Tuesday 5 January 2010 (12:00-16:00 GMT)

The IASB and the FASB met for a special joint meeting in London to discuss issues that were not discussed during the regular December joint meeting. Several IASB members, FASB members, and FASB staff joined the meeting via video link or teleconference. IASB Board Member Robert Garnett chaired the meeting.

Leases

Scope - Purchases and Sales of the Underlying Asset

The Boards started their discussion with identification of a principle that could be used to determine when a transaction was a purchase or sale of the underlying asset and thus should be excluded from the leases guidance.

Most Board members agreed with the staff proposal to base that principle on control: when a contract transfers control of the underlying asset, it is in fact a purchase or sale and should therefore be excluded from the scope of the leases standard.

Despite the unanimous support for that principle, several Board members expressed their concerns whether that principle would be operational and whether additional guidance that would encompass also risk and rewards type of guidance would not be required. Other Board members were concerned that control was to be defined in the same way as control in the revenue recognition project due to the specific nature of the leasing relationship with continuing involvement (which can be interpreted as a kind of a protective right). These members were concerned that without a more detailed specification (for exampple, identification of the control at the end of the lease term) the control principle would not be operational, as control is effectively shared for the lease term.

The Boards spent a considerable amount of time discussing the issue of the definition of control. Some Board members proposed to adapt the revenue recognition definition of control to include also a future ability to direct the use and receive benefits from the underlying asset or to include residual risk and rewards in the test. The Boards finally agreed with the concept of control but instructed the staff to try to find words that would better articulate that concept for the specific environment of leases. Following that decision the Boards decided to wait with the discussion on the perspective from which to assess the transfer of control for the next Board meeting, when the principle of control would be refined.

Some Board members were concerned that in case the definition of control differed in the revenue recognition and leases projects, some contracts might fall out of scope of both standards (and thus no guidance would apply to them).

The Boards agreed to include in the leases guidance indicators to help reporting entities determine whether control had transferred to the lessee. There was little disagreement among the Board members that control of the underlying asset was normally transferred in leases where title to the underlying asset transfers to the lessees automatically at the end of the lease or in leases that include a bargain purchase option. Nonetheless, some Board members were concerned how the bargain purchase option was defined and whether it should be assessed at inception or reassessed at each reporting date. The staff clarified that the bargain purchase option should not be reassessed: it should be considered only at inception.

On the other hand, views of Board members were split on whether control of underlying asset was normally transferred when a contract covers the whole of the expected useful life of the underlying asset or when a contract is expected to cover the whole of the expected useful life of the underlying asset because it includes options to renew the lease at a bargain price. Even though some members supported such extension, other Board members remained concerned and proposed alternative criteria that would capture these types of situations. The Board asked the staff to develop those indicators further and, particularly, to clarify how they were articulated.

The Boards agreed that purchase options should be accounted for in the same way as options to expend or terminate the lease. Some of the Board members expressed their concerns about the consistency of the treatment of purchase options (and options to expand or terminate) and contingent rentals, as both of those might capture the same economic substance.

Insurance Contracts

Unbundling

The Boards started their discussion of insurance contracts with the issue:

• whether to mandate separate recognition and measurement of various components of the contracts (insurance, investment, service) as if they were separate contracts, and
• whether to account for them in accordance with the respective standards (with the possible outcome that they would be based on a different measurement attribute).

The staff proposed that unbundling of a component of a contract for recognition and measurement should be required if that component was not interdependent with other components of the contract.

Most IASB members agreed with such an approach. Nonetheless, the FASB members were concerned with the concept of unbundling and challenged the aim to be achieved by unbundling. In particular they felt uncomfortable that practical measurement issues should influence recognition and presentation and challenged the implications of unbundling for presentation purposes. After a brief discussion the staff clarified that in their view unbundling would be quite rare as in most of the cases the individual components were interdependent. Some Board members challenged that conclusion and were concerned that a recommendation to unbundle only when interdependent for recognition and measurement was premature and further analysis of its impact was needed and it was contrary to the recommendation to disaggregate components for presentation purposes.

Several Board members raised the implications of unbundling on the policyholder's accounting (to be discussed on a next Board meeting) and the impact on universal life policies that were usually unbundled under current requirements.

Finally, the IASB voted in majority for the staff proposal to unbundle a component if that component was not interdependent with other components of the contract, whereas the FASB was against. The FASB members wanted more analysis of the effects of unbundling on embedded derivatives, presentation as well as further broader considerations (for example, how was the notion of interdependence related to the closely related notion currently employed for some of the embedded derivatives under IAS 39).

Notwithstanding further decision on unbundling, the Boards agreed that in cases where unbundling would not be required it should be prohibited.

The Boards continued to discuss whether to prohibit an insurer from unbundling the deposit component for presentation in the performance statement unless unbundling of that component was required for recognition and measurement. Most of the Board members were not prepared to make that decision before a broader discussion of the presentation of insurance contracts in the performance statement. Moreover, some of the Board members were concerned that such a decision might lead to inconsistency in the presentation between the income statement and statement of financial position and they wanted to understand whether such inconsistency was justified.

Presentation of the Performance Statement

The Boards continued their discussion of presentation in the performance statement. The staff discussed five presentation alternatives supported by examples (written premium, earned premium, unbundled, summarised margin, and expanded margin approaches).

The Boards agreed in principle that revenue should be reported on an earned basis rather than on a written basis. Nonetheless, the staff was asked to further analyse how the earned basis would be defined.

Without making any decision the Boards discussed whether an insurer should report as revenue the part of the premium that does not relate closely to the insurance coverage and other service provided under that contract (that is, whether insurers should report as revenue the premium that relates to expected future repayments to the same policyholders).

The discussion of the presentation alternatives was inconclusive, with no specific model gaining much support. In general, margin approaches seemed to have some support in the IASB, even though multiple practical issues were raised. The staff was asked to perform additional analysis and recommend a model based on that analysis. Nonetheless, it seemed that many Board members were not prepared to endorse a single model for presentation as, in their view, a single model might not provide useful information for all types of insurance contracts. Some Board members supported the unearned premium approach for non-life, non-deposit short term contracts. The Boards will continue discussion on the presentation of the insurance contracts at a future meeting.

Embedded Derivatives

Finally, the Boards discussed the accounting treatment for derivatives embedded within an insurance host contract. The Boards were split between measuring those embedded derivatives using the same measurement approach applied to the insurance contracts and fair value.

In the discussion, most Board members seemed to favour a mixed approach to embedded derivatives that would require bifurcation of embedded derivatives and their measurement at fair value in some circumstances and treating them as part of the insurance contracts in other circumstances. The Board asked the staff to analyse the issue and present an updated analysis at a future Board meeting.

This summary is based on notes taken by observers at the joint IASB-FASB meeting and should not be regarded as an official or final summary.