Disclosures in interim reporting periods

At their October 19, 2011 joint meeting, the FASB and IASB (the "boards") discussed the application of certain of the disclosure requirements proposed in their revenue recognition project to both interim and annual financial statements. The boards' staff recommended in their staff paper that in addition to information that has changed significantly from prior financial statements, entities should only be required to provide certain disclosures as of interim reporting periods, including the following "quantitative" disclosures:

The boards debated whether specific requirements for interim financial statements were necessary, but they tentatively agreed with the staffs' recommendation; however, the boards decided to include a question in their forthcoming exposure draft asking constituents to provide input on the costs and benefits of requiring the specific disclosures in interim financial statements. The boards plan to continue outreach activities as well to evaluate the proposal's cost-benefit relationship.

In addition, the FASB tentatively concluded not to amend ASC 270, Interim Reporting, to specify interim disclosures on revenue or contracts with customers for nonpublic entities.

As part of the IASB 'Annual Improvement Project', issues related to IFRS 3 Business Combinations and IFRS 13 Fair Value Measurement were brought in front of the IASB Board (Board) with the intent of proposing amendments to each of the discussed standards. Ultimately, if approved by the Board, the proposed amendments would be included in the 2011 Annual Improvements ED that would be issued in December 2011 for further consideration.

At the onset of the Board meeting, the IASB staff discussed the agenda, highlighting the fact that the issue related to IFRS 13 will be addressed first followed by the issues related to IFRS 3.

IFRS 13 Fair Value Measurement — Short-term receivables and payables issue

Issue background

The IASB staff provided a brief overview of a matter raised by a constituent specific to the deletion of IFRS 9, paragraph B5.4.12 upon the issuance of IFRS 13. This paragraph, among other things, provides a practical expedient for measuring short-term receivables and payables as the original invoice amount in instances where there is no stated interest rate and the effect of discounting is immaterial.

The IASB staff indicated that that paragraph was deleted to eliminate discussion related to 'discounted cash flow analysis' considerations, which is now included in IFRS 13. The unintended result was the deletion of the guidance on measuring short-term receivables and payables with no stated interest rate.

Amendment considerations

The IASB staff provided two alternative approaches to addressing the aforementioned issue:

View A:

This view would provide that paragraph B5.4.12 be reinstated by adding a paragraph to IFRS 13, Appendix D (Amendments to Other Amendments), which would reinstate the deleted paragraph under a newly added heading 'Short-term Receivables and Payables with No Stated Rate'. In addition, a paragraph would be added to IFRS 13 Basis for Conclusion, detailing the fact that the deletion of the paragraph was not intended to remove an entity's ability to apply a practical expedient for measuring short-term receivables and payables with no stated interest rate. View B: The IASB staff reiterated the fact that supporters of this view have the belief that paragraph B5.4.12 was deleted on the basis that this guidance was no longer needed in IASB 9 as it is now incorporated into IFRS 13. Furthermore, the concept of materiality is addressed in IAS 1 Presentation of Financial Statements and includes the practical expedient. So, proponents of this view recommend not reinstating this paragraph and addressing constituent concerns by adding a paragraph to in the Basis for Conclusions of IFRS 13 under a heading 'Short-term receivables and payables with no stated interest rate'.

Conclusion

The Board voted, concluding that View B was the appropriate approach which would result in the amending of the Basis of Conclusions by adding the following paragraph:

BC138A:

After issuing IFRS 13 the Board was made aware that an amendment to IFRS 9 that resulted in the deletion of paragraph B5.4.12 might be perceived as removing the ability [to apply a practical expedient] to measure short-term receivables and payables with no stated interest rate at invoice amounts without discounting when the effect of discounting is immaterial. The Board did not intend to change practice in the measurement of those short-term receivables and payables. In determining whether to retain paragraph B5.4.12 in IFRS 9, the Board concluded that the paragraph was no longer needed for two reasons: (a) IFRS 13 contains guidance for using present value techniques and (b) IAS 1 Presentation of Financial Statements addresses materiality [, effectively providing such a practical expedient].

One of the Board members also indicated that the proposed paragraph language should exclude the practical expedient concept as it is not necessary in the context described.

IFRS 3 Business combinations — Contingent consideration guidance issue

Issue background

The IASB staff provided a quick overview of the background leading to the identification of four issues related to the accounting for contingent consideration. These issues were identified during the review of IFRS 3 in conjunction with certain guidance included in IAS 32, IAS 37, and IFRS 9.

The IASB provided a quick synopsis of the four issues:

• Issue 1: Current guidance seems to be unclear and more clarity is needed in determining the appropriate guidance that should be used to identify whether contingent consideration is classified as a liability or equity. Currently IFRS 3, paragraph 40 refers to IAS 32 as well as 'other applicable IFRSs', which may cause confusion to those applying the guidance;
• Issue 2: Guidance on subsequent measurement of contingent consideration as included in IFRS 3, paragraph 58(b)(ii) is not clear since it explicitly states that changes in fair value should be measured in accordance with IAS 37, though IAS 37 requires a 'best estimate' measurement rather than fair value;
• Issue 3: Guidance included in IFRS 3, paragraph 58(b)(i) states that subsequent measurement of contingent consideration classified as a financial asset or financial liability should be at fair value in accordance with IFRS 9, though IFRS 9 permits a financial asset or financial liability to be measured at amortised cost in some instances;
• Issue 4: Certain constituents are unclear of the contingent consideration disclosure requirements as IFRS 3, paragraph B64 details certain disclosure requirements and the other referenced IFRSs include other disclosure requirements.

Amendment considerations

The IASB staff highlighted proposed amendments to IFRS 3, as detailed in paragraph 23 and 37 of IASB Staff Paper 6A. In addition, the IASB staff proposed an amendment to IAS 39 Financial Instruments: Recognition and Measurement, to provide a partial scope exclusion for contingent consideration arising from a business combination. These three amendments would work to improve the guidance by eliminating inconsistencies in contingent consideration classification and measurement guidance and clarifying subsequent measurement rules.

Appendix B to Staff Paper 6A details the amendment recommendations:

Proposed amendments to IFRS 3, paragraph 58 (changes underlined or struck):Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date. Such changes are measurement period adjustments in accordance with paragraphs 45—49. However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments. The acquirer shall account for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:

1. Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity.
2. Other contingent consideration classified as an asset or a liability that:
   1. is a financial instrument and is within the scope of IFRS 9 shall be measured at fair value at each reporting date, with any resulting gain or loss recognised either in profit or loss for the period, unless the recognition of the resulting gain or loss is required or in other comprehensive income in accordance with the relevant IFRSIFRS 9.
   2. is not within the scope of IFRS 9 shall be accounted for in accordance with IAS 37 or other IFRSs as appropriate.

Conclusion

This session concluded with the Board voting on three questions posed by the IASB Staff:

All Board members in attendance answered affirmatively to the three posed questions and the proposed amendments will be included in the 2010-2012 Annual Improvements cycle and be exposed accordingly.

At their October 19, 2011 joint meeting, the boards discussed the development of educational material relating to fair value measurements. The IASB staff first described the objectives and processes underlying the staff plan to develop these educational materials. Following the staff's presentation, members of both Boards commented.

Proposed plan for developing educational material

The IASB staff first described this overarching project objective: educational material relating to fair value measurements will describe the thought process that one might go through to meet the objective of a fair value measurement consistent with both IFRS 13 Fair Value Measurement and ASC Topic 820 Fair Value Measurement in the FASB Accounting Standards Codification.

The staff then described the process identified for developing these materials. The fair value measurement project team, comprised of staff from both the IASB and FASB, will develop the educational material. An advisory panel comprised of experts preparing fair value measurements in both emerging and developed economies will assist the project team. Membership would include experts (a) who attended the Emerging Economies Group (EEG) meeting in July 2011, (b) from other emerging economies, (c) from the International Valuation Standards Council (IVSC), (d) from the United States, and (e) from other parts of the world. This panel would help develop educational material covering examples discussed at the EEG meeting in July 2011 and would bring other relevant examples to assist in meeting the objective of describing the process involved when applying the fair value measurement principles of IFRS 13.

The IFRS Foundation will publish educational materials developed by the project team, which will model the materials on the IASB's fair value Expert Advisory Panel's report issued in 2008 entitled Measuring and disclosing the fair value of financial instruments in markets that are no longer active. Similar to this report, the educational materials discussed today would not be authoritative. The target date for issuance is June 2012. The IASB staff will post a draft document on the IASB's website, enabling interested parties to review the document and provide their views.

As noted above, the IFRS Foundation will publish the educational materials. However, because IFRS 13 and Topic 820 represent substantially converged standards, any material developed for applying IFRS 13 could be used by entities applying US GAAP.

Comments from members of the boards

Some board members expressed concern that the materials might be wrongly viewed by the public as authoritative and that issues raised during the process to develop these materials may indicate a need to amend IFRS 13 or Topic 820. In response, the staff highlighted its intention to make clear that all materials are not authoritative. Leslie Seidman, Chairman of the FASB, also noted that the boards would jointly consider any potential amendments to IFRS 13 or Topic 820, including any practical expedient for determining a fair value measurement. In a related comment, the staff also noted its intention to carefully word the educational materials, avoiding language that could be construed as amending or interpreting the measurement and disclosure requirements of the standards.

As part of its continuing deliberations surrounding the Exposure Draft Leases (Leases ED) the boards discussed several lessor and lessee related topics including:

• The proposed receivable and residual approach
• How the receipt of variable lease payments impact the subsequent measurement of the residual asset
• Lessor presentation in the statement of comprehensive income
• Fair value requirement for lease receivable held for sale
• Transition requirements for both lessee and lessor.

The Boards made a number of tentative decisions, including the following:

Receivable and residual approach

Decisions

• Initially measure the residual asset as an allocation of the carrying amount of the underlying asset. The initial measurement of the residual asset comprises two amounts: (a) the gross residual asset, measured at the present value of the estimated residual value at the end of the lease term discounted using the rate the lessor charges the lessee, and (b) the deferred profit, measured as the difference between the gross residual asset and the allocation of the carrying amount of the underlying asset.
• Subsequently measure the gross residual asset by accreting to the estimated residual value at the end of the lease term using the rate the lessor charges the lessee. The lessor would not recognise any of the deferred profit in profit or loss until the residual asset is sold or re-leased.
• Present the gross residual asset and the deferred profit together as a net residual asset.
• The Boards also tentatively decided that there should be no distinction between when profit is or is not reasonably assured in accounting for a lease contract by a lessor.
• The FASB and the IASB tentatively decided that a lessor's lease of investment property would not be within the scope of the receivable and residual approach. Instead, for such leases the lessor should continue to recognise the underlying asset and recognise lease income over the lease term.

Discussion

The boards had tentatively decided on the receivable and residual approach ("R&R") at prior meetings. The staff has received input on these decisions from outreach they performed. The staff summarised the outreach which reflected concern regarding the reasonably assured/not reasonably assured criteria, including difference between leases and revenue recognition, auditability of the criteria, and the perceived option to elect a model. Based on the outreach the staff recommended certain modifications to the R&R approach.

The boards discussion first focused on how to measure the residual asset and how to subsequently accrete the residual asset. The staff presented 4 options:

• Approach A - Initially measure the residual asset by determining what the future depreciated carrying amount would be at the end of the lease term as if it were not subject to lease accounting and then discount this based on the rate the lessor charges the lessee. The residual asset is subsequently accreted.

• Approach B - initially measure the residual asset as the present value of the estimated fair value at the end of the lease term. The residual asset is subsequently accreted.

• Approach C - Initially measure the residual asset at an allocation of the carrying amount. The residual asset would not be subsequently accreted.

• Approach D - Initially measure the residual asset at the present value of the estimated fair value at the end of the lease term. Additionally the manufacturing profit of the underlying asset is allocated between the receivable and the residual asset. The profit associated with the residual asset is deferred until the underlying asset is sold or re-leased.

The other significant decision was regarding the staff's recommendation to provide a scope exception from the proposed lessor accounting for a lessor's lease of multiple leases of physically distinct portions. These lessors would apply current operating lease accounting. The Boards agreed that the proposed R&R approach would result in many operational challenges for these lessors. Additionally other board members believed that there were different economics with these arrangements. However, the boards were concerned with trying to define multi-tenant properties. Therefore they tentatively decided to provide the scope exception for investment properties as defined in IAS 40 and the proposed FASB's Investment property entity project.

Variable lease payments and the measurement of the residual asset

Decisions

• If the rate the lessor charges the lessee does not reflect an expectation of variable lease payments, the lessor would not make any adjustments to the residual asset with respect to variable lease payments.
• If the rate the lessor charges the lessee reflects an expectation of variable lease payments, the lessor would adjust the residual asset on the basis of its expectation of variable lease payments by recognising a portion of the cost of the residual asset as an expense when variable lease payments are recognised in profit or loss. Any difference between actual and expected variable lease payments would not result in any further adjustment to the residual asset with respect to variable lease payments.

The boards had concerns about the staff's recommended approach to account for variable lease payments and the subsequent measurement of the residual asset. The biggest concern was the complexity of the proposal. Other board members were concerned with the inconsistency this would create with the lessee model. The boards were initially split in their votes (IASB in favour of the staff's recommendation and the FASB opposing). However the FASB board members changed their vote so that there would be convergence in this decision.

Presentation statement of comprehensive income

Decisions

• The accretion of the residual asset as interest income
• The amortisation of initial direct costs as an offset to interest income
• Lease income and lease expense (for example, revenue and cost of sales) in the statement of comprehensive income either in separate line items (gross) or in a single line item (net), on the basis of which presentation best reflects the lessor's business model
• A lessor should separately identify income and expenses arising from leases by either separate presentation in the statement of comprehensive income or disclosure in the notes to the financial statements. If disclosed, the notes should reference the line item in which the income is presented.

Fair value requirement for lease receivables held for sale

Decisions

• Should not measure a lease receivable at fair value, even if part or all of that receivable is held for the purpose of sale
• Should apply existing derecognition requirements (in IFRS 9 Financial Instruments, or FASB Accounting Standards Codification Topic 860, Transfers and Servicing) to lease receivables, but allocate the carrying amount of a lease receivable on the basis of its fair value excluding any option elements and variable lease payments that are not transferred
• Should apply the disclosure requirements in IFRS 7 Financial Instruments: Disclosures, and Topic 860 for transferred lease receivables.

Lessee transition

Decisions

• The Boards tentatively decided that for capital/finance leases existing at the beginning of the earliest comparative period presented, a lessee would not be required to make any adjustments to the carrying amount of lease assets and lease liabilities and should reclassify those lease assets and lease liabilities as right-of-use assets and liabilities to make lease payments.

The Boards tentatively decided that for operating leases existing at the beginning of the earliest comparative period presented, a lessee should:

• Recognise liabilities to make lease payments at transition measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of the effective date for each portfolio of leases with reasonably similar characteristics. The incremental borrowing rate for each portfolio of leases should consider the lessee's total leverage, including leases in other portfolios.
• Recognise right-of-use assets equal to the proportion of the liability to make lease payments at lease commencement calculated on the basis of the remaining lease payments.
• Record to retained earnings any difference between the liabilities to make lease payments and the right-of-use assets at transition.
• A lessee could also choose to apply the requirements in the proposed lease standard retrospectively in accordance with IAS 8 or ASC 250.

The boards also tentatively decided to provide the following reliefs when adopting the lease standard:

• An entity is not required to evaluate initial direct costs for contracts that began before the effective date
• An entity may use hindsight in comparative reporting periods including the determination of whether or not a contract is or contains a lease.

Lessor transition

Decisions

• The Boards tentatively decided that for finance/sales-type and direct finance leases existing at the beginning of the earliest comparative period presented, a lessor would not be required to make adjustments to the carrying amount of the assets associated with those leases.

For operating leases existing at the beginning of the earliest comparative period presented, the Boards tentatively decided that a lessor should:

• Recognise a right to receive lease payments, measured at the present value of the remaining lease payments, discounted using the rate charged in the lease determined at the date of commencement of the lease, subject to any adjustments required to reflect impairment.
• Recognise a residual asset consistent with the initial measurement of the residual asset under the receivable and residual approach, using information available at the beginning of the earliest comparative period presented.
• Derecognise the underlying asset.
• A lessor could also choose to apply the requirements in the proposed lease standard retrospectively in accordance with IAS 8 or ASC 250.

Several board members favoured full retrospective approach to adopt the proposed lease standard. However, there was concern about the cost of this approach therefore the boards tentatively decided on providing an option between the modified approach and full retrospective.

The FASB board also noted that these decisions did not change the previous decisions relating to leverage leases.

The Boards concluded that the staffs should develop (1) an impairment model using a relative credit risk approach, (2) potential triggers, indicators, or thresholds used to transfer assets out of Bucket 1 into Bucket 2, and (3) disclosures to provide transparency around an entity's credit risk management and application of the impairment model. The staffs plan on presenting these items to the Boards at their joint meeting in December.

Background

The objective of the proposed impairment model is to reflect the general pattern of deterioration of the credit quality of debt instruments. To do this, financial assets subject to impairment accounting (such as loans or debt securities measured at amortised cost or fair value through other comprehensive income) would be split into three main buckets. These buckets would determine the amount and timing of credit losses to be recognised on debt instruments reflecting different phases of credit deterioration.

The boards have been debating whether to apply a "relative" or an "absolute" credit risk approach in "bucketing" debt instruments. Under a relative credit risk approach, originated and purchased assets would be initially classified in Bucket 1 even if they are of lower credit quality (e.g., subprime loans) and would be subsequently transferred into Bucket 2 or 3 if a deterioration in credit quality occurs; for loans acquired at a discount due to credit losses, the effective interest rate is calculated taking into account initial credit loss expectations and no allowance is established upon initial recognition. However, feedback from initial outreach efforts indicated operational challenges related to that approach (e.g., entities may be unable to monitor and track deterioration in the credit quality of assets over time because of system limitations and, in certain circumstances, may not maintain historical loss expectation data). Instead of pursuing a relative credit risk approach, therefore, the boards reversed course and tentatively decided at their September 2011 meeting to pursue an "absolute" credit risk approach in which all assets of similar credit quality as of a point in time are included in the same bucket. Under the absolute credit risk approach, assets with lower credit quality may be originated or acquired directly into Buckets 2 or 3.

Relative Credit Risk Approach

The Boards began their discussion on the impairment of financial assets by providing feedback obtained in a meeting with banking regulators and the Institute of International Finance. Preparers were concerned about a model, such as an absolute credit risk approach i The absolute and relative credit risk approaches were discussed at the September 21, 2011 joint board meeting - that would result in day 1 losses, particularly for entities who participate in higher risk lending. The Boards responded to these preparers that they had decided to change course (as noted above) and pursue an absolute credit risk approach rather than a relative credit risk approach because of concerns expressed by preparers about the operationality of a relative credit risk approach.

Because of (1) the inconsistencies in the feedback received on the absolute and relative credit risk approaches (through previous outreach studies and by way of this meeting) and (2) the Boards' views that the relative credit risk approach was conceptually better than the absolute credit risk approach and that the perceived operational concerns with a relative credit risk approach were not as insurmountable as previously assumed, the Boards directed the staff to develop an impairment principle using a relative credit risk approach. This approach would most closely align with the overall objective of the "three bucket" expected loss model, which is to reflect the general pattern of deterioration of the credit quality of assets. Under this approach, assets would start in Bucket 1 and would be transferred to Bucket 2 and Bucket 3 as credit loss expectations deteriorate (reflecting the uncertainty in the collectibility of cash flows). In addition, the Boards recommended that the principle apply not only to loans but also to debt securities.

The Boards also discussed the principle supporting the Bucket 1 allowance of 12 to 24 months. While some board members believed that the allowance amount represented an incurred-but-not-reported (IBNR) loss amount, others viewed the allowance as an amount that properly adjusted an asset's effective yield. Because of this debate, the Boards highlighted the need to clearly articulate this principle when drafting the Basis for Conclusions for the new impairment standard.

Transferring Out of Bucket 1

The Boards acknowledged that the a new impairment model would address the "too little, too late" criticism raised in the recent financial crisis about the current impairment model in U.S. GAAP and IFRS only if the principle on when to transfer assets out of Bucket 1 was clearly articulated and grounded by a threshold lower than "probable", indicating a deterioration in an asset's credit quality to a particular level. Based on previous Board discussions, this principle would incorporate the concepts and definitions of rating agency classifications along with concepts of regulatory guidance. Further, certain Board members indicated that the principle should also incorporate a notion that an entity should not ignore current market conditions that may indicate that some or all of the contractual cash flows will not be collected.

Disclosures

The Boards acknowledged that a relative credit risk approach to impairment may lead to comparability concerns across financial institutions because the manner in which entities manage credit risk and view assets' credit quality may differ. Accordingly, the Boards instructed the staffs to develop disclosures to provide transparency around an entity's credit risk management. The Boards also recommended that the staffs leverage existing standards when developing such disclosures.

Next Steps

Some Board members expressed a concern that the staffs could not develop an impairment principle based on a relative credit risk approach and related disclosures in time for the next joint meeting in November. Because of this, the Boards agreed to discuss the staffs' proposals at their joint meeting in December.

The session was extensive and it began an hour earlier than scheduled and ended one hour later.

The Boards considered a verbal summary of the investors' outreach that took place during the last few months. The Staff summarised it saying that there were two broad themes emerging from the outreach. Based on their understanding investors wanted to see:

• More evidence of the Boards' intention to listen to their views and concerns. However the Staff also noted they received conflicting views and requests from investors; and
• An accounting standard that reports economic volatility, volume information and provides them with insights into the effects of measurement judgements as well as when these judgements are changed, in particular when dependent on changes in interest rates.

Scope - Fixed fee service contracts

The FASB Staff led the discussion on this item reminding the Boards that last March they tentatively agreed to exclude certain types of fixed fee contracts from the definition of insurance.

Staff recommended that fixed fee contracts that provide service as the primary purpose should be excluded from the scope of the insurance contract standard if they exhibit all of the following characteristics:

The discussion considered specific arrangements to be in the grey area including windscreen replacement, roadside repair, warranty and health as the Boards worked to ensure they understood where specific contracts would fall out of scope.

Overall, there was broad support from the Boards despite some open questions on certain contracts such as warranty or health related contracts. The Staff recommendation was unanimously approved by both Boards, subject to redrafting certain language and inclusion of application guidance or examples.

Presentation - Statement of comprehensive income (SoCI)

The Staff reminded the Boards that in the June meeting, there were presentation alternatives for which the Boards expressed interest in more information. The Staff outlined with illustrative examples the alternatives to the recommended presentation highlighting what information would be required to be on the face and in the notes and how the recommendation applies to the Building Blocks Approach (BBA) and the Premium Allocation Approach (PAA). The Staff noted that they concluded that a separate presentation of BBA and PAA items is useful.

The Staff asked whether the Boards agree that the insurer should disclose:

In addition, the Staff asked with which of the recommendations below the Boards agree with and which line items should be presented as a minimum on the face of the SoCI.

The recommendations were:

• Recommendation A - Disclose the underwriting margin either in total or segregated between the BBA and the PAA contracts with a requirement to present premium earned income and claims expenses for the PAA contracts and a requirement to present premiums due for the contracts under the BBA; or

• Recommendation B - Mandate only the BBA underwriting margin in the SoCI leaving the PAA and the BBA premiums due items as required disclosure notes with an option to include them on the face of the SoCI as an accounting policy election. 
  The Staff noted that volume information under Recommendation A is on the face whilst Recommendation B would allow for that information to be in the disclosure notes and it would result in an approach that would produce a similar SoCI for pure insurers as well as conglomerates with insurance operations. Recommendation A would always operate under the usual materiality principle.

• Recommendation C (suggested in an addendum by one of the IASB members) — Combine BBA and PAA in separate columns that refer to the underlying business models (i.e. life and non-life for lack of better definition at this point) with only two items mandated on face: the sum of premium earned and premium due, the latter adjusted for the changes in the BBA liability, and the underwriting margin line. The proponent IASB member noted that this approach makes information more comparable outside the insurance sector.

A lively albeit inconclusive debate followed where we noted in particular that the Boards only agreed that the recommendations could be seen in a different light if there was a more extensive unbundling of deposit components.

All acknowledged that users wish to see volume information (e.g. premiums) and the underwriting margin. It was also noted that insurers could be required to only apply the IAS 1principles to address the need to include particular items on the face of the SoCI. With these considerations, that do not appear to represent tentative decisions, the Boards asked the Staff to bring back this matter using examples that explore Recommendation C and that illustrate the differing entity types.

The Boards did not address the remaining questions from the Staff paper.

Presentation - Statement of financial position (SoFP)

The Staff asked whether, for the BBA contracts, the Boards agree that insurers should disaggregate the following components, either in the SoFP or in the notes (in this case the amounts must reconcile to the SoFP):

The Boards unanimously agreed with this recommendation. However, in response to a proposal from one of the FASB members to consider whether acquisition costs could also be separately presented in the SoFP as an asset they agreed to have the Staff pursue this further at a future meeting.

The Staff then asked whether, for those contracts measured under the PAA, the Boards would agree that the liability for unexpired coverage (i.e. that based on the unearned premium method) should be disclosed separately from the liability for incurred claims (always based on the BBA).

The Boards agreed with this recommendation unanimously.

The Boards then decided that for the PAA an insurer would recognise as a receivable any uncollected premium due to secure the short duration coverage irrespective of the fact that the policyholder has a right to cancel the policy and forfeit the payment of those premiums not yet due. The receivable would be an asset outside the scope of the insurance contracts standard. The vote was unanimous from FASB and majority-based from the IASB (9 against 6).

The Staff had proposed that only the unconditional right to receive a premium is accounted for as an asset with the conditional premiums deducted from the unearned premium liability. The Boards overruled them on the grounds that this would be a departure from the existing practice that seems to have support from many users.

It should be noted that with this decision an insurer would account for the unearned premium liability based on the way the policyholder agrees to pay the premium (i.e. all upfront or by instalments over the coverage period). In the event of a significant conditional premium payment the accounting of the receivable under the financial instruments standard would recognise a lower asset than in the event of an upfront payment. This is due to the initial fair valuation of the asset which would take into account the probability of certain cash flows not being collected. As a result the unearned premium liability would also be lower to reflect the fact that it may expire earlier following the cancellation of the "stand ready" obligation that a non-payment of a future premium would trigger.

The majority of the Boards then approved the Staff recommendation that the PAA liability would be presented separately from the BBA liabilities. This required two IASB votes because they initially perceived this as implicitly requiring a vote for a two-model approach which they reject. However when the IASB Staff reassured the IASB that this was not the case and 10 IASB members approved the proposal with only 5 still voting against it.

One last item on the SoFP discussion was the agreement to account for portfolios that under the BBA may be assets separately from portfolios that are liabilities. On the grounds that there will be a future debate on the presentation of acquisition costs deemed part of the contractual cash flows the FASB unanimously supported the proposal with 13 IASB members voting in favour and only 2 against it.

Eligibility criteria for the PAA

The last item for discussion at this meeting was a matter that the Staff brought back after having been unsuccessfully discussed at two previous joint meetings with July being the most recent instance of this ongoing stalemate. Unfortunately also this third attempt was fruitless and the Staff will be preparing a new attempt in the coming months.

Parallel to this discussion and increasing its overall importance in the Boards' efforts to converge is the underlying disagreement between the Boards on an accounting standard for insurance contracts that uses a single or two measurement models or, in other words, whether the PAA is a simplification of the BBA or an accounting model on its own.

IASB strongly believes that there should be a single model with a simplification allowed when the PAA delivers materially the same results as the BBA. FASB instead believes that a separate model based on the PAA should be codified in the final standard.

At this meeting the Staff suggested to consider the PAA as the measurement for any type of insurance contract and develop criteria for when an insurer would not be permitted to use it. This new approach, which was further refined with an addendum paper released the night before the joint meeting, would require an insurer to use the BBA when either of the following applies:

For both criteria the Staff had also produced application guidance which triggered a lively but ultimately inconclusive debate around its outcomes.

The Boards gave general support for what the Staff was trying to achieve but concern over the application guidance being ambiguous and resulting in the accounting of contracts under the PAA that both Boards would instead expect to be measured with the BBA ended in a request to redraft the guidance that supports these criteria. The Boards also asked for examples of contracts that are in the PAA or in the BBA based on these future revised criteria.