Start Date: Jul 20, 2011
End Date: Jul 22, 2011
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The IASB and FASB held a joint Board Meeting on 20-22 July 2011. Both boards met in London for joint discussion topics. |
Wednesday, 20 July 2011IASB meeting (08:30-10:45)
IASB-FASB joint meeting (11:15-18:00) Thursday, 21 July 2011IASB-FASB joint meeting (09:00-18:00) Friday, 22 July 2011IASB meeting (10:00-14:15) |
Jul 20, 2011
The IASB discussed the proposals in the hedge accounting exposure draft related to hedging groups and net positions.
The IASB discussed the proposals in the hedge accounting exposure draft related to hedging groups and net positions. The exposure draft permitted the hedging of groups of items, but for cash flow hedges the exposure draft restricted hedging offsetting cashflows (net positions) when those cash flows affect profit or loss in different periods. This restriction was put in place to address various Board concerns.
The comment letter responses and outreach activities were very supportive of the proposals. However, the feedback received highlighted certain areas where constituents requested additional clarity or flexibility, those issues include:
To address the request regarding removing the restriction on cash flow hedges impacting profit or loss across reporting periods, the staff presented the Board with five possible alternatives:
The Board primarily considered Alternative 3 and Alternative 5 based on the staff recommendations. The Board was fairly split on the topic with certain Board members concerned over removing the restriction for cash flow hedges of forecast transactions because of the complexity and the potential for earnings management. Other Board members expressed support for removing the restriction as they pointed out that hedge accounting could be applied by entering in to two separate hedging relationships with derivatives for the gross amounts which seemed overly burdensome and costly when a single derivative for the net position would accomplish the same result. One of the IASB members questioned if there were any risks outside of foreign currency risk where cash flow hedging of forecast transactions would be used (for example, interest rate risk). The staff noted that the issues that have been raised by constituents have primarily been foreign currency related. The Board member said that limiting the removal of the restriction to only foreign currency transactions would alleviate some of this concerns.
Ultimately, the Board tentatively agreed (9 votes to 6 votes) to extend the eligibility for designation as a hedged item to net positions involving forecast transactions that affect profit or loss in different period when hedging foreign exchange risk.
[Note: The IASB Update clarified the Board's tentative decision during this session that cash flow hedges of net positions would only be available for hedges of foreign currency risk. The Board also tentatively decided to remove the restriction that the offsetting cash flows in a net position must affect the income statement in the same reporting period. Instead, the eligibility criteria would be extended to require that the items within the net position must be specified in such a way that the pattern of how they will affect the income statement is set out as part of the initial hedge designation.]
The Board also discussed financial statement presentation for hedging of groups and net positions. The exposure draft proposed that gains and losses on the hedging instrument would be presented in a separate financial statement line item when the hedging relationship involves a net position hedge that affects different line items in profit or loss (e.g. sales and cost of sales). Most comment letter respondents and outreach participants supported the exposure draft proposals; however, some respondents disagreed with the proposals. Those who disagreed felt that, among other reasons, such a net presentation would not adjust the financial statement line items affected by the hedged item and therefore create volatility within those income statement line items. However, the staff also note that presenting the gains or losses on the hedging instrument in as separate line item avoids considering transactions that do not exist (forecast transactions) and presenting artificial gains or losses to achieve a gross presentation.
The Board tentatively agreed that for a hedge of a group of items with offsetting hedged risk positions that affect different line items in the income statement (net position hedges) to present the reclassification of gains or losses on hedging instruments in a separate line item in the income statement without adjusting the line items affected by the forecast transactions.
Jul 20, 2011
The IASB considered (1) a staff recommendation to permit the recognition of forward points that exist at inception of a hedging relationship in profit or loss over time on a rational basis and accumulate subsequent fair value changes in accumulated other comprehensive income, and (2) consider outreach activities for the exposure draft regarding aggregated exposures.
The hedge accounting exposure draft proposed a change in the accounting for the time value of options but did not propose any changes in the accounting for forward contracts (i.e., an entity may designate either the forward contract in its entirety or the change in the spot element of the forward contract as an eligible hedging instrument. Feedback to the exposure draft requested the board extend the proposals related to time value of options to also include forward points.
The IASB staff noted that the time value of options and forward points do share similar characteristics, in particular that the time value changes over time with the fair value reaching zero at the end of the contract.
Currently under IAS 39, entities who elect to designate the forward contract in its entirety (the 'forward rate method') for transaction related items results in an accounting similar to the proposals in the exposure draft for time value of options (e.g., the initial time value is deferred in OCI and recognised based on the general requirements of the hedged item (i.e., 'basis adjusted'). However, for time period related hedged items, no similar allowance is provided and entities must either use the forward rate method or designate only the spot element (with fair value changes in the forward points recognised as a trading gain or loss). The staff found during outreach this was particularly a relevant issue for financial institutions in Asia who routinely use funding swap transactions. In their view, forward points represent the interest differential between the two currencies at inception and are economically considered an adjustment to the investment yield.
The IASB staff recommended the Board permit the recognition of forward points that exist at inception of a hedging relationship in profit or loss over time on a rational basis and accumulate subsequent fair value changes in accumulated other comprehensive income. One Board member expressed concerns with the proposal stating his view that he looked at forward points as different from time value of options as forward points could be a cost of hedging but could also be an income source. As a result, he considered forward points a basis risk that should be recognised in hedge ineffectiveness. However, other IASB members generally supported the staff recommendation although a couple expressed a preference for making a requirement rather than permitting forward points to be accounted for similar to the approach for time value of options. The Board tentatively agreed to permit the recognition of forward points that exist at inception of a hedging relationship in profit or loss over time on a rational basis and accumulate subsequent fair value changes in accumulated other comprehensive income.
The hedge accounting exposure draft proposed that if an entity combines an exposure with a derivative in order to create a different aggregated exposure managed as one exposure for a particular risk then that aggregated exposure may be designated as a hedged item.
During outreach activities for the exposure draft, constituents were very supportive of the proposals regarding aggregated exposures as it helps to align hedge accounting with an entity's risk management and removes the current arbitrary restrictions that exist in IAS 39. Only limited constituents disagreed with the proposals; however, several constituents requested the board 1) provide examples to illustrate the accounting mechanics related to aggregated exposures, 2) provide clarification that accounting for aggregated exposures is not a method of 'synthetic accounting' and 3) to clarify whether hedge accounting must be achieved for the combined exposure and derivative as a precondition for the aggregated exposure being an eligible hedged item in another hedging relationship.
Additional topics related to aggregated exposures where constituents asked for further clarity included:
Based on the constituent feedback, the IASB staff recommended that the Board confirm the proposal in the exposure draft subject to providing additional clarifying guidance, include illustrative examples in the final standard, clarify that derivatives that are part of an aggregated exposure are always recognised a separate assets or liabilities and measured at fair value and to provide in the basis for conclusions of the final standard that an aggregate exposure is part of hedge accounting and not a form of 'synthetic accounting', not to impose specific restrictions which would require hedge accounting for the original exposure and derivative that form the aggregated exposure, and to clarify that the notion of an aggregated exposure includes a highly probably forecast transaction of an aggregated exposure if that aggregated exposure once executed is eligible as a hedged item and how to apply the general requirements in the context of designating a derivative as part of an aggregated exposure.
One of the IASB members inquired of the staff on one of the clarification topics in the agenda paper of whether derivatives that are basis swaps can be used when hedging aggregated exposures. The agenda paper highlighted that because the basis swap only changes the type of variability that they do not qualify in either a cash flow or fair value hedge relationship. The Board member mentioned that he would support permitting basis swaps in hedging relationships. Another Board member stated their support for the inclusion of the illustrative examples as he felt that examples provide better clarity than complex and detailed guidance.
However, one Board member stated that he disagreed with permitting aggregated exposures as eligible hedged items in the exposure draft and still had concerns. In fact, he felt as the staff proposals were expanding the ability to hedge aggregated exposures. He would prefer that the Board add more discipline around the initial relationship as he had concerns that entities could override the classification and measurement requirements. Another Board member agreed with this concern.
The Board tentatively agreed to the following:
Jul 20, 2011
The IASB unanimously agreed to the issuance of the agenda consultation request document.
The IASB is preparing to issue a consultation document on their future agenda. The Board received a draft of the report and was provided the opportunity to ask the staff any questions. The only question asked of the staff is whether it would be communicated that the current major projects would need to be completed prior to commencing with any other projects discussed in the agenda consultation document. The staff clarified that the current projects would not be included for discussion as part of the consultation request.
The Board unanimously agreed to the issuance of the agenda consultation request document.
Jul 20, 2011
As part of its continuing deliberations surrounding the Exposure Draft Leases, the IASB and FASB deliberated on the topics of the lessor accounting model, accounting for variable lease payments and embedded derivatives.
As part of its continuing deliberations surrounding the Exposure Draft Leases (Leases ED), the Boards deliberated on the topics of the lessor accounting model, accounting for variable lease payments and embedded derivatives.
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Summary The Boards made a number of tentative decisions during these deliberations, as follows: Lessor accounting model: Application of a single lessor accounting model (i.e., the receivable and residual approach) for all leases except those that are short-term (defined as a lease that, at the date of commencement of the lease, has a maximum possible lease term, including any options to renew or extend, of 12 months or less) or leases of investment property measured at fair value. Under the 'receivable and residual' approach, the lessor would:
The Boards requested that the staff further explore the application of the 'reasonably assured' concept as it relates to recognising profit at lease commencement. Accounting for variable lease payments: Variable lease payments that depend on an index or a rate would be initially measured at the rate that exists at lease commencement. Lessees and lessors would reassess variable lease payments that depend on an index or rate when measuring the lessee's liability to make lease payments and the lessor's right to receive lease payments in subsequent periods. At reassessment, all changes to the lessee's liability and the lessor's receivable resulting from changes in variable lease payments that depend on an index or rate would be reflected as proposed in the Leases ED. However, the Boards asked the staff to bring back two specific topics regarding recognition at a future meeting. Embedded derivatives: Entities would be required to assess whether their lease contracts include embedded derivatives which would be accounted for in the scope of current guidance. |
As part of the June 2011 Board meeting, the Boards asked the staff to explore possible lessor accounting approaches; specifically considering whether to apply a single lessor accounting model and, if so, what the model would be, or whether to retain the current operating and finance lessor accounting models while distinguishing between leases that transfer substantially all the risks and rewards of ownership. The Boards also provided the staff with informal votes on a number of key topics in relation to possible lessor accounting model approaches.
Lessor accounting model
Continuing from discussions as part of the May and June joint Board meetings, the Boards considered two approaches for the lessor accounting model: (1) a dual-model approach consisting of current operating lease accounting for 'other-than-finance' leases and the 'receivable and residual' approach for 'finance' leases (akin to current capital leases) ("dual-model approach") and (2) the 'receivable and residual' approach for all leases ("single-model approach").
The 'receivable and residual' approach would include the following elements:
The staff provided feedback from constituent outreach, in which a clear majority of IFRS constituents preferred a single-model, while US GAAP constituents were relatively split between a single- or dual-model approach. The majority of the staff preferred the single-model approach given its consistency with the lessee single-model approach and the fact that the spectrum of lease contracts was not considered to be uniquely different so as to justify two unique model approaches. However, a minority of staff expressed a preference for a dual-model approach given the key economic differences of different lease transactions. These individuals reconciled having a single lessee model (as opposed to a dual-model for lessors) by acknowledging that there is a threshold difference for revenue recognition (lessor) as compared to liability recognition (lessee).
The Boards reviewed practical examples of both approaches and noted that the 'receivable and residual' approach, when compared to current operating lease accounting, provided for accounting which better reflected the pricing of the contract (e.g., constant rate of return on investments), provided users with better information about risks by separately recognising the receivable and residual asset and provided a more accurate depiction of the economics of the transaction within a company's statement of financial position.
As a result, the Boards tentatively agreed to apply a single-model approach for lessors.
The Boards were asked to consider whether the 'receivable and residual' approach could be used in all leasing environments. Specifically, the Boards were asked to consider the following possible scope exceptions:
Profit recognition under a 'receivable and residual' approach
The Boards were asked, in applying the 'receivable and residual' approach (discussed above), if a lessor should recognise profit on the right-of-use asset transferred to the lessee at lease commencement (i.e. the difference between the fair value of the underlying asset and the carrying amount at lease commencement), or defer profit recognition over the lease term unless the lease agreement transfers substantially all of the risks and rewards of ownership of the underlying asset.
The staff proposed that profit should be recognised to the extent that profit is reasonably assured in an attempt to limit variability in profit or loss when the lessor has not transferred substantially all of the risks and rewards of ownership of the underlying asset to the lease or the estimate of the residual value of the underlying asset is not a reliable prediction of what the underlying asset will be worth at the end of the lease term. Reasonably assured would be designed to be generally consistent with the use of the term in the revenue recognition project.
The staff noted the appropriateness of initial profit recognition in that, at lease commencement, the lessor has performed by making the underlying asset available for use by the lessee and, in exchange, has a lease receivable. Likewise, the staff noted that recognition of any manufacturing / dealer profit at lease commencement is derived from services performed in advance of entering into the lease.
Both Boards generally agreed with the staff's recommendation; however, such agreement was based on the ability to adequately define the term reasonably assured. Specifically, the Boards considered examples outlined by the staff, including uncertainties in: estimating the residual value at the end of the lease term; allocating payments made by the lessee into lease and non-lease components; and determining the fair value of the underlying asset at lease commitment. The staff identified all three of these environments as areas in which the right-of-use asset transferred would not be reasonably assured.
Board members expressed concerns related to the consistency of the 'reasonably assured' concept to that outlined in the revenue recognition model and the confusion of the concepts of reasonably estimated and reasonably assured.
While these concerns are inter-related, specific concerns expressed by Board members included:
After debate, the Boards tentatively agreed with the staff recommendation that at lease commencement, a lessor should recognise profit on the right-of-use asset transferred to the lessee if that profit is reasonably assured. If the profit on the right-of-use asset transferred is not reasonably assured, a lessor would apply the 'receivable and residual' approach outlined above except that the lessor would initially measure the residual asset as the difference between the carrying amount of the underlying asset and the lease receivable. The lessor would subsequently accrete the residual asset using a constant rate of return to an amount equivalent to the underlying asset's carrying amount at the end of the lease term as if it had been subject to depreciation.
However, in the above decision, the Boards asked the staff to provide draft wording for application of reasonably assured in advance of final drafting of the standard. Many Board members preferred that the application guidance consider the definition of reasonably assured outlined in the revenue recognition project (i.e., consistent principle), but provide criteria which were appropriate for a leasing environment, while also applying the reasonably estimated concept.
In April and June 2011, the Boards tentatively decided that variable lease payments should not be included in the measurement of a lessee's liability to make lease payments and a lessor's lease receivable unless those payments represent:
As part of this Board meeting, the Boards were asked to discuss the measurement of variable lease payments that depend on an index or a rate within the lessee's liability to make lease payments and the lessor's right to receive lease payments. This discussion was derived from clarification requested by constituents as to how to apply a spot rate to the initial measurement of variable lease payments that depend on an index or a rate; specifically considering an environment in which a daily spot rate does not exist (e.g. when the lease payments are linked to an annual rate of inflation) or the index is a scale rate (e.g. lease payments are linked to a consumer price index (CPI) formula — such as a rate of 125 at the lease commencement date). In these environments, constituents were questioning whether the spot rate was indicative of: an annual rate of inflation of zero or CPI rate of 125, respectively; a rate based on the most recent annual rate of inflation; or a rate based on a historical average.
In considering this environment, the staff recommended clarifying the previous tentative decision by stating that variable lease payments that depend on an index or rate should initially be measured based on the index or rate that exists at the date of commencement of the lease (as opposed to stating measurement in accordance with the spot rate since a spot rate does not always exist). As an example, for a lease tied to CPI, a CPI of 100 at lease commencement would result in applying a CPI of 100 throughout the remaining lease term. The measurement of the lessee's liability would exclude any estimation of future rates / indices.
A minority of the Boards expressed a desire to apply a more reliable rate if one is available (i.e. a rate that more appropriately reflected the economics of the transaction). Specifically, these Board members noted that the spot rate is likely not indicative of a future rate prediction, and thus, for example, if a forward rate existed, they preferred the use of the forward rate. However, multiple Board members expressed concern with applying with applying any methodology other than that proposed by the staff, as these Board members felt that the staff proposed a practical expedient that limited structuring opportunities. Further, these Board members noted the complexity that may be added in applying a methodology other than that proposed by the staff. As such, the Boards tentatively agreed that variable lease payments that depend on an index or rate should initially be measured based on the index or rate that exists at the date of commencement of the lease.
The Boards then considered whether reassessment and subsequent measurement of variable lease payments that depend on an index or rate is necessary.
While a minority of the Boards noted the added complexity / time burden of reassessing each lease each period, other Board members did not identify this as an overly complex or time intensive task. They noted the benefits of requiring reassessment, including timely delivery of more relevant information to users of financial statements given that it reflects current economic decisions and consistency with the requirement to reassess options to extend or renew a lease and the accounting for foreign exchange differences.
As such, the Boards tentatively agreed to require reassessment of variable lease payments that depend on an index or rate.
Finally, as a result of the above decision, the staff asked the Boards how to account for changes in the expected amount of such payments; recommending the following:
Many Board members, while agreeing with the framework, were unclear as to how to distinguish current and future period adjustments in the lessee accounting model. The staff noted that they will bring this issue back in a future discussion.
Another Board member cited concern with the lessee approach in an environment in which profit is deferred based on the reasonably assured concept outlined above. This Board member requested the staff to consider an environment in which profit is constrained in amending the above application proposal (i.e. can you always say take to profit or loss). The staff will bring this issue back in a future discussion.
The Boards were asked to consider whether entities would be required to assess whether their lease contracts include embedded derivatives which would be bifurcated and accounted for in accordance with the guidance on financial instruments, as is currently required under both IFRSs and US GAAP.
The staff outlined little constituent feedback in this area given that the Leases ED did not provide guidance on embedded derivatives in lease contracts nor did it request feedback from constituents in this area. Staff analysis highlighted that retaining the embedded derivative assessment requirement would provide users with timely information regarding risks related to embedded derivatives, limit structuring opportunities and provide fair value information in relation to lease payments.
The Boards strongly supported retaining current guidance requiring assessment as to whether host lease contracts contain embedded derivatives in providing fair value measurement of assets and liabilities relating to lease contracts. They expressed that:
While the Boards supported requiring assessment as to whether host lease contracts contain embedded derivatives, one Board member expressed a desire to provide clarity in any final standard as to the appropriate accounting guidance to apply in accounting for embedded derivatives considering the scope of IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement is limited to financial instruments as opposed to a lease liability.
Jul 20, 2011
The IASB and FASB discussed criteria on how and when assets should be transferred from one 'bucket' to the next under the 'three bucket' approach to impairment, and also the measurement of items in 'bucket one'.
During the June 2011 joint Board meetings, the Boards agreed to continue development of an impairment approach for financial assets using three "buckets":
At the last meeting, the staffs were asked to develop criteria on how and when assets should be transferred from one bucket to the next; the existing criteria in IFRS and US GAAP on current impairment triggers was one method suggested for developing this criteria.
The staffs presented to the Boards an agenda paper which summarised an event based approach (utilising the existing impairment triggers in IFRS and US GAAP) and a credit risk management approach. The credit risk management approach was further broken down into an 'absolute' credit risk model and a 'relative' credit risk model.
Under the event based model approach all assets (whether originated or purchased) would start in bucket one with transfers occurring based on specific events which indicate the existence of credit deterioration or improvement. However, the event based approach would also require differentiation between events that would cause a transfer between buckets and events that would not cause a transfer but would instead change the loss expectations. In considering this approach, the staffs felt it was difficult to identify a principle to differentiate events and changes in circumstances that would require a transfer across categories from those that would only impact the estimate of expected losses.
Under the 'absolute' credit risk model approach, the objective would be to reflect the change in credit quality of assets consistent with an entity's credit risk management practices. As assets are originated or purchased, they would be categorised into one of the three buckets based on its absolute level of credit risk, regardless of whether the asset's pricing appropriately reflects the associated credit risk.
Under the 'relative' credit risk model approach, the objective would be to reflect the credit deterioration or improvement in assets utilising an entity's credit risk management practices. This approach would result in transfers across buckets based on changes in credit loss expectations. As assets are originated or purchased, they would initially start in bucket one and then transfers to buckets two and three would occur based on changes in credit loss expectations. It was noted by the staffs that under this approach, some loans with higher credit risk could be held in bucket one while other loans with lower overall credit risk but for which changes in credit loss expectations have occurred would be held in buckets two or three.
During Board discussions, many Board members were generally supportive of the use of a credit risk model rather than solely an event driven model, although some Board members requested retaining or layering aspects of the event driven model into the credit risk model approach. Many Board members leaned toward the 'relative' credit risk model approach with some having fundamental concerns with the 'absolute' credit risk model approach.
One of the FASB members suggested using a 'more likely than not' threshold of whether the asset continues to perform consistently with the original pricing of the asset to determine whether the asset would be recognised in bucket one or bucket two. When it becomes 'probable' the asset will not perform consistently with the original pricing then the asset would move to bucket three. He also suggested potential disclosures of a roll-forward of asset balances from period to period which would include a migration of the allowance by bucket.
The FASB Chair added that if the event driven approach were incorporated into the credit risk model it was important that the terminology be more clear as use of the term 'events' suggests the model is no longer focused on 'expected' credit losses but rather incurred credit losses. She suggested use of the term 'cues' instead of 'events'.
The Board tentatively decided to proceed with development of a credit risk model using the 'relative' approach but including event indicators as cues for assets transferring between buckets.
During the June 2011 joint Board meetings, the Boards tentatively agreed that for assets in 'bucket one' an allowance should be recognised equal to 12 months of expected credit losses based on the initial expectations plus the full amount of any changes in expectations. However, the Boards recognised there may be operational difficulties with such an approach and requested the staffs to further develop this approach ensuring it was operationally feasible and to conduct outreach to identify how to make the approach operational.
The outreach activities performed by the staffs (including EAP members) identified that the recognition approach supported by the Boards was the most operationally challenging of the alternatives considered by the Boards and would require significant systems modifications. Many also commented on the similarities to the original IASB exposure draft which was not considered operational for open portfolios of assets because of the requirement to track initial expectations of credit losses. These constituents also felt that if the migration to bucket two and bucket three occurred earlier than envisioned for transfers to the bad book would have been under the Supplementary Document (SD) proposals then the pressure on the allowance for bucket one would be diminished. As a result, they suggested the calculation for the bucket one allowance be as operationally simplistic as possible as the incremental benefit from a complex calculation methodology would not be justified.
The staffs presented the Boards with four alternative methods for calculating the bucket one allowance balance:
Based on the feedback provided during the outreach activities, the staffs believe that Method A and Method B are worthy of additional consideration but do not support further pursuing Method C and Method D because of the operational difficulty associated with these approaches. The staffs also wanted to clarify terminology as they felt the terms 'annual loss rate' and 'annualised loss rate' may be being used interchangeably when in fact they are different concepts. An 'annual loss rate' would be those losses expected to occur over the next 12 months while an 'annualied loss rate' would be the lifetime expected losses divided by the lifetime of the assets multiplied by a 12 month period. These two approaches could result in different allowance amounts if assets have loss emergence patterns that are front or back loaded.
One of the IASB members said that he was one of the more vocal supporters of the Boards' previous decision but he has changed his view to supporting either Method A or Method B as the allowance amount for bucket one would not be significantly different and because the Method C and Method D approaches would result in allowance balances that are not comparable across entities. One FASB member questioned how Method D could be described as a simplification of the Board's previous decision as he felt that such a method could not be practically applied. One IASB member said that he could support either Method A or Method B but that if a 12 month loss period was used then he would like to introduce disclosure requirements for assets on a 'watchlist' of being transferred from one bucket to another. One IASB member said he did not support either Method A or Method B because of the resulting day 1 loss that is associated with such an approach. One FASB member expressed concern with Method A as he felt that based on initial research he had performed of US banks over more than the last half century that banks typically have more allowance recorded than 12 months of write-offs, therefore he felt that Method A could result in less allowance being recognised that current US GAAP.
The Boards tentatively agreed to keep the calculation for the bucket one allowance operationally simple and to further consider an approach of using either 12 or 24 months' worth of losses expected to occur on the financial assets, or for the remaining expected life if that is less than 12 or 24 months. The Boards also tentatively agreed to require the use of an annual loss rate (or a 24 month loss rate).
Jul 21, 2011
The Boards hosted a presentation by the Institute of Chartered Accountants of Scotland (ICAS) to provide the results of their joint project with the New Zealand Institute of Chartered Accountants in which they conducted a study on reducing disclosures in financial reporting.
The Boards hosted a presentation by the Institute of Chartered Accountants of Scotland (ICAS) to provide the results of their joint project with the New Zealand Institute of Chartered Accountants in which they conducted a study on reducing disclosures in financial reporting. Those standards in the scope of this project included IFRSs 1, 2, 3, 5, 6, 7, and 8 and IASs 1, 2, 7, 8, 10, 12, 16, 19, 20, 21, 23, 24, 29, 33, 36, 37, 38, 40 and 41.
The study started with a review of the conceptual framework. Their recommendations include:
The group estimates that there recommendations would result in an overall 30% reduction in the number of pages in the financial statements. They suggested the Board package the report as an outreach document to solicit constituent feedback.
The Boards commended the group for their efforts. Some of the Board members were supportive of the groups' recommendations while other Board members (particularly representatives of the user community) expressed reservations with the proposals, in particular the removal of the account reconciliations. The IASB Chairman said the Board would discuss how to proceed with the report at a future Board meeting.
Jul 21, 2011
As part of its continuing deliberations surrounding Leases ED, the IASB and FASB deliberated on the topics of the lessee presentation and disclosure.
As part of its continuing deliberations surrounding Leases ED, the Boards deliberated on the topics of the lessee presentation and disclosure.
SummaryThe Boards made a number of tentative decisions during these deliberations, as follows: Statement of Cash Flows:
Statement of Financial Position:
Disclosures: The Boards discussed certain disclosure requirements from the Leases ED and tentatively decided on the following:
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The staff discussed the presentation for lessees of cash paid for leases in the statement of cash flows and other supplemental cash flow disclosures. Leases ED proposed that a lessee shall classify cash payments for leases as financing activities in the statement of cash flows and present them separately from other financing cash flows. However, the staff identified four issues with cash flow requirements for lessees based on constituent feedback and past Board tentative decisions. These issues included:
Interest:
Many Board members expressed concern with mandating the classification of interest paid for leases since this decision is outside of the scope of the leases project. However, specifying the classification of the principal portion of the liability to make lease payments would be appropriate because similar liabilities are classified in this manner in current practice.
Other Board members focused on the need to provide clarity to users as to all cash components of leases by way of an aggregated disclosure. Given that staff recommendations included bifurcation of principal and cash payments in the statement of cash flows, these Board members expressed the need for one disclosure specifying all cash components of a lease, including fixed principal, variable lease payments and interest.
The Board was asked to consider whether the principal and interest should be bifurcated in the statement of cash flows. While the FASB tentatively decided that the principal and interest should be bifurcated, the IASB tentatively decided not to bifurcate payments. The FASB Chair then asked if the IASB would be opposed to allocation of principal and interest of cash paid for lease payments in accordance with current applicable IFRS or US GAAP requirements. The IASB did not oppose this view.
Variable lease payments:
The staff noted, as a result of previous tentative Board decisions, the value of the right-of-use asset and the liability to make lease payments should only include amounts for variable lease payments that are index based (in addition to disguised fixed payments). Since the liability to make lease payments does not include other variable lease payments, the staff outlined that there is no settlement of a financing liability by the lessee when those variable lease payments are made, and therefore, it would be inappropriate to include those cash flows in the financing section of the statement of cash flows. However, given that users would like information about variable lease payments, based on outreach performed, the staff recommended that cash paid for variable lease payments excluded from the measurement of the right-of-use asset and the lease liability to make lease payments be classified as an operating activity. Period expenses arising from variable lease payments that were not included in the measurement of the right-of-use asset and liability to make lease payments should be presented separately in profit or loss or disclosed in the notes to the financial statements.
Many Board members were concerned with presenting fixed payments in one section of the statement of cash flows (i.e., financing), while presenting variable lease payments in another section (i.e., operating). Another Board member saw it as 'penalising' to include variable lease payments in operating cash flows since operating cash flows are a focal point for investors. However, other Board members saw variable lease payments as unique from fixed payments, as such variable payments (which were not included in the right-of-use asset) are often based on performance results, such as variable rent payments based on sales during the quarter. These Board members saw variable payments as more akin to period costs and an operating cash flow.
The Boards tentatively agreed that cash paid for variable lease payments excluded from the measurement of the right-of-use asset and the liability to make lease payments would be classified as an operating cash flow. However, the Boards also tentatively decided that period expenses for variable lease payments not included in the right-of-use asset and corresponding liability, along with fixed principal payments, would be disclosed in the notes to the financial statements under a comprehensive disclosure.
Noncash information:
With little debate, the Boards tentatively agreed that the acquisition of a right-of-use asset in exchange for a lease liability would be disclosed in an additional non-cash disclosure in the statement of cash flows.
Short-term leases:
With little debate, the Boards tentatively agreed that cash outflows for short-term leases not included in the liability to make lease payments would be included in the operating section of the statement of cash flows, as there is not a settlement of the liability to make lease payments. The Boards confirmed that this decision was limited to lessees who took the Board's practical expedient from reporting short-term leases within the statement of financial position.
In making all of the above decisions, the FASB Chair expressed a desire to have user feedback on these decisions to ensure coherency. Likewise, another Board member asked that the staff bring back a separate paper to provide a comprehensive disclosure which would highlight both expenses and cash flows for lessees and where recognised in the financial statements.
The staff discussed the presentation for lessees' right-of-use assets and liabilities to make lease payments in the statement of financial position. Based on comment letter feedback, the staff identified the following issues for discussion by the Boards:
The Boards considered whether the final lease standard should require that lease assets and lease liabilities be separately presented in the statement of financial position or notes to the financial statements. All Board members agreed that these assets and liabilities have unique measurement attributes and are viewed differently than other assets in certain circumstances (e.g., bankruptcy), and consequently, preferred separate presentation.
Thus, the Boards tentatively agreed that the leases standard would require that lease assets and lease liabilities be separately presented in the statement of financial position or notes to the financial statements. If not presented on the face of the statement of financial position, the amounts disclosed in the notes should indicate in which line item in the statement of financial position the relevant assets and liabilities are presented in. The Boards noted that preparers should follow applicable guidance prescribed in other standards in determining if presentation on the face of the statement of financial position is required.
In considering the presentation of the right-of-use asset, the staff asked the Boards to consider whether the right-of-use asset should be presented in its own asset class and not as part of property, plant and equipment in the statement of financial position. The Boards noted that the right-of-use asset should be presented such that the economic benefits arising from both leased and owned assets are shown similarly (i.e., the nature of the future economic benefit the entity will receive from the lease of an asset during the lease term and the function the asset serves is similar to that of owned assets, and therefore should be presented consistently).
In order to show how the asset is being used by the entity, the Boards tentatively agreed that the presentation of the right-of-use asset would be classified in a consistent manner to classification had the entity owned the asset (if a building if owned, then it would be classified as a building when leased).
Finally, the Boards discussed whether the right-of-use asset should be considered a tangible or intangible asset. This was considered to be a crucial issue in regulated industries, such as financial institutions, given consideration to regulatory capital and taxation. In deliberations, the Boards considered the relevant presentation to be indicative of a regulatory issue and it was not the position of the Boards to dictate presentation for regulatory capital purposes. One Board member noted that the Boards should define exactly what the right-of-use asset is and leave it to regulators to determine presentation for regulatory assessment. Thus, consistent with current guidance in IAS 17 and ASC Topic 840, the Boards decided it was not necessary to clarify whether the right-of-use asset recognised by the lessee represents a tangible or an intangible asset.
The Boards discussed a number of lessee disclosure requirements, including that of disclosure requirements for short-term leases. As part of these deliberations, the staff presented the following recommendations to the Boards based on analysis performed:
In deliberation of all of the above recommendations, the Boards expressed the following primary concerns:
In consideration of all of the above deliberations, the Boards tentatively agreed with all of the staff recommendations, absent the following:
Jul 21, 2011
The IASB and FASB discussed the modified approach for short term insurance contracts, considering a summary of the relevant decisions made to date as well as a report from the outreach that had been undertaken.
The staff introduced the discussion topic, the modified approach for short term insurance contracts, and provided a summary of the relevant decisions made to date as well as the outreach that had been undertaken. In particular, the staff discussed the feedback on the ED proposals and the Insurance Working Group feedback on the post-ED discussions to date.
The staff proposed two approaches, with the IASB and FASB staffs each supporting different approaches. The IASB staff proposed a "one-model" approach, under which the simplified model for the pre-claims accounting phase of a short term contract is based on the revenue recognition project and serves as a proxy for the building block approach which is then used for the post-claims accounting phase of these contracts. The FASB staff proposed a "two-model" approach, under which the simplified model and the building blocks approach are separate accounting models and short term and long term insurance contracts are different types of contract.
With minor exceptions (principally in the eligibility criteria), the two approaches are expected to have largely similar practical results. The staff noted that it is likely that approximately 90% of the contracts eligible for the simplified under one approach would also be eligible under the other approach. The Boards were, however, unable to reconcile the "one-model" and "two-model" concepts with their understanding of the insurance project overall direction so far and whether specific contract examples would meet the eligibility criteria under the two approaches. The allocated time was largely spent debating whether a one-model approach or a two-model approach should be used and whether that approach was justified by the economics of the underlying transactions.
No decisions were reached and none of the other topics in the Papers were considered. It is emblematic of the current level of progress on this project that one member commented that the Boards had "wasted one and a half hours talking in circles". The Boards directed the staff to prepare additional information for the next meeting. This additional work is primarily a review of insurance contract types to identify those contracts that are likely to meet the eligibility criteria for one approach but not the other so that the Boards could then consider whether changes should be made to the eligibility criteria proposed by the staff in today's meeting.
Jul 21, 2011
The IASB and FASB discussed the scope and presentation of the proposed disclosure requirements that would allow users to more easily compare credit exposure among US GAAP and IFRS preparers, in light of the Board's inability to agree on the overall approach for offsetting of financial assets and financial liabilities.
During the 14 June 2011 joint Board meeting, the IASB tentatively agreed on an offsetting approach that requires setoff when an unconditional right exists that is legally enforceable in both the normal course of business and in bankruptcy, insolvency or default and the entity has the intention to settle a financial asset and financial liability net or simultaneously. During that meeting the FASB tentatively agreed on an offsetting approach that provides an exception from the general offsetting criteria for derivative instruments when a right of setoff is only enforceable in bankruptcy, insolvency, or default of one of the counterparties. As the two Boards were unable to agree on the overall approach for offsetting of financial assets and financial liabilities, the Boards decided to focus on disclosure requirements that would allow users to more easily compare credit exposure among US GAAP and IFRS preparers.
Disclosure - Scope
Some preparers who submitted comment letter responses to the offsetting exposure draft had expressed concerns over the scope of the proposed disclosure requirements. In particular, some questioned the usefulness of the disclosures for financial assets and financial liabilities that are not subject to a right of set-off as they felt existing disclosure requirements about credit risk already provide sufficient information. They felt that the proposed requirements would require an entity to re-examine all their contractual arrangements in order to proved the required disclosures.
Based on these comments, the Boards tentatively agreed to retain the original disclosure objective proposed in the exposure draft but to modify the scope of the disclosure requirements to apply only to instruments under an enforceable master netting agreement or similar arrangement and to clarify that an entity would not need to provide the required disclosures if the entity has no financial assets or financial liabilities subject to a right of set-off at the reporting date.
Disclosure - Presentation
The staffs presented the Boards with two alternative presentation approaches for the proposed disclosures:
|
(1) |
the gross amounts |
|
(2) |
the amounts presented in the statement of financial position |
|
(3) |
any other amounts that can be offset in the event of bankruptcy, insolvency or default of any of the parties (including cash and non-cash financial collateral) |
|
(4) |
the entity's net exposure. |
Alternative B would also permit entities a choice of providing the effect of rights of set-off only enforceable and exercisable in bankruptcy, default or insolvency of either party not taken into account in arriving at the amounts presented in the statement of financial position (including collateral) to be presented either by major type of financial instrument and/or by counterparty.
The staffs clarified that many preparers mentioned during outreach activities that they would not track such information by financial instrument type but rather by counterparty. Additionally, the staffs noted that the requirement to separately present collateral would typically be done by counterparty and to allocate to major financial instrument type would require an allocation exercise.
The Boards generally supported the Alternative B approach but the discussion quickly got sidetracked around the topic of the election to permit the disclosures by counterparty. One IASB member mentioned that based on the comments received during the offsetting roundtables he would require the disclosure by counterparty and permit entities to also disclose by financial instrument type if they chose. One of the FASB members questioned what use providing counterparty information in generic terms (e.g. Counterparty A, Counterparty B, etc.) would provide to users and analysts and why the actual counterparty name would not be required. The staff responded that in certain jurisdictions entities may be prohibited from disclosing counterparty information, similarly they may have business confidentially reasons for not being able to disclose. However, analysts may ask the entities directly regarding counterparty exposure based on the information provided in financial statements on an anonymous basis. Another FASB member mentioned he would prefer entities to provide the counterparty information but believed the requirement to provide by individual counterparty may be too granular and result in entities choosing not to provide such information as he felt that individual counterparties would quickly be identified even if generic terms were used. He said he would prefer that some level of aggregation of counterparty exposure were used so entities would be more likely to provide counterparty information.
Ultimately, the Boards tentatively agreed to Alternative B including permitting entities a choice of providing the effect of rights of set-off only enforceable and exercisable in bankruptcy, default or insolvency of either party not taken into account in arriving at the amounts presented in the statement of financial position (including collateral) to be presented either by major type of financial instrument and/or by counterparty.
Jul 21, 2011
The IASB and FASB considered (1) whether to re-expose the proposals in the leasing project, (2) a detailed assessment of feedback received on effective dates and transitional disclosures and (3) an effective date for the revenue recognition project.
Even through the Boards have not completed all of their deliberations regarding the leasing project, the Chair of the FASB questioned whether a decision could be made to re-expose the leasing project to provide interested parties with an opportunity to comment on revisions the Boards have undertaken since the publication of Leases ED. With little deliberation, the Boards noted that decisions taken to date were sufficiently different from those published in the Leases ED to warrant re-exposure of the revised proposals. The Boards intend to complete their deliberations, including consideration of the comment period, during the third quarter of 2011 with a view to publish a revised exposure draft shortly afterwards.
Following an October 2010 request for views from stakeholders about the time and effort that would be involved in adopting several new standards and when those standards should be effective, in addition to further constituent outreach conducted during the second quarter of 2011, the staff presented a detailed assessment of feedback received on effective dates and transitional disclosures necessary to assist users in understanding the effects of new requirements.
Following this discussion, the Boards were asked to consider whether: early adoption should be permitted and first-time adopters of IFRSs (IASB-only discussion topic) should be permitted to adopt IFRSs early. This initial discussion was in reference to the following projects: revenue recognition, leases, financial instruments and insurance contracts.
The staff recommended that early application of standards should be permitted. However, the staff noted that the Boards should assess further each separate standards project to determine whether this policy is appropriate in the context of that project or whether other conditions should be applied. The majority of the Boards expressed concerns with allowing for early adoption given that it would lead to incomparable financial information between entities given timing of adoption of new standards. This was a particular focus of the IASB given the need to promote comparability across jurisdictions. Opposing Board views expressed concern with denying preparers the ability to prepare financial statements under the new standards given that the new standards are expected to be more relevant and faithfully representative. Finally, a few Board members expressed that a vote was not needed in this area, as national standard setters maintained the power in a local jurisdiction to allow for early adoption if so desired.
When put to a vote, the FASB did not support early adoption of standards. However, the IASB chose not to vote on the general topic of early adoption of standards, as it would look at each project individually in reaching a conclusion on early adoption.
The staff asked the IASB if it would permit early application of new IFRSs by first-time adopters of IFRSs, consistent with its current policy (i.e., first-time adopters could choose early the requirements in IFRSs before the mandatory effective date). With little debate, the IASB agreed to permit early application of new IFRSs by first-time adopters of IFRSs.
The staff requested that the Boards consider an effective date for the revenue recognition project, in addition to considering potential early application of the final standard.
The staff recommended that the effective date of the proposed standard (as would be outlined in the 2011 re-exposure draft) would not be earlier than annual reporting periods beginning on or after 1 January 2015, but explained that the Boards would re-evaluate the effective date before issuing the final standard. Such timing served to consider cross-project discussions, required system changes and dual processing and transitioning.
Multiple Board members questioned the need for a vote on the effective date given that the timing of final standard issuance had not yet been determined. Other Board members felt it was important to highlight to constituents a preliminary date so that preparers could evaluate their own transitioning requirements. Also, one Board member expressed a desire to extend the effective date (e.g., annual reporting periods beginning on or after 1 January 2016) to allow for adequate time for translation of standards, system changes and retrospective application. While Board members acknowledged this concern, many preferred to retain the 2015 dating and reconsider the date at finalisation of the standard.
Thus, the Boards decided that the effective date of the proposed standard (as would be outlined in the 2011 re-exposure draft) would not be earlier than annual reporting periods beginning on or after 1 January 2015. A more definitive date would be established at final standard issuance.
Further, the FASB decided that early adoption of the standard would not be permitted, while the IASB narrowly voted to permit early adoption of this particular standard.
Jul 22, 2011
The staff provided the IASB with a summary from the IFRS Interpretation Committee's July 2011 meeting.
The staff provided the Board with a summary from the IFRS Interpretation Committee's July 2011 meeting.
Jul 22, 2011
The IASB considered a staff recommendation to delay the mandatory effective date of IFRS 9 'Financial Instruments' to annual periods beginning on or after 1 January 2015.
The mandatory effective date for the classification and measurement and derecognition sections of IFRS 9 is currently 1 January 2013. The basis for conclusion of IFRS 9 references that the Board expects transition of all phases of the IAS 39 replacement project to occur concurrently and that it may delay the effective date to align with the effective date of the forthcoming insurance standard. However, based on the progress of the hedge accounting (including macro hedging) and impairment projects, it has become questionable whether 1 January 2013 is still a realistic effective date to finalise all portions of the standard and provide sufficient time for implementation. Additionally, the insurance project is still ongoing and an effective date has not yet been determined. Based on the above, the staff recommended to the Board to delay the mandatory effective date to annual periods beginning on or after 1 January 2015.
One of the IASB members strongly opposed delaying the effective date of IFRS 9 for various reasons but primarily because of the unintended message that constituents could infer. He was also concerned over the precedent that could be set in that a regulator or standard setter could view not endorsing a new standard as a means to delay or reopen it for consideration.
Many other IASB members sympathised with the concerns of the Board member, but still supported the staff recommendation for deferral. One Board member questioned whether 2015 was the appropriate date and if 2016 may be more appropriate. Several Board members emphasised that it would be important how the deferral were communicated so that misinterpretations over the deferral did not occur.
The Board tentatively agreed to defer the mandatory effective date of IFRS 9 to annual periods beginning on or after 1 January 2015 with early application still permitted. The deferral of IFRS 9 will be proposed in an exposure draft with a 60 day comment period.
Jul 22, 2011
The IASB considered whether to proceed with the proposals in the offsetting exposure draft or to simply retain existing IAS 32 guidance and implement new disclosures based on the exposure draft and deliberations with the FASB.
At the 14 June 2011 joint Board meeting, the IASB and FASB supported separate overall approaches for the general criteria of offsetting. Based on this decision the Boards are working on disclosures to minimise the differences when comparing those with financial instruments subject to offset under IFRS and US GAAP. Given that the fundamental purpose of the project was for convergence between IFRS and US GAAP, the IASB discussed whether to proceed with the proposals in the exposure draft or whether to retain the current guidance in IAS 32.
While many argue that the existing offsetting guidance in IAS 32 was 'not broke', the offsetting project did identify several areas of divergence in the application of IAS 32 particularly around the concepts of (1) currently enforceable right of set-off, (2) legally enforceable, (3) simultaneous settlement, (4) unit of account and (5) collateral/variation margin.
In particular the staff noted that IAS 32 does not currently provide any guidance regarding the application of collateral in offsetting arrangements and that constituents often look to FIN 41 in US GAAP for application of the simultaneous settlement criterion. The staff mentioned that looking to another source of accounting standards for guidance is an indictment that the standard is not sufficiently clear or detailed. As a result, the IASB staff recommended the Board proceed with the proposals in the offsetting exposure draft while addressing those areas of concern raised by comment letter respondents.
The Board was largely split on whether to proceed with the exposure draft or to simply retain existing IAS 32 and implement new disclosures based on the exposure draft and deliberations with the FASB. Those Board members supporting proceeding with the proposals in the exposure draft felt it incomprehensible to identify significant practice issues through the project and to not resolve them, particularly when the majority of the work has already been completed. One IASB member mentioned that the IASB was unanimous in support of the exposure draft during the last joint meeting while the FASB was split 4-3; he felt this issue would likely re-emerge at some future point but the FASB would be unlikely to move to IAS 32 given the issues that were identified during the project but may find support for the proposals in the exposure draft based on their closeness of their current vote. However, those Board members supporting retaining existing IAS 32 felt the purpose of the project was for convergence and if convergence was not achieved, then issuing a new offsetting standard was change for the sake of change at a time when constituents are already experiencing new standard fatigue.
The IASB Director of Capital Markets mentioned a hybrid approach of the two alternatives where IAS 32 could be retained but then supplemented by additional guidance. She mentioned that issuing a new standard would undoubtedly result in new application issues as constituents dissect and interpret the new guidance. However retaining the IAS 32 offsetting model and supplementing with additional guidance may result in less implementation efforts but resolve some of the practice issues identified during the project. One of the IASB members asked if these issues could also be addressed through the annual improvements process.
The Board tentatively agreed (8 votes to 7 votes) not to proceed with the proposals in the exposure draft and instead retain the guidance in IAS 32. However, the Board instructed the staff to identify potential ways that IAS 32 could be clarified and supplemented by additional guidance to resolve some of the issues identified during the offsetting project.
May 18, 2012
May 15, 2012
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May 08, 2012
May 01, 2012
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Mar 22, 2012
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Nov 16, 2011
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