Publication of the Exposure Draft

The IASB and FASB have had an ongoing project on discontinued operations on their agenda for some time. The staff discussed with the Board their plan for re-exposing the proposals based on redeliberations from the 2008 exposure draft. The staff believe that the proposals would not be in the scope of the Annual Improvements process and therefore a separate due process document would be required. The staff recommended publishing the exposure draft during Q2 2011 with a 120 day comment period.

However, several of the IASB Board members had concern with this approach. One Board member mentioned that in the revised workplan issued the previous day; this project was not even included as an active project. He had concerns that deciding to issue an exposure draft on a project one day after the workplan was released could subject the Board to criticism from constituents. Other Board members expressed similar concerns, mentioning that the proposed changes were much more significant for those currently applying US GAAP and therefore the IASB should wait and see what feedback the FASB receives from their own exposure draft before deciding how to proceed. They felt any issuance of an exposure draft should not occur before Q3 2011.

The Board unanimously agreed to hold off an issuing an exposure draft until Q3 2011 and monitor what the FASB does in the interim.

Purchased debt instruments

The Boards continued their discussions from the 22 March joint meeting in Norwalk on the accounting for purchased debt instruments subject to impairment accounting.

The discussion centred on how to recognise interest income for 'good book' purchased loans and whether purchased and originated loans should be treated similarly (e.g., effective interest rate based on contractual cash flows) or whether purchased loans should be treated differently (e.g., effective interest rate based on expected cash flows, including expected credit losses).

During the previous meeting, the IASB was supportive of a single model while the FASB preferred differentiation for purchased loans. The staffs prepared three illustrative examples to assist the Boards in their continued discussion on the topic.

The staffs began by requesting the Boards to limit the initial discussion in the context of loans in the good book. However, the unit of account question between the 'good book' and 'bad book' added significant complexity to the discussion (whether a 'good book' acquired portfolio would need to separate out any 'bad book' loans or whether an entire portfolio of 'bad book' loans would be considered for a separate interest recognition model). The inclusion of the 'floor' allowance in the examples (as a reduction in the purchase price/fair value of the purchased loans for a net carrying amount) also added to the confusion. One of the IASB members suggested that Board members ignore that part of the example and instead focus solely on the income recognition.

The IASB members generally remained consistent with their view from the prior meeting that for 'good book' loans that interest recognition should be the same as for originated loans. However, two IASB members did express support for separate models by using expected cash flows rather than contractual cash.

One of the FASB members strongly supported different interest recognition models for originated and purchased loans as he felt that information on organic growth of a customer relationship (originated loans) was important information for financial statement users and including acquired loan portfolios distorted that information. However, many of the FASB members were swayed by the examples that for 'good book' loans the interest recognition model should be consistent with originated loans.

The Boards also discussed how income should be recognised for 'bad book' loans acquired. In addressing the unit of account question for 'bad book' loans, the staffs responded they would prefer not to dictate the approach but to leave to how an entity manages their loan portfolios in determining whether an entire acquired portfolio would be considered 'bad book' or whether the 'bad book loans would be individually identified loans from a 'good book' acquired portfolio.

Ultimately both Boards tentatively decided that for 'good book' loans interest income would be recognised based on contractual cash flows while for 'bad book' loans interest income would be recognised based on expected cash flows. However, the Boards acknowledged there were other issues that may need to be addressed including non-accrual status of loans, differentiation between 'good book' and 'bad book' acquired loans and potentially needing to revisit based on feedback received on the impairment approach in the Supplementary document.

The FASB Chair also concluded the impairment discussion by recognising they have received requests from certain constituents to provide additional time to submit their comment letters. She encouraged those constituents to still send in their comments when possible, but mentioned that the Boards had received some consistent themes through the comment letters they have received to date and the outreach activities performed and they have decided to proceed with deliberations on those areas.

Unlocking the margin

The staff held an education session with both Boards to discuss the topic of whether the residual or composite margin should be locked-in at inception or unlocked over the life of the contract. The staff asked the Boards for direction but no official decisions were made during this meeting.

Both the IASB and FASB proposals on insurance contracts would require the margin to be locked-in at inception and allocated to future periods. While the ED did not ask a specific question on unlocking the margin, many comment letter respondents disagreed with the requirement that the residual or composite margin should be fixed at inception.

Those who support unlocking the margin believe that the initial lock provides counterintuitive results as changes in estimates are recognised in profit or loss, even though the measurement of the liability includes a profit margin. They feel that it is not representationally faithful to recognise expense in one period only to reverse it in a later period. However, those not in favour of unlocking the margin believe that unlocking would defer the recognition of changes in estimates of the value of the insurance contract liability to periods after the period in which they occur

The staffs are considering recommending requiring unlocking the residual or composite margin to reflect estimated future changes and assumptions about non-financial inputs and to adjust the residual or composite margin prospectively for favourable and unfavourable changes. Additionally, the staff is considering recommending that if the measurement of the liability includes a risk adjustment, the boards should prohibit the residual margin plus the risk adjustment from becoming negative, and if the measurement of the liability does not include a risk adjustment, the Boards should prohibit the composite margin from becoming negative.

A majority of the IASB members generally supported where the staff was going with considering unlocking the margin, however several members on both Boards had concerns that they were introducing significant complexity into the model. Additionally, the FASB Chair expressed reservation about deferring items outside of profit and loss. She also questioned where the staff intended to go with the future discussion to occur around other comprehensive income and said the Boards needed to see the entire recommendation on both items to consider properly. The IASB Chair agreed. The FASB did not hold a tentative vote to determine whether their Board supported the direction of the staff.

The IASB staff also provided the Boards with a summary from the insurance working group's last meeting. The group discussed three topics during the meeting including 1) the discount rate, 2) presentation and 3) the residual margin. The group may hold another meeting in May 2011.