comprehensively. They also agree with the principle-based approach proposed in the exposure draft, with many commenting that they thought that the proposal would resolve many of today's practice problems in applying IAS 39 Financial Instruments: Recognition and Measurement. The Board was not asked to make any decisions at this meeting. Insurance contracts  The IASB and FASB continued their discussions on insurance contracts by considering the following topics: alternative presentation models, allocation of the composite margin in profit and loss, whether the boards should permit or require a practical expedient for the discount rate, education sessions on the risk adjustment and on an alternative approach to deriving a discount rate, the discount rate for participating contracts, the timing of initial recognition and the definition of an insurance contract. Alternative presentation models The boards discussed several presentation approaches for the performance statement for insurers. The boards directed the staff to seek input on these approaches from the Insurance Working Group and from other users of insurance financial statements to help the boards to understand which approaches are most likely to meet the needs of users and whether those approaches would cause practical difficulties for the preparers of the financial statements. The boards were not asked to make any decisions on this topic. Composite margin-examples of run-off patterns The boards considered alternative ways by which the composite margin could be allocated through profit or loss ('run off') in the statement of comprehensive income. The boards were not asked to make any decisions on this topic. Practical expedient for the discount rate The boards discussed whether a practical expedient should be provided for determining the discount rate for a particular subset of entities. The boards tentatively decided not to provide a practical expedient for determining the discount rate. Fourteen IASB members supported this decision, and one voted against. The majority of the FASB members also supported this decision but noted that they would review this issue when they considered the scope and definition, particularly if those decisions would lead to contracts issued by non-financial institutions being within the scope of the standard. Discount rate for participating contracts The boards discussed the discount rate for insurance contracts that contain participating features. The boards tentatively decided to: clarify that the objective of the discount rate used to measure participating insurance contracts should be consistent with the discount rate used to measure non-participating insurance contracts. provide guidance that to the extent that the amount, timing or uncertainty of the cash flows arising from an insurance contract depend wholly or partly on the performance of specific assets, the insurer should adjust those cash flows using a discount rate that reflects that dependency. All the IASB and FASB members supported this decision. Recognition The boards tentatively decided that insurance contract assets and liabilities should initially be recognised when the coverage period begins, and to require the recognition of an onerous contract liability in the pre-coverage period if management becomes aware of onerous contracts in the pre-coverage period. All the FASB members and ten IASB members supported this decision (five voted against). Definition of an insurance contract The IASB's exposure draft (ED) Insurance Contracts and the FASB's Discussion Paper Preliminary Views on Insurance Contracts (DP) proposed to define an insurance contract as 'a contract under which one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder'. The boards tentatively decided to confirm the proposal in the ED and DP that: an insurer should consider the time value of money in assessing whether the additional benefits payable in any scenario are significant. a contract does not transfer significant insurance risk if there is no scenario that has commercial substance in which the insurer can suffer a loss, with loss defined as an excess of the present value of net cash outflows over the present value of the premiums. All the FASB members and twelve IASB members supported this decision (three voted against). Next steps The boards will continue their discussion on this project at their joint meeting in the week of 21 March 2011. Education session on the risk margin The IASB and FASB invited a guest speaker to provide an education session on how in practice a risk margin is calculated using a cost of capital approach and the linkage to the determination of the best estimate liabilities. The external presenter was Joachim Oechslin from Munich Re. The discussion will be continued on 22 March 2011 with presentations by other guest speakers. The boards were not asked to make any decisions on this topic. Education session on an alternative approach to deriving a discount rate The IASB and FASB invited guest speakers to present an approach that derives a yield curve for a discount rate for all cash flows expected at a given duration by: identifying those liability cash flows that are matched in duration with the cash flows from the insurer's existing asset portfolio considering the reinvestment needs for cash flows that are not matched in duration, and considering the effect of options and guarantees embedded in the liabilities. The external presenters were Jean-Michel Pinton and Baptiste Brechot from CNP Assurances and Eric Meistermann, from Deloitte. The boards were not asked to make any decisions on this topic. Leases  The IASB and the FASB discussed how to distinguish between a lease and a purchase or a sale, the accounting for purchase options, and short-term leases. Distinguishing between a lease and a purchase or a sale The boards discussed whether the leases standard should provide guidance for distinguishing a lease from a purchase or a sale. The boards tentatively decided that guidance should not be provided in the leases standard for distinguishing a lease of an underlying asset from a purchase or a sale of an underlying asset. That is, if an arrangement does not contain a lease, it should be accounted for in accordance with other applicable standards (for example, property, plant, and equipment or revenue recognition). The IASB voted 11 in favour and 4 against, while the FASB voted unanimously in favour. Accounting for purchase options The boards discussed how lessees and lessors should account for options to purchase the underlying assets that are included within an arrangement that contains a lease. The boards tentatively decided that lessees and lessors should include the exercise price of a purchase option (including bargain purchase options) in the measurement of the lessee's liability to make lease payments and the lessor's right to receive lease payments, if the lessee has a significant economic incentive to exercise the purchase option. If it is determined that the lessee has a significant economic incentive to exercise the purchase option, the right-of-use asset recognised by the lessee should be amortised over the economic life of the underlying asset, rather than over the lease term. The IASB voted 13 in favour and 2 against, while the FASB voted unanimously in favour. The boards also discussed whether a lessee and a lessor should reassess how to account for a purchase option included within an arrangement that contains a lease in subsequent periods. The boards tentatively indicated a preference for specifying the same reassessment guidance for purchase options as was tentatively decided for options to extend or terminate a lease. However, the boards instructed the staff to seek input through targeted outreach on the costs and benefits of requiring reassessment. The boards will continue their redeliberations of the Leases exposure draft at future meetings. Short-term leases The IASB and the FASB discussed the accounting for short-term leases by lessees and lessors. The boards tentatively decided that: A short-term lease, for both lessees and lessors, is defined as 'a lease that, at the date of commencement of the lease, has a maximum possible term, including any options to renew, of 12 months or less'. The IASB and the FASB both voted unanimously in favour. Lessees and lessors may elect: as an accounting policy for a class of underlying asset(s) (the IASB voted 8 in favour and 7 against, while the FASB voted 5 in favour and 2 against), to account for all short-term leases by not recognising lease assets or lease liabilities (the IASB voted 10 in favour and 5 against, while the FASB voted 4 in favour and 3 against); and to recognise lease payments in profit or loss on a straight-line basis over the lease term, unless another systematic and rational basis is more representative of the time pattern in which use is derived from the underlying asset. All the IASB and FASB members supported this decision. Next steps The boards will continue their redeliberations of the Leases exposure draft at the meeting in the week beginning 21 March. IASB-only sessions

Impairment - education session 

The IASB held an education session to discuss how to estimate expected losses and the impairment of purchased debt securities. No decisions were made at this meeting. The Board will discuss these issues jointly with the FASB at next week's joint board meeting.

Effective dates - post-employment benefits and other comprehensive income 

The IASB met to confirm the effective date and transitional provisions in the light of the more general consultation being undertaken by the Board on effective dates.
The Board unanimously confirmed that the other comprehensive income amendments would be effective from 1 January 2012 and that the post-employment benefits amendments would be effective from 1 January 2013.

Sweep issues - forthcoming IFRS 12 Disclosure of Interests in Other Entities

The Board discussed a sweep issue that was raised by one board member during the drafting of IFRS 12 Disclosure of Interests in Other Entities. The board member was concerned that the risk disclosures did not adequately address situations in which an entity 'stepped in' to provide financial support to structured entities with which it had previously been involved, but in which it did not have any interest before providing the financial support.
The Board agreed that the final disclosure standard would clarify that, to meet the disclosure objective for risks associated with interests in unconsolidated structured entities, an entity should provide information about its exposure to risk from involvement that it had with unconsolidated structured entities in previous periods (eg sponsoring the structured entity), even if the entity no longer has any contractual involvement with the structured entity at the end of the reporting period.

IASB Update

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 London on the afternoons of Tuesday 1 February and Wednesday 2 February. Some IASB board members participated by phone and some by video. Most of the meeting was held jointly with the FASB. FASB members participated by video on Tuesday and by phone on Wednesday, because poor weather had caused the FASB to close its offices on that day. In the IASB-only sessions the Board considered the last of the major staff recommendations for the project to improve the reporting by an entity of defined benefit schemes that it sponsors. The topics discussed were classification of post employment benefit plans and accounting for risk sharing features in defined benefit plans. The Board will discuss effective dates and transitional provisions in February with the goal of issuing the amendments in early April. In the sessions held jointly with the FASB, the boards began the more detailed discussions on topics in the revenue recognition, leases and insurance contracts projects. For leases, the staff used two cases to help the boards focus on the factors that are critical to distinguishing the lease of an asset from a contract for services. For revenue recognition the boards discussed warranties and acquisition costs. The insurance contracts team also presented its analysis for acquisition costs so that the boards could consider this topic at the same time for both the revenue recognition and the leases projects. The boards have identified several topics that affect all of the revenue recognition, leases and insurance contracts projects. (These are called cross-cutting issues.) The staff and boards are ensuring that those topics are considered in a consistent manner. The topics discussed at the joint IASB/FASB board meeting were: Insurance contracts Leases Revenue recognition The topics discussed at the IASB Board meeting were: Post-employment benefits Post-implementation review Sessions held jointly with the FASB Contact us International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411 E-mail: info@ifrs.org Website: www.ifrs.org Future Board meetings The IASB meets at least once a month for up to five days. The next Board meetings in 2011 are: 14-18 February 2 March 14-18 March To see all Board meetings for 2011, click here. Archive of IASB Update Newsletter Click here for archived copies of past issues of IASB Update on the IASB website. Podcast summaries To listen to a short Board meeting audio summary (podcast) of previous Board meetings, click here. Insurance contracts The IASB and FASB continued their discussions on insurance contracts by discussing how insurers should account for acquisition costs for insurance contracts. The boards tentatively decided that the contract cash flows should include those acquisition costs that relate to a portfolio of insurance contracts. This was supported by all IASB board members present and by three of the FASB board members. The FASB tentatively decided to include implementation guidance to clarify which acquisition costs should be included in the initial measurement of an insurance contract, rather than being recognised as an expense as incurred. The IASB did not vote on this proposal. The boards discussed whether acquisition costs included in the initial measurement of the cash flows should include only those associated with successful selling efforts. All FASB board members tentatively supported this approach. The IASB did not reach a consensus on this issue. The boards asked the staff to provide further clarification on how to define incremental costs, direct costs, or direct and incremental costs to better understand the acquisition costs that would be included in the cash flows. Next steps The board will continue their discussions on insurance contracts in their joint meeting in the week of 14 February. Leases The IASB and the FASB discussed the definition of a lease and how to distinguish between a lease contract and a service contract. Using some examples, the boards discussed the application of the following principles to identify a lease: Fulfilment of the contract depends on the supplier (lessor) providing a specified asset. The contract conveys to the customer (lessee) the right to control the use of the specified asset. The boards will continue their discussions at a future joint meeting. Revenue recognition The IASB and the FASB continued their redeliberations of the exposure draft Revenue from Contracts with Customers by discussing the accounting for warranties. The boards decided that an entity should account for some warranties as a warranty obligation (ie as a cost accrual) in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets orFASB Accounting Standards Codification® Topic 450 Contingencies. This was supported by all IASB and FASB members present. To determine which warranties an entity would account for as a cost accrual, the boards decided that: If a customer has the option to purchase a warranty separately from the entity, the entity should account for the warranty as a separate performance obligation. Hence, the entity would allocate revenue to the warranty service. If a customer does not have the option to purchase a warranty separately from the entity, the entity should account for the warranty as a cost accrual unless the warranty provides a service to the customer in addition to assurance that the entity's past performance was as specified in the contract (in which case the entity would account for the warranty service as a separate performance obligation). Four IASB members and one FASB member present did not support this decision. However, all the board members supported further development of the application requirements to help an entity to determine when a warranty provides a service to the customer in addition to assurance that the entity's past performance was as specified in the contract. The boards also tentatively decided that: An entity should recognise an asset for the incremental costs of obtaining a contract that the entity expects to recover. Incremental costs of obtaining a contract are costs that the entity would not have incurred if the contract had not been obtained. An asset recognised for the costs of obtaining a contract should be presented separately in the statement of financial position and be subsequently amortised on a systematic basis consistent with the entity's performance under the contract(s) to which the asset relates. Two IASB members and one FASB member present did not support this decision. At a future meeting, the boards will discuss the costs of fulfilling a contract. Next steps At their next February joint meetings, the boards will discuss the following topics: Recognising revenue for a service Identifying distinct goods or services Combining contracts Contract modifications Existence of a contract and the definition of a performance obligation Onerous performance obligations Gift cards and breakage. IASB-only sessions Post-employment benefits  The IASB continued its discussion of the proposals in the exposure draft Defined Benefit Plans (the ED) relating to accounting for risk sharing features. Classification of post-employment benefit plans The Board tentatively decided to clarify that for a plan with a benefit formula to be classified as a defined benefit plan, the benefit formula needs to give rise to a legal or constructive obligation that may require the employer to pay additional contributions as a result of current or past service beyond any contributions already paid for that service. All Board members present at the meeting supported this decision. Accounting for risk-sharing features in defined-benefit plans The Board tentatively decided: to clarify that the benefit to be attributed in accordance with paragraph 67 of IAS 19 is the benefit net of the effect of the employee contributions; to confirm the proposal that the effect of employee contributions should be deducted in determining the defined benefit obligation, but to withdraw the proposal that the effect of employee contributions should always be presented as a reduction in service cost; to clarify that the conditional indexation should be reflected in the measurement of the defined benefit obligation, regardless of whether the indexation or changes in benefits are automatic or are subject to a decision by the employer, by the employee, or by a third party such as trustees or administrators of the plan; and to clarify that if there exist any limits on the legal and constructive obligation to pay additional contributions, the effect of those limits should be included in the calculation of the defined benefit obligation. All Board members present at the meeting supported these decisions. In addition, the Board decided to confirm the proposal that the assumptions used to estimate conditional indexation or changes in benefits should be compatible with the other assumptions used to determine the defined benefit obligation. Two Board members present at the meeting did not support this decision Next steps In the Board meeting for the week beginning 14 February, the IASB intends to discuss the effective date and transition requirements for the amendments to IAS 19. Post-implementation review  The IASB considered a plan for developing a framework for conducting post-implementation reviews. The plan proposes to seek views from the IFRS Advisory Council, the IFRS Interpretations Committee and national standard-setters. The Board agreed with the proposed plan and asked the staff to also seek views from the Analyst Representative Group. The staff expect to bring the results of these consultations, together with the draft framework for post-implementation reviews, to the Board for discussion in April.