At the May 2012 meeting, the Boards tentatively decided that an entity would be required to meet a definition and also to consider additional factors to determine whether it is an investment company.

To date, the IASB has tentatively decided that the definition of an investment entity would be as follows:

1. An investment entity does all of the following:
   1. Obtains funds from an investor or investors and provides the investor(s) with professional investment management services
   2. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns from capital appreciation or capital appreciation and investment income
   3. Manages and evaluates the performance of substantially all of its investments on a fair value basis.
2. An investment company and its affiliates do not obtain, or have the objective of obtaining, returns or benefits from their investments that are either of the following:
   1. Other than capital appreciation or capital appreciation and investment income
   2. Not available to noninvestors or are not normally attributable to ownership interests.

To date, the FASB has tentatively decided that the definition of an investment company would be as follows:

1. An investment company is an entity that does both of the following:
   1. Obtains funds from an investor or investors and provides the investor(s) with professional investment management services
   2. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds for returns from capital appreciation, investment income, or both.
2. An investment company and its affiliates do not obtain, or have the objective of obtaining, returns or benefits from their investments that are either of the following:
   1. Other than capital appreciation or investment income
   2. Not available to other noninvestors or are not normally attributable to ownership interests.

The FASB also tentatively decided that the concept of managing on a fair value basis would be a factor that an entity would consider to determine whether it is an investment company (whereas the IASB decided that fair value would be part of the definition of an investment entity). That assessment would consider how the entity manages and evaluates the performance of its investments, how the entity transacts with its investors, and how asset-based fees are calculated to determine whether the entity manages its investments on a fair value basis.

The Boards also discussed whether an entity should consider the following factors to be an investment company and asked the staff to investigate how these factors would interact with the definitions noted above:

• Number of investments and investors
• Whether the investors are related parties
• Unit ownership

At the July 2012 meeting, the Boards discussed which alternative it would prefer regarding the relationship of the definition of the factors to be an investment company:

1. Alternative 1: Do not require an entity to meet one or more of the factors to be an investment entity.
2. Alternative 2: Require an entity to meet at least one factor to be an investment entity. However, this required factor need not be specified.
   1. If an entity meets only the ‘number of investments’ factor, it should be required to have multiple substantive investments;
   2. If an entity meets only the ‘number of investors’ factor, it should be required to have multiple substantive investors.
3. Alternative 3: Amend the definition to require an entity to have a significant ownership interest held by an investor that is not related to the investment manager or investors not related to the parent entity.

The staff noted that there is an emphasis that irrespective of the alternatives, if an entity did not meet a factor – it would be required justify how it continues to meet the definition to be an investment company.

The IASB tentatively decided that unit ownership should not form part of the definition of the investment entity but rather be a feature or characteristic (i.e., as part of application guidance).

The IASB noted that the terminology ‘factors’ was not part of the IFRS vocabulary and that such ‘factors’ should not form part of the definition of an investment entity but rather as characteristics or features (i.e., as part of the application guidance). The Board tentatively supported Alternative 1 and one of the Board members suggested a rewording of the definition of the investment entity and application guidance (which was tentatively supported by the Board, subject to further drafting/editorial changes).

The draft suggestion is that an investment entity is an entity that:

1. Obtains funds from one or more investors for the purpose of providing investor(s) with professional investment management services;
2. Whose business purpose and only substance is to invest the funds for returns for a) solely capital appreciation or b) solely a combination of capital appreciation and income; and
3. Manages and evaluates the performance of substantially all of its investments on a fair value basis.

The application guidance would centre on ‘typically, an investment entity’s ownership is in units or has multiple classes and returns with different risks and returns. An entity whose primary business purpose is solely for income is not an investment entity.’

The IASB noted that the definition should stand on its own and that the features/characteristics would be application guidance. The IASB noted that the disclosures (to be discussed at the Thursday Board meeting) would require an entity to disclose how the entity decided that it was an investment entity which would include consideration of the features/characteristics. One of the Board members suggested when drafting, it should be clearly stated that it would be unlikely for an entity to be an investment entity if that entity did not meet any features.

The FASB noted that there was a difference in scope between the FASB and the IASB approach (i.e., FASB had a broader scope). The FASB tentatively agreed with the change in terminology from factors to characteristics/indicators. The FASB also supported Alternative 1 but noted that its tentative decision was based on a definition of the investment entity along with a description of the typical characteristics of an investment entity along with one or more examples illustrating how this would be applied in practice. The FASB emphasised that it would expect an entity to meet all the characteristics/indicators (or to explain why it didn’t meet some of the characteristics/indicators) to be able to meet the criteria to be an investment entity (i.e., taking a top down approach).

The staff updated the IASB on the input received from the Insurance Working Group (IWG) meeting held on 25-26 June.

The staff led the discussion referring the Board members to agenda papers summarising the feedback from the IWG. The staff summarised three main observations from the IWG members as follows:

1. There is desire for one single, converged standard yet the need to balance this with quality and timeliness remains a high priority for all IWG members
2. There is a level of disappointment with the inability to reconcile certain differences between IASB and FASB
3. There is a need for the Boards to assess unintended consequences through field testing.

In addition, the staff discussed feedback on the remaining issues the project faces including the costs and complexities of the recently approved “OCI solution”, the earned premium proposal for presenting volume information and the opening balance sheet on transition date.

Concerns expressed over the OCI solution centred on the accounting mismatch that would arise from requiring changes in the insurance liability to be presented in OCI when not all assets will be required at FVTOCI.

On the earned premium discussion, there was continued emphasis on the need for volume indicators but concern that the costs of the earned premium approach would be disproportionate to the benefits achieved because (1) revenue is a less important indicator of profitability for insurers than other entities and (2) the proposed metric would be a new metric not currently used by life insurers.

IWG members also discussed and had differing views on transition. While the proposal in the original exposure draft was universally rejected, many views were expressed at the meeting. Some considered retrospective application given the fact that the transitional provisions would have a significant effect for many years beyond the transition balance sheet due to the long-term nature of insurance liabilities.

No decisions were made and the session ended. The Boards will continue discussions on the Insurance Contracts project in September.

Over the past two years, the Due Process Oversight Committee (DPOC) has been working with the IASB to develop due process reporting protocols which have been designed to assist the IASB demonstrate that it is using its due process efficiently and effectively in the development of Standards and Interpretations. In addition, the new Handbook proposes that the staff will be required to prepare several summary reports each year for the Board and DPOC.

At the July 2012, the staff provided a report on the following activities identified in the Due Process Handbook.

1. Comment letters — the staff noted that no letters were withheld from public posting for the year ended 30 June 2012. These comment letters and other unsolicited letters have been posted on the IASB website.
2. Availability of meeting papers — the staff noted that for the year ended 30 June 2012, all agenda papers that had been distributed to the IASB members for public meetings were posted on the IASB website. A few Board members suggested providing the papers a little earlier to enable Board members to have more time to review the matters under discussion.
3. Consultative Groups — The proposed new Due Process Handbook states that the staff should assess the consultative groups each year to determine whether each group and membership should continue and to report these findings to the IASB and DPOC. The staff recommended that the IASB formally wind up the working groups for financial statement presentation, Employee Benefits and the Expert Advisory Panel for fair value measurement. The Board tentatively agreed to wind up these groups as these related projects have been completed.
4. Market and Prudential Regulators — Over the past year, the IASB has maintained an active dialogue through regular meetings with securities and prudential regulators.

As part of their continuing deliberations surrounding the Exposure Draft Leases (Leases ED), the Boards discussed several topics including:

• Due process considerations (IASB only meeting)
• Lessee accounting: Transition, presentation and disclosure relating to leases where the lessee recognises a single lease expense in its statement of comprehensive income
• Lessor receivable and residual approach: Measurement of the underlying asset if a lease terminates prematurely
• Interim disclosures
• Comment period

The staffs expect that the tentative decisions made at this meeting will be the last decisions to be made before re-exposing the lease accounting proposals, other than those that may arise during the drafting process and a few issues to be discussed by the FASB during a FASB only meeting.

Due process considerations (IASB only)

The IASB Due Process Handbook (the Handbook) includes mandatory and non-mandatory due process steps to be undertaken before the publication of an exposure draft or the issue of a new IFRS or an amendment to existing IFRSs. Highlighting the steps that the Board has undertaken in respect of the Leases revised exposure draft, the IASB staff believed that the Board had complied with all mandatory steps listed in paragraph 112 of the Handbook and all non-mandatory steps listed in paragraph 113 of the Handbook and sought confirmation from the Board that it too believed all necessary steps had been undertaken. Board members were satisfied that all necessary steps had been taken.

Lessee accounting

Statement of financial position

In July 2011, the Boards discussed presentation in a lessee’s statement of financial position (SFP) for leases accounted for using the interest and amortisation approach. However, given the recent decision to have two separate lease accounting models (an interest and amortisation (I&A) approach) and a straight lease expense (SLE) approach), the Boards were asked to consider the presentation of right-of-use assets and liabilities to make lease payments in a lessee’s SFP for leases for which the lessee recognises a single lease expense in the statement of comprehensive income (SCI) (i.e. SLE).

Regarding the presentation of right-of-use assets, the staffs recommended that the current tentative decision regarding the classification of the right-of-use asset recognised under the I&A approach be applied for the right-of-use asset recognised under the SLE approach such that a lessee would present the right-of-use asset under the SLE approach as if the underlying asset were owned, and that the asset would be separately presented in the SFP or disclosed in the notes to the financial statements. If right-of-use assets are not separately presented in the SFP, disclosures would indicate in which line item the right-of-use assets are included.

One IASB member preferred that preparers not be provided with an option of presenting the right-of-use asset in either the SFP or in the notes. His preference was for inclusion in the SFP. However, his general concern related to increased optionality in the model. Three IASB members supported this view. However, other Board members noted that requiring presentation in the SFP would not be conducive to all entities where leasing is not a significant portion of their business.

With no additional deliberations, both the IASB and FASB tentatively agreed with the recommendation of the staffs.

Regarding the presentation of the lease liability under the SLE approach, the staffs proposed two options: [Option A] requires presentation as a separate line item in the SFP or disclosure in the notes separately. If the liability under the SLE approach is not separately presented in the SFP, the disclosure should indicate in which line item in the SFP the liability is included. [Option B] applies a consistent methodology to Option A but includes the restriction that the liability under the SLE approach should not be presented together with other liabilities that result in interest that is presented as such in the SCI and are paid with cash flows that are presented in the financing section of the statement of cash flows (SCF).

The staffs did not reach a consensus on this topic, with the majority of staffs favouring Option A and a minority of the staffs favouring Option B.

The majority of the Boards agreed that either presenting or disclosing the liability to make lease payments under the SLE approach (Option A) would be useful. They noted that the relationship between interest or finance costs and the liabilities that give rise to that cost can be important to the user’s assessment of that entity’s cost of funding. However, Board members had different views about restricting the presentation of lease liabilities on the SFP. Some viewed cohesiveness across the primary financial statements as important and, thus, recommended preventing the lessee from presenting the lease liability under the SLE approach with other financial liabilities that result in interest or finance costs being presented as such in the SCI and SCF. Others saw no basis for the restriction because all liabilities to make lease payments are measured in the same way. Thus, they did not think that a lessee should be prevented from presenting all lease liabilities together in the SFP.

Another IASB member expressed concern that the staffs were characterising SLE expenses as non-interest baring obligations. She fundamentally disagreed with this view, and noted, if characterised that way in the ballot draft, she would likely provide an alternative view on the proposals.

When put to a vote, both Boards tentatively agreed with the majority staffs’ view, Option A.

Statement of cash flows

In June 2011, the Boards discussed the SCF for lessees for leases accounted for using the I&A approach. However, given the recent decision to have two separate lease accounting models, the Boards were asked to consider the presentation of cash paid in the SCF for leases applying the SLE approach.

The staffs’ analysis noted that for the effects on the SCF to be representationally faithful to the presentation of amounts in the SCI, the cash paid for leases under the SLE approach should be presented in the operating activities section of the SCF. This assessment was primarily based on the definition of operating activities in the SCF described in paragraph 14 of IAS 7 Statement of Cash Flows and the glossary in the FASB Accounting Standards Codification®.

One FASB member reluctantly agreed with the staff recommendation, but noted that current SCF guidance is ‘torturous’ to apply and he would like for his board consider a fundamental review of SCF guidance.

One IASB member questioned whether IAS 7 could be amended to require separate disclosure of cash paid for leases (similar to requirements to disclose cash paid for interest and income taxes). He noted that current proposals will make it difficult for users of the understand cash payments for leases given that certain components are excluded from the statement of financial position (e.g., short-term leases and variable lease payments which are not based on an index or rate or in-substance fixed). Many Board members supported the additional disclosure of cash paid for leases, but preferred that the staffs analyse this proposal before voting. The staffs noted that they would analyse this proposal and possibly provide a future staff paper.

When put to a vote, both Boards tentatively agreed with the staff recommendation.

The staffs then recommended that the right-of-use asset acquired in exchange for a lease liability for which the lessee recognises a single lease expense in its SCI be disclosed as a supplemental noncash transaction disclosure (similar to the tentative decision previously made about the acquisition of right-of-use assets under the I&A approach).

Both Boards tentatively agreed with the recommendations set forth by the staffs, but some concern was expressed that disclosure requirements were duplicative in nature when considered with other disclosures previously discussed. The staffs noted that where disclosures were duplicative, preparers would only be required to disclose the item once.

Disclosures

The Boards considered the disclosure requirements for leases accounted for using the SLE approach given that previous deliberations on disclosure requirements were on the basis of only the I&A approach. Disclosures reconsidered included the maturity analysis, reconciliation of the opening and closing balance of lease liabilities and right-of-use assets and the table of expenses and cash flows related to leases recognised in the reporting period.

Regarding the maturity analysis disclosure, the staffs considered recommending separate maturity analyses for I&A and SLE approach leases; noting that a maturity analysis is already required for I&A approach leases according to current tentative decisions. However, the staffs noted that the main objective of providing a maturity analysis disclosure is to provide additional information about the lessee’s commitments at the reporting date, and the timing of future cash flows associated with those commitments. Because of this, requiring separate maturity analyses would appear less relevant given that all lease liabilities are measured in the same way and future cash flows remain the same regardless of the accounting. Consequently, on balance, the staff did not think the separate maturity analyses would be incrementally useful and recommended that a lessee should disclose one maturity analysis that sets out the undiscounted cash flows relating to all lease liabilities, and that analysis reconciled to the total lease liability.

Based on the fact that the FASB had previously tentatively decided that a lessee should disclose the maturities of contractual commitments related to lease agreements for services and other non-lease components that are not recorded as part of the lease liability (the IASB previously tentatively decided not to require this disclosure), the FASB staff also recommended that preparers not be required to bifurcate the disclosure of the maturity of contractual commitments associated with services and other non-lease components between the two lease types (FASB only).

With no debate, both Boards tentatively agreed with the recommendations set forth by the staff; the last recommendation being a FASB only tentative decision.

Regarding the reconciliation of opening and closing balances of lease liabilities, the staffs recommended requiring a lessee to disclose a reconciliation of opening and closing balances of lease liabilities under both the I&A approach and the SLE approach. The reconciliation would include interest on the unwinding of the discount, thereby requiring that the lessee presents and discloses any accrued interest or accretion on the lease liability together with the liability balance itself.

With little debate, both Boards agreed with the staff recommendation. However, the FASB did direct its staff to bring back a separate paper regarding disclosure implications related to private companies.

Regarding reconciliation of opening and closing balances of right-of-use assets, the staffs recommended requiring a lessee to provide a reconciliation of opening and closing balances of right-of-use assets under both the I&A approach and the SLE approach, by class of underlying asset, consistent with previous tentative decisions reached on right-of-use assets under the I&A approach.

Many FASB members expressed concern of disclosure overload in this area. They noted that a reconciliation of the right-of-use asset under the SLE approach is not necessary because some of the potentially useful information is already provided elsewhere through other disclosures. They also saw the preparation of reconciliations as costly and questioned the need for this information by users – both for leases under the I&A approach and the SLE approach. However, IASB members expressed support for a reconciliation under both lessee approaches. They highlighted the consistency of this disclosure with requirements to reconcile movements in property, plant and equipment (which is not explicitly required under US GAAP although certain key movements require disclosure) and saw this information as useful to users.

Following deliberations, the FASB tentatively decided to reverse its previous tentative decision and not require a  reconciliation of opening and closing balances of right-of-use assets for either the I&A or SLE approach. However, the IASB tentatively decided to require disclosure of reconciliations under both the I&A and SLE approach based primarily on the consistency of this tentative decision with current IFRS disclosure requirements for property, plant and equipment.

Finally, regarding disclosure of expenses related to leases recognised in the reporting period, the staffs recommended requiring a lessee to disclose a table of lease expense followed by cash payments. This table would include amortisation expense under the I&A approach, interest expense under the I&A approach, expenses relating to variable lease payments not included in the liability to make lease payments, expenses for those leases in which the short-term practical expedient is applied, lease expense under the SLE approach, principal and interest paid under the I&A approach and cash paid on the fixed portion of the leases under the SLE approach.

Many Board members again expressed concern regarding disclosure overload and the costs to preparers. Most of these Board members saw value in disclosure of variable lease expense given that the amount can vary significantly from period to period and the amounts are not recorded as part of the liabilities (and thus, not reflected in any of the disclosures that relate to liabilities), but felt other disclosures proposed by the staffs were too costly given the benefit provided. When put to a vote, both Boards tentatively agreed that the disclosure should be limited to variable lease expense.

Transition: Measurement of the right-of-use asset

The Boards considered whether, on transition, when applying the SLE approach, right-of-use assets should be measured on the basis of the proportion of the liability to make lease payments at commencement, relative to the remaining lease payment (i.e., the modified retrospective approach as tentatively decided by the Boards in previous deliberations of the I&A approach).

The staffs noted that when the Boards previously tentatively decided to apply the modified retrospective approach at transition, this decision was made in the context of the I&A approach being applied to all leases and, therefore, not in the context of the SLE approach. The Boards decided to change from the simplified retrospective approach proposed in the Leases ED (whereby the right-of-use asset is made equal to the liability at transition) to the modified retrospective approach to address respondents’ concerns about the ‘front loading’ of expenses that would result from the proposals in the Leases ED. In contrast to the I&A approach, the SLE approach results in a straight-line expense pattern in the SCI. Consequently, the Boards’ rationale for changing to the modified retrospective approach is not applicable when considering the single lease expense approach.

The staffs noted that, when applying the SLE approach, if lease payments are even or relatively even over the lease term, the right-of-use asset recognised under a fully retrospective transition approach would be similar to the measurement of the liability to make lease payments on transition. Accordingly, they noted that that permitting lessees to measure the right-of-use asset at the same amount as the liability to make lease payments on transition would be a simplified way to retrospectively apply the new proposals for many leases. When lease payments are uneven, the results of applying the simplified approach (i.e., measuring the right-of-use asset at the same amount as the liability to make lease payments) and a fully retrospective approach may not always be similar. However, the staffs suggested that adjusting the right-of-use asset by the amount of any recognised prepaid or accrued lease payments would provide a similar result to that of a fully retrospective approach. Therefore, the simplified approach in the Leases ED, with possible revision for uneven lease payments, was seen as a way forward.

On the basis of this analysis, the staffs recommended that, at transition when applying the SLE approach, a lessee should be permitted to either recognise a right-of-use asset for each outstanding lease, measured at the amount of the related liability to make lease payments, adjusted for any uneven lease payments, or apply a fully retrospective transition approach.

With no debate, both Boards tentatively agreed with the staff recommendation.

Lessor accounting

At its May 2012 Financial Instruments: Impairment joint meeting, the Boards discussed the application of the proposed expected credit loss model to lease receivables. At that time, the staffs indicated that the leases team would consider the broader issue of the interaction between the accounting for the lease receivable, the impairment of the lease receivable and the asset underlying the lease, if that asset were to be returned to the lessor before the end of the lease term. Therefore, this meeting served to discuss how the lessor would initially measure the underlying asset when it applies the receivable and residual approach and the lease terminates before the end of the expected lease term, resulting in the lessor reclaiming the underlying asset and re-recognising the underlying asset earlier than expected.

The staffs presented three alternatives for measuring the underlying asset on re-recognition: [Option X] fair value, [Option Y] carrying amount of lease-related assets and [Option Z] revised value. Under Option X, the lessor would derecognise the lease receivable and net residual asset and re-recognise the underlying asset at fair value. The difference between the carrying amount of the lease assets derecognised and the fair value of the underlying asset re-recognised would be recognised as a gain or loss. Under Option Y, the lessor would reclassify the lease receivable and net residual asset as the underlying asset (i.e., the lessor measures the underlying asset at the carrying amount of the lease-related assets). Consequently, this option would never result in a gain being recognised on the residual asset as a result of the lease terminating prematurely. Under Option Z, the lessor would calculate a revised rate implicit in the lease (the rate actually earned on the abbreviated lease) based on the fair value of the underlying asset at the time of premature lease termination. The lessor uses the revised inputs to compute deferred profit on the residual asset had the lessor known that the lessee would prematurely terminate the lease for purposes of determining the net residual asset at the time of repossession. For each option presented, in addition to any impairment testing of the lease receivable during the lease term, the staffs noted that the lessor would measure the impairment allowance for the lease receivable in accordance with the proposed financial instrument impairment guidance immediately before reclaiming the underlying asset. Consequently, because the lessor would no longer receive all of the lease receivable (i.e., the financial asset) at the time that the lease terminates prematurely, the lessor would record any impairment loss by comparing the carrying amount of the lease receivable and the fair value of the portion of the underlying asset related to the lease receivable plus any cash expected on termination.

The staffs recommended Option Y such that, when a lessor re-recognises the underlying asset when a lease terminates before the end of the expected lease term, the underlying asset is measured as the sum of the carrying amount of the lease receivable (after any impairment) and the net residual asset.

In Board deliberations, no support was expressed for Option Z. While some support was expressed for Option X given its relevance and understandability to users of financial statements, others were concerned that this option would result in recognition of deferred profit on the residual asset when the underlying asset is re-recognised, could allow for a net gain from the repossession of the underlying asset and would result in application of a fair value approach contrary to certain entities’ business models.

Many IASB members supported Option Y. They noted that the approach was simple to understand and apply and is consistent with the Boards’ tentative decision not to recognise profit on the residual asset (given that deferred profit on the residual asset is not recognised under this option). However, other IASB members expressed concerns with this approach.

Specifically, one Board member preferred that the lessor reclassify the lease receivable and net residual asset at the time of lease termination without measuring the impairment allowance for the lease receivable in accordance with the proposed financial instrument impairment guidance immediately before reclaiming the underlying asset. Subsequent to the reclassification, he then suggested that the underlying asset should be tested for impairment. His preference was primarily based on simplicity. However, he also noted that economically, a loss should not be reflected for the financial asset (i.e., the lease receivable) when such a loss is offset by appreciation of the underlying asset which can be marketed for re-lease. IASB staff members expressed concerns with this proposal. They noted that the proposal would result in entities bypassing the impairment guidance for a financial asset (thus requiring amendments to IFRS 9 Financial Instruments) and instead subjecting the financial (i.e., receivable) and non-financial (i.e., underlying asset) asset to the non-financial asset impairment guidance in IAS 36 Impairment of Assets (with likely revision to IAS 36 required based on nature of the combined asset). They also noted that deferred profit embedded in a residual asset would mask any impairment of the re-recognised asset. Finally, in responding to certain Board member concerns regarding the economics of recognising an impairment loss when the earnings power of the underlying asset has appreciated, they noted that any recognised loss on the lease receivable reflects the loss on the leased asset which should be considered separately from the potential future earnings potential of the underlying asset.

Another Board member expressed concern that if the fair value of the portion of the underlying asset related to the lease receivable is greater than the carrying amount of the lease receivable, the lessor would not recognise any gain when the underlying asset is re-recognised. He noted this was not consistent with the way that collateral on a financial asset would be measured on initial recognition. However, the staffs’ outreach suggested that the termination of a lease prematurely typically results in a loss for the lessor, rather than a gain. When a loss is recognised, the portion of the underlying asset related to the lease receivable would be measured at fair value, which is consistent with the way that collateral on a financial asset would be measured on initial recognition.

After an extensive debate, the IASB tentatively agreed with the staff recommendation (Option Y).

With no debate, the FASB tentatively agreed with the staff recommendation of Option Y. They noted that this topic had been discussed by their Board as part of an education session.

Interim disclosures

The Boards discussed whether any of the proposed lessee and lessor disclosure requirements should be required at interim reporting periods.

Evaluating the need for interim disclosures based on the relative significance of leases to the financial statements of an entity, the nature of interim reporting as a condensed update to the previous annual financial statements, the ability to use interim financial statements with annual disclosures to analyse future cash flows and current interim reporting requirements for other items, the staffs recommended that for lessees, no amendments to IAS 34 Interim Financial Reporting (IFRSs only) or Topic 270, Interim Reporting/SEC Regulation S-X, Rule 10-01, Interim Financial Statements (US GAAP only) should be made. This assessment was based primarily on the following considerations:

• Information disclosed in a lessee’s annual financial statements would give a user a good basis for understanding the composition of leases, the future cash flows related to leases and information about the underlying contracts.
• If there is a significant change such that the year-end disclosures are no longer representative of the entity’s current leasing activities, the entity would generally be expected to disclose that change in accordance with the requirements in Rule 10-01 and IAS 34.

With little feedback, the Boards tentatively supported the recommendation set forth by the staffs.

Considering interim disclosure requirements for lessors, the staffs recommended that IAS 34 and Topic 270 should be amended to require a tabular disclosure of the components of lease income. This assessment was based primarily on the fact that the staffs believed a breakdown of lease income at interim periods would be informative to users in assessing future cash inflows from revenue-generating activities, regardless of whether there is a change in trends since year end. The staffs also noted that interim disclosures regarding segmentation of revenue are specifically required in IFRSs and US GAAP, and thus, the incremental costs should not be significant.

The FASB tentatively supported the recommendation of the staffs. However, multiple IASB members expressed concern that the proposals were too prescriptive and should instead require related disclosures only if lease transactions are a significant component of an entity’s business model. One IASB member suggested that the IAS 34 disclosure requirements should be amended such that lease income be disclosed as a single number with a caveat that additional disaggregation of the income figure may be necessary to provide an understanding of the changes in an entity’s performance since the last annual reporting period. The IASB tentatively supported the revision to the staff recommendation. The FASB was asked if they wished to revisit their tentative decision for convergence purposes, but the FASB tentatively decided to retain their earlier vote. Therefore, this represents an area where convergence was not achieved.

Comment period and permission to begin the balloting process

The Boards were asked to decide on the length of the comment period for a revised Leases ED, authorise the staffs to prepare a ballot draft based on the package of tentative decisions and related information discussed during redeliberation of the Leases ED and communicate any intention to present an alternative view to the revised Leases ED.

In accordance with the IASB’s Due Process Handbook and general guidance in the FASB’s Reference Manual, the staffs recommended a comment period of 120 days.

One FASB member suggested that the comment period be a minimum of 120 days so as to avoid a situation where the comment period deadline falls during year end reporting for calendar year entities. Both Boards tentatively agreed with this revision to the staffs’ recommendation, however, the IASB Chair noted that in the international realm, it is difficult to avoid conflicting with year end reporting requirements given that entities operate with different fiscal year end dates.

The FASB Chair asked the staffs when they anticipated issuing a revised Leases ED. The staffs noted that they anticipate issuance by the end of November 2012; timing which is based primarily on the amount of time it took the staffs to issue the 2011 revised exposure draft on revenue recognition following the last decision-making meeting.

The FASB Chair then noted that she would not yet ask the FASB to authorise the FASB staff to prepare a ballot draft given that the FASB will be holding a FASB only meeting next week to discuss remaining FASB only issues on the project. However, she did ask if any FASB members planned to present an alternative view to the proposals once drafted.

Two FASB members noted an intention to dissent, with one additional member uncertain as to whether he would dissent. Reasons for dissention included:

• Concerns regarding the costs of the new proposals relative to the benefits achieved. In particular, this Board member noted that the project failed to achieve one of its key objectives; that being, the removal of a bright-line between lease types.
• Failure to recognise contractual commitments related to variable consideration arrangements. This Board member noted that non-contractual liabilities in the form of contingencies may be reflected in the statement of financial position based on a probability assessment, while contractual liabilities associated with variable components of leases will often be excluded from the statement of financial position which he found difficult to comprehend.
• Concerns over proposed disclosures. Board members expressed a desire for certain additional disclosures including disclosure of cash paid for leases and a comprehensive rollforward of profit and loss and statement of financial position activity during the period.
• Concerns over the lack of convergence on a number of areas. Many of the areas where convergence was not achieved was seen to be the result of existing US GAAP and IFRS guidance creating potential differences in accounting treatment, but this Board member highlighted differences in disclosure requirements arising today as another area of concern.

The IASB Chair did not formally ask for a vote to authorise the IASB staff to prepare a ballot draft on the leasing proposals, but implicitly, it was assumed that the authorisation was provided. Two IASB members noted an intention to dissent, with one additional member uncertain as to whether she would dissent. Reasons for dissention included:

• Concerns regarding the complexity of the proposals.
• Concerns regarding the lack of a conceptual basis for the straight-line expense model for some leases.
• A failure to achieve one of its key objectives of the project; that being, the removal of a bright-line between lease types.
• Concerns regarding the lack of symmetry between the lessor model and the revenue recognition project.
• A belief that many technical issues remain unanswered. Some of the areas specifically highlighted included whether land and buildings are assessed as one unit of account or separately when applying the new lease classification test and implications of impairment on the straight-line expense lease model.

The IASB continued its discussion on development of an accounting model for macro hedging activities on the basis of the ’11 steps’ that the Board initially discussed at its November 2011 meeting. Similar to previous meetings, this session was an educational session where no decisions were made.

The purpose of this meeting was to discuss how some entities incorporate capital management objectives into their overall risk management. In an interest rate risk context, this is generally referred to as an 'equity model book'. When applying this approach, capital is typically considered as a fixed interest rate risk profile, which is then included in interest rate risk management.

The IASB staff noted that mechanically, the equity model book approach shares similarities with the core demand deposit discussion (previously discussed by the Board) in that both are managed under the transfer price mechanisms based on modelling and (typically) replication. However, there are also differences between the two. The equity model book approach is based on a target for the base return for equity funding, while the core demand deposit model is based on expected behaviour of liabilities. Consequently, the impact of the management decisions might be larger, as it includes the judgement about the target of the base return for equity funding on which the valuation of the equity model book is based.

Bearing the features of the equity model book in mind, the decision whether to ignore or accept it is about what information users find useful. Information conveyed through profit or loss volatility depends on whether an equity model book approach is accepted:

1. if not, fair value changes in derivatives represent opportunity gains/losses.
2. if so, (an absence of) net profit or loss volatility represents the accuracy of hedging activities based on the objective to lock in the base return for equity funding.

In receiving a high-level overview of the equity model book, many Board members questioned whether the equity model book was generally limited to banks. The staff noted that they had not performed outreach at this stage, but believed the equity model book was generally limited to banks and insurance companies. Board members then asked whether an equity model book was a central feature to a macro hedging model. The staff indicated that there were some trade-offs to using the equity model book for accounting purposes as compared to a simple model design. That being, providing understandability and operational feasibility versus using a model which provides consistency with the Conceptual Framework and limits arbitrage opportunities. However, the staff noted that the absence of an equity model book would not in and of itself make the macro hedge model irrelevant, but rather, would limit the inputs which are eligible for use in a macro hedging model.

Many Board members requested clarification as to how the equity model book worked in practice. The staff noted that the valuation of the book economically represents an adjustment of the overall valuation of the entire risk position that represents management targets. Therefore, the change in the valuation of the equity model book cannot, in most cases, be allocated to items of the risk position as an adjustment of their respective carrying amounts. The acceptance of the valuation for recognition and measurement purposes would imply using a separate presentation (e.g., accumulated other comprehensive income or other portion of equity) in order to reduce complexity. Hearing this explanation, one Board member saw the equity model book as a placeholder to achieve an effective cash flow hedge. However, he expressed concern that the book essentially resulted in the recognition of opportunity gains or losses where he did not believe the gains or losses were achieved economically. However, others saw benefits arising from use of the equity model book consistent with that which was outlined in the staff’s analysis. This spoke to the fact that the decision as to whether to ignore or accept the equity model book is derived by the information users find useful.

At the June 2012 meeting, the IASB discussed an IAS 28 amendment proposed by the IFRS Interpretations Committee which aimed to provide guidance on whether and where an investor should account for its share of the changes in the net assets of the associate that are not recognised in profit or loss or other comprehensive income (OCI) of the associate (i.e., ‘other net asset changes’). Several Board members disagreed with the proposed amendment citing concerns that it did not address all types of other net asset changes that could occur in practice (e.g., share-based payments in an associate) as well as causing complexity arising from an asymmetry in accounting between a reduction and an increase in the investor’s share ownership interest in an associate. As such, the IASB asked the staff to analyse the following views for where an investor could recognise such changes: 1) investor’s equity, 2) investor’s OCI or 3) investor’s profit or loss for discussion at the next meeting.

At the July 2012 meeting, the IASB discussed the following views for accounting for other net asset changes of an associate:

• View 1: recognise share of associate’s other net asset changes in investor’s equity:
  • This view is consistent with the ‘one-line consolidation’ perspective and provides some symmetry by recognising the other net asset changes in the same part of the investor’s financial statement as it is recognised in the associate’s financial statements.
  • In addition, it was noted that prior to the consequential amendment to IAS 28, the investor’s share of changes in the investee’s equity was required to be recognised in the investor’s equity. If there had been an unintentional oversight in the consequential amendment leading to a lack of clarity, then equity could be seen as the logical place to recognise the changes which would be in line with the original requirements of IAS 28.
• View 2: recognise share of associate’s other net changes in investor’s OCI:
  • This view notes that IAS 1 precludes the associate’s other net asset changes from being regarded as ‘owners transactions’ from an investor’s perspective and therefore prevents such changes from being presented within equity (as an associate is not considered as part of the consolidated group under IFRS 10 Consolidated Financial Statements/IAS 27 Consolidated and Separate Financial Statements).
• View 3: recognise share of associate’s other net asset changes in investor’s profit and loss:
  • This view notes that the equity method is the basis of measurement of a financial asset investment and that changes in the measurement of financial assets should be recognised in profit or loss.

A few Board members noted that conceptually the changes should go through either profit and loss or OCI. However, these Board members acknowledged that the work on defining performance had yet to be completed.

The Board noted that the tentative decision taken below was not a conceptual answer but rather a pragmatic short term solution to address current diversity in practice.

The IASB tentatively decided that an investor should account for its share of the changes in the net assets of the associate in equity (i.e., View 1). The IASB also tentatively decided that given the significant change this amendment would have on current practice, it would issue a separate exposure draft to amend IAS 28 rather than to include it as part of the annual improvement. No additional amendment to IFRS 1 First-time Adoption of International Financial Reporting is required and the amendment would apply retrospectively. The comment period should be no less than 120 days.

An education session was held on revenue recognition in preparation for decision making sessions on Thursday. No decisions were made at this session. The topics discussed included:

• Identifying separate performance obligations: clarifying the criteria for identifying separate performance obligations and distinct goods and services;
• Performance obligations satisfied over time: clarifying the criteria in paragraph 35 of the revenue recognition revised exposure draft;
• Licenses and rights to use; and
• Identifying onerous losses arising from contracts with customers.

At their joint meeting, the Boards discussed the accounting for reclassifications of financial instruments between the fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVTOCI) and amortised cost measurement categories. This follows from the May 2012 joint meeting in which the IASB tentatively decided to extend the existing reclassification requirements in IFRS 9 Financial Instruments to debt investments measured at FVTOCI, and the FASB tentatively decided to require financial assets to be reclassified prospectively when, and only when, the business model changes. Changes in the business model that require reclassifications must be (i) determined by the entity’s senior management as a result of external or internal changes, (ii) significant to the entity’s operations and (iii) demonstrable to external parties.

Reclassification date

The FASB first considered the date on which a reclassification should take effect. The IASB staff noted that IFRS 9 requires an entity to recognise reclassifications as of the first date of the period beginning immediately after the period in which the change in business model that results in a reclassification occurs. Therefore, this IASB staff did not propose any reconsideration of this decision because such a change would be inconsistent with the IASB’s objective to make limited modifications to IFRS 9.

The FASB staff proposed that entities should recognise reclassifications between any of the categories as of the last day of the period in which the change in business model that results in a reclassification occurs; a proposal which is not converged with IFRSs.

The FASB staff noted that because the change in an entity’s business model is expected to be vary infrequent, given the characteristics outlined as part of the May 2012 joint meeting, reflecting the effect of the change in the business model in the period in which the change occurs provides more useful information to the users of the financial statements. The staff acknowledged that this recommendation is different from the requirements in IFRS 9. However, the staff believed that the date of reclassification would not be a key difference between the Boards’ respective classification and measurement models for financial assets, particularly given the anticipated infrequency of such events occurring.

A couple of FASB members expressed concern over the failure to converge with IFRSs. However, consistent with the views expressed by the FASB staff, they were comfortable with the staff’s recommendation. Multiple FASB members preferred that the reclassification date be consistent with the date in which a change in business model is recognised. However, they acknowledged the high preparer costs associated with this alternative. When put to a vote, the FASB tentatively agreed with the recommendation set forth by the staff; acknowledging the lack of convergence with the IASB in this area. One IASB member noted that the subsequent event disclosures required by IAS 10 Events after the Reporting Period would assist in reconciling the divergent views of the IASB and FASB in this area, as subsequent event disclosures would be expected to encompass disclosure of business model changes recognised as of the first date of the period beginning immediately after the period in which the change in business model that results in a reclassification occurs.

The FASB requested that its staff bring back the issue of disclosures related to reclassifications under its model at a later date.

Reclassification mechanics

The Boards then considered the mechanics of reclassifications. The FASB was asked to consider the accounting for all possible reclassification scenarios between the three measurement categories, while the IASB was asked to consider the accounting for the reclassification of eligible debt investments into and out of the FVTOCI measurement category (given that IFRS 9 already includes the requirements for reclassifying financial assets between amortised cost and FVTPL).

The FASB staff presented multiple recommendations regarding the accounting for reclassifications between amortised cost and FVTPL. Those recommendations included:

• For reclassifications from FVTPL to amortised cost, the fair value of the financial instrument becomes the amortised cost on the reclassification date, and an entity would calculate the effective interest rate (EIR) on the basis of this new carrying amount. This is consistent with existing requirements in IFRS 9.
• For reclassifications from amortised cost to FVTPL, an entity remeasures the asset at fair value and recognises the difference between amortised cost and fair value in net income. This accounting is consistent with IFRS 9.

One FASB member was concerned with the structure of the proposals. He found them complex and preferred that all reclassifications be treated as a derecognition event (as if sold and repurchased). However, other FASB members disagreed with the view that all reclassifications were derecognition events; nothing that they may be a change is business strategy.

With little additional feedback, the FASB tentatively agreed with the above staff recommendations.

The IASB and FASB staffs then presented multiple recommendations regarding the accounting for reclassifications between other categories. Those recommendations included:

• For reclassifications from FVTOCI to FVTPL, amounts accumulated in other comprehensive income are “recycled”, or recognised in profit or loss, and the financial asset continues to be measured at fair value.
• For reclassifications from FVTPL to FVTOCI, changes in fair value occurring after the reclassification date are recognised in other comprehensive income, and the financial asset continues to be measured at fair value. On the date a reclassification is recognised, an entity should calculate an EIR on the basis of the new carrying amount (i.e., fair value on the reclassification date) to determine the amounts of interest and amortisation it should recognise in profit or loss going forward.
• For reclassifications from amortised cost to FVTOCI, the financial asset is remeasured at fair value, and any difference between the amortised cost and fair value is recognised in other comprehensive income.
• For reclassifications from FVTOCI to amortised cost, the financial asset is transferred at fair value, but amounts accumulated in other comprehensive income are derecognised with an offsetting entry to the financial asset’s new carrying amount (i.e., the new carrying amount is treated as though it had always been classified at amortised cost).

Both Boards, with no debate, tentatively agreed with the above staff recommendations.

Disclosures

The IASB was asked to consider disclosures related to reclassifying eligible debt investments into and out of the FVTOCI measurement category. Deliberations on other disclosures related to its classification and measurement model will be considered during Friday’s IASB only meeting, while the FASB will consider disclosures related to its model at a future FASB only meeting.

The IASB proposed that the disclosure requirements in paragraphs 12B through 12D of IFRS 7 Financial Instruments: Disclosures should be extended to reclassifications into or out of FVTOCI, as applicable; believing the information equally relevant for these reclassifications.

One Board member expressed concern with the period in which the disclosures in paragraph 12D of IFRS 7 would be required. Specifically, he noted that paragraph 12D requires disclosure of the fair value of financial assets at the end of the reporting period  as well as the fair value gain or loss that would have been recognised in profit or loss during the reporting period if the financial assets had not been reclassified, if an entity has reclassified financial assets. This Board member requested that this disclosure be amended to avoid an entity parking assets from one measurement category into another, such that an entity would be required to provide the disclosures in paragraph 12D to the extent that unrealised losses in a portfolio are of equal or greater value to that evident on the reclassification date. However, others believed that this disclosure was not necessary for the long-term because requiring information about the former measurement category is inconsistent with the objective of prospective reclassification. They also expressed concern at the cost of his proposal given that the scope of the disclosure.

When put to a vote, the IASB tentatively agreed with the IASB staff recommendation.

Loan commitments and financial guarantee contracts

The Boards discussed whether to include within the scope of the proposed impairment model:

• For the IASB,
  • loan commitments that are not accounted for at FVTPL, and
  • financial guarantee contracts to which IFRS 9 applies and that are not accounted for at FVTPL.
• For the FASB,
  • loan commitments that are not accounted for at FVTPL, and
  • financial guarantee contracts that are not accounted for either at FVTPL or as an insurance contract*.

*The FASB staff indicated that the insurance contracts project team would be considering the issue of which insurance contracts fall within the scope of the insurance model (as opposed to the impairment model) at a future FASB only meeting given the interaction with current guidance in US GAAP.

The IASB and FASB staffs presented multiple recommendations regarding the scope and application of loan commitments and financial guarantee contracts within the impairment model as follows:

• The proposed impairment model should apply to loan commitments and financial guarantee contracts to which IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies / that are not accounted for at FVTPL in accordance with US GAAP.
• The proposed impairment model should apply to instruments that create a present legal obligation to extend credit. When estimating expected credit losses the maximum contractual period over which the entity is exposed to credit risk shall be considered.
• The usage behaviour shall be estimated over the lifetime of a loan commitment when estimating expected lifetime losses.
• The final requirements should state explicitly that expected credit losses of undrawn loan commitments or financial guarantee contracts should be reported separately as a liability.

Regarding the first recommendation (i.e., whether the impairment model should apply to loan commitments and financial guarantee contracts to which IAS 37 applies), one IASB member noted that he did not disagree with the staff recommendation, but he had concerns with both the IAS 37 model and the impairment model. He noted IAS 37 has its flaws given the “probable” threshold which provides the “wrong” answer for individual items but the “right” answer for portfolios. He also noted that IAS 37 produces peculiarities given that two credit instruments with the same economics are accounted for differently based on funding. However, he noted that IAS 37 was preferable in certain respects to the current impairment proposals in that it accounts for all of the cash flows associated with the asset. Specifically, IAS 37 requires recognition of a loss if the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it (per IAS 37.68). On the contrary, the impairment model does not take into account the expected benefits. Instead, it focuses on losses; thereby resulting in day 1 losses in the allowance for Bucket 1 which may not reflect economic reality. He concluded this summary by noting that neither answer was perfect, but he did not have a proposal as to how best to move forward.

However, when put to a vote, both Boards tentatively agreed with all of the recommendations as set forth by the staffs.

The IASB staff then presented multiple recommendations for IFRS reporting. Those recommendations included:

• The discount rate to be applied to discounting the expected credit losses arising from a loan commitment or a financial guarantee contract shall be the rate that reflects:
  • current market assessments of the time value of money (i.e., risk free rate); and
  • the risks specific to the cash flows (but only if, and to the extent that, the risks are taken into account by adjusting the discount rate rather than by adjusting the cash shortfalls being discounted).
• As part of the impairment project the accounting for revenue arising from loan commitments or financial guarantee contracts shall not be changed.

One IASB member questioned why discount rate application was considered an IASB only issue. The FASB staff indicated that its constituents had not expressed specific concerns regarding the need for explicit guidance on the discount rate to be applied. Therefore, the FASB staff was not proposing any additional guidance.

With no additional debate, the IASB tentatively agreed with the IASB only recommendations as set forth by the IASB staff.

Disclosures

The Boards discussed disclosures for the three-bucket impairment model being developed by the Boards. The staffs, providing a detailed analysis of its disclosure objectives (which was based on providing financial statement users with an understanding of how management applies the three-bucket impairment model), outlined recommendations for both quantitative and qualitative disclosures. In addition, the staffs developed proposed disclosures designed to enable users of financial statements to compare purchased credit-impaired assets (‘PCI’, i.e., those purchased with an explicit expectation of loss) to other assets. The staffs intend these disclosures as a complement to what currently exists in US GAAP and IFRSs, as the disclosures recommended as part of this meeting were intended to address the new elements of the impairment model; namely, the expected loss data and credit migration between the three buckets. However, both the IASB and FASB will be holding separate meetings to discuss the overall suite of proposed disclosures under IFRSs and US GAAP, respectively.

Disclosures recommended by the staffs are summarised as follows:

In considering the proposals set forth by the staffs:

Both Boards were supportive of proposed disclosures in the following areas:

• • Expected Loss Calculations, although several Board members commented that such disclosures should be entity-specific as opposed to allowing for the use of boilerplate disclosures.
  • Transfer Criteria
  • Allowance Roll Forward Narrative Disclosures
  • Financial Asset Ending Balances
• Regarding the proposed collateral disclosures, many Board members believed the scope of collateral disclosures needed to be narrowed to introduce qualitative description of the collateral policy (however, the FASB noted that a qualitative description is already required in US GAAP). Further, Board members preferred that no specific disclosures were required in relation to financial assets in Bucket 1. Instead, disclosures would focus on financial assets which have moved to the lifetime measurement objective. Both Boards tentatively agreed with these counter-proposals.
• Regarding proposed risk disaggregation disclosures, many IASB members expressed concern that the proposal for an entity to disaggregate its financial assets measured under the impairment model into lower, moderate and higher risk categories, for each measurement objective, would be costly and complex to implement and apply. However, other Board members noted that the banking industry is currently required to provide risk disaggregation information in many jurisdictions for regulatory purposes, and thus, they believed this information could be leveraged. Believing this information to be very useful to users, they preferred that the disclosures be amended such that entities are required to provide risk disaggregation information to the extent provided for regulatory purposes. However, if disaggregation information is not currently provided in accordance with regulatory requirements, the proposals set forth above should be applied. The IASB tentatively supported this counter-proposal and directed the staff to develop this principle in drafting.

FASB members noted that principles set forth in the proposed disclosures are consistent with those currently in US GAAP. As such, they tentatively supported the principles outlined in the proposals. They did acknowledge, however, that they would implement the principles of the proposed disclosure in a manner consistent with current US GAAP guidance, absent any ‘tweaks’ deemed necessary.

• Regarding proposed purchased-credit impaired disclosures, Board members preferred to maintain the proposed objectives set forth in the staff’s proposals without prescribing any required format for such disclosures. This discussion followed from the staffs’ proposals being accompanied by a tabular disclosures complying with the requirements described in the staffs’ proposals.

Another Board member noted that the comparison of purchased-credit impairment to other financial assets subject to impairment accounting should be based on similar financial assets.

Both Boards tentatively agreed with the staff recommendations subject to the above amendments.

• Both Boards were supportive of the proposed disclosures regarding financial asset ending balances. However, many Board members requested the inclusion of a rollforward of financial assets and the allowance by measurement category as part of the proposals. Some Board members questioned the need of a rollforward of the financial asset balance, but others thought it was needed to foreshadow risk. Ultimately, both Boards tentatively agreed to require a rollforward of financial assets and the allowance by measurement category as part of the proposals. However, they directed the staff to develop more fully this requirement (including avenues to make the requirement more cost effective for preparers) and conduct directed outreach on this proposal.

Finally, many Board members asked how the above disclosure requirements would apply to non-financial institutions. The staff noted that they intended to bring this issue back as a sweep issue.

Next steps

Subsequent to agenda topics, the FASB Chair discussed next steps as part of the FASB’s deliberation efforts. The FASB Chair indicated that in outreach it conducted with various constituents and stakeholders, concerns were expressed with the expected loss approach previously agreed to by the Boards. The concerns appear to be directed at application of the ‘Bucket 1’ measurement objective of expected losses relating to a loss event that is expected in the next 12 months. Some of the stakeholders expressed concern that, under the latest proposal, reserves for loan portfolios might not reflect the appropriate amount of risk (i.e., some stakeholders believed that the proposal would likely result in lower reserves for portions of loan portfolios). In addition, stakeholders raised questions about the proposed guidance for determining when financial assets should be transferred to ‘Bucket 2’, which requires an estimate of lifetime expected losses.

The FASB Chair then indicated that before issuing an exposure draft, the FASB plans to discuss at a future meeting several remaining topics, in conjunction with reviewing a summary of outreach conducted to date by the FASB staff on application guidance expected to supplement the current proposals. Accordingly, the FASB did not vote on the issuance of an exposure draft on impairment at this meeting.

The FASB Chair indicated that there was some ‘flexibility’ in the current schedule, and the FASB hoped that most of these topics could be discussed during the August meeting in order to avoid a substantial delay in issuance of an exposure draft.

She noted that the FASB still strongly desires a converged standard with the IASB on impairment; however, the FASB believes it is essential that the board addresses the questions that have been raised in the US before moving forward with an exposure draft so that the FASB can feel confident that the proposal would result in an improvement in financial reporting.

In response, the IASB Chair expressed frustration with the FASB’s decision and ended the meeting by saying “...we really have done our job very poorly” [if the Boards are unable to come to a conclusion after three attempts over a three year period].

At the July 2012 meeting, the IASB discussed the following issues:

• whether to extend the exception to consolidation to an insurer’s insurance investment fund subsidiaries;
• the reassessment requirements;
• the disclosure requirements;
• the transition requirements and effective date;
• other sweep issues; and
• whether all due process steps had been followed in the Investment Entities project.

Request for extension of exception to consolidation

The Investment Entities exposure draft (‘the ED’) proposed an exception from consolidation for the controlled investees of investment entities.  Many insurance companies have controlling interests in investment funds (‘insurance investment funds’).  While many insurance companies agreed with the exception to consolidation proposed for investment entities in the ED, they also argued that insurance investment funds should qualify as investment entities and that those insurance investment funds should not consolidate their controlled investments. In addition, several insurance companies also requested an additional extension of the exception from consolidation proposed in the ED, citing that they should be required to measure their controlling interest in the actual insurance investment funds at fair value rather than consolidating them. They noted that presenting a single line item for the fair value of their interest in the insurance investment fund, along with a single line item for the current value of their liability to policyholders who receive the returns from those investment funds, would provide the most useful information.

At the June 2012 meeting, the IASB tentatively decided that the fair value accounting used by an investment entity subsidiary to account for its controlled investments should not be retained at a non-investment entity parent level. As such, following these tentative decisions and the IFRS 10 requirements, insurers would be required to a) consolidate their controlling interests in insurance investment funds and b) consolidate any controlled investees of those insurance investment funds.

While a few Board members expressed sympathy for where the insurers were coming from, the IASB tentatively agreed with the staff’s recommendation not to extend the exception to consolidation for insurers’ insurance investment fund subsidiaries as the topic was outside the scope of the Investment Entities project as the purpose of the project was to provide an exception to consolidation for investments entities.

Sweep issues

The IASB discussed the following sweep issues:

Issue: The ED proposed that an investment entity would measure controlled investees and investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9 Financial Instruments.  However, the ED did not provide any specific guidance on the initial measurement of controlled investees and investments in associates and joint ventures;

Tentative decision: The IASB tentatively agreed with the staff’s recommendation that an investment entity should initially measure all controlled investees and investments in associates and joint ventures in accordance with IFRS 9.

Issue: measurement of all investment assets held by an investment entity

Tentative decision: The ED only provided measurement guidance for the controlled investees and investments in associates and joint ventures held by investment entities, and required investment entities to measure those investments at fair value through profit or loss in accordance with IFRS 9.  The staff noted that many constituents requested more comprehensive measurement guidance for all investments held by an investment entity.  The IASB tentatively agreed with the staff’s recommendation that the investment entities requirements should not include any measurement guidance for investments other than controlled investees and investments in associates and joint ventures as it was outside of the scope (which was to provide an exception from consolidation for investment entities) of the Investment Entities project to provide comprehensive measurement guidance for all investments held by an investment entity.

Issue: the use of a net asset value (‘NAV’) practical expedient for fair value

Tentative decision: Some constituents noted that US GAAP allows an investor in an investment company to use the reported NAV per share of that investment company as a practical expedient for fair value in certain circumstances but that IFRS 13 Fair Value Measurement did not provide such a practical expedient.  The IASB tentatively agreed with the staff’s recommendation not to introduce a NAV practical expedient for fair value measurement within the context of the Investment Entities project as: a) it is outside the scope of the Investment Entities project to provide fair value measurement guidance for investments in investment entities, b) entities that may not have controlled investees may use the definition of an investment entity to determine whether they are eligible for a NAV practical expedient and c) NAV could be calculated differently in different jurisdictions.

Issue: whether the definition of an investment entity should include a reference to existing regulatory requirements

Tentative decision: The staff noted that the FASB’s proposed Accounting Standards Update, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, proposed that an entity that is regulated as an investment company under the SEC’s Investment Company Act of 1940 would be treated as an investment entity for accounting purposes and would not be required to assess the proposed criteria.  However, the ED did not have a reference to existing regulatory requirements in guidance relating to the determination of investment entity status.  The staff expressed concern that there are different regulatory requirements in different jurisdictions and these requirements could change over time and that such regulatory requirements were outside the control of the IASB.  The IASB tentatively agreed with the staff’s recommendation that the definition of an investment entity should not make reference to existing regulatory requirements (i.e., the definition should stand on its own).

Issue: whether an investment entity should be allowed to provide financial support to its investments

Tentative decision: The ED contained disclosure requirements relating to the provision of financial support but did not explicitly state whether an investment entity could provide financial support (e.g., loans, guarantees, to its investees).   The IASB tentatively decided that an investment entity should not be prohibited from providing financial support to its investees as long as the provision of financial support does not constitute a separate substantive activity of the entity.

Reassessment

The ED proposed that an entity shall reassess whether it meets the criteria to be classified as an investment entity if facts and circumstances indicate that there are changes to one of more of the criteria used to determine investment entity status. If the entity’s reassessment shows that its status has changed, the ED proposed that an entity shall account for the change prospectively from the date of the change.  The FASB’s proposed Accounting Standards Update, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements proposed that an entity reassess whether it is an investment entity if the purpose and design of that entity changes.  A few constituents noted that the requirement to continuously reassess whether facts and circumstances are changing would be too onerous and stated a preference for the FASB ED ‘purpose and design’ approach.  The staff noted that the requirement to use facts and circumstances to both initially assess and subsequently reassess a particular situation is used in numerous IFRS standards, including IFRS 10 Consolidated Financial Statements and that they did not expect a change in investment entity status to occur frequently.  In addition, the staff noted that they were not aware of situations where the reassessment of facts and circumstances could be considered unduly onerous.  The IASB tentatively agreed with the staff’s recommendation to require an entity to reassess its investment entity status if facts and circumstances indicate that its status has changed.

Accounting for loss of investment entity status

The ED proposed that an entity that no longer meets the definition of an investment entity should account for the change in its status prospectively by changing the accounting for its investments from the date when the change in status occurred. This would require an entity (when that change in status occurs) to apply IFRS 3 Business Combinations to those investees that are required to be consolidated as a result of the entity no longer qualifying as an investment entity.

The staff noted that this guidance recognises the change in status as a significant economic event and accounts for the change in status as a ‘deemed acquisition’, i.e., to use the fair value of the investment at the date of the change of status of the investor as the ‘deemed’ consideration transferred and would result in the recognition of goodwill or a gain on a bargain purchase.

The IASB tentatively agreed with the staff’s recommendation to provide more explicit guidance in the final investment entities amendments regarding the accounting for controlled investees in the case when an entity loses its investment entity status (i.e., the requirements of IFRS 3 should be applied and goodwill or a bargain purchase as applicable should be recognised when an entity ceases to qualify as an investment entity).  One of the Board members noted that the change is accounted from the date when the change in status occurs which is different from IFRS 9 which accounts for the change from the beginning of the next reporting period.  The staff noted that this recommendation was consistent with IFRS 10 which accounts for the change from the date when the change in status occurs.

Accounting for loss of investment entity status by an intermediate parent

At the June 2012 meeting, the IASB tentatively decided that a non-investment entity parent should be required to consolidate all controlled investees, regardless of whether the investments are held through an investment entity subsidiary (i.e., an intermediate parent entity that qualifies as an investment entity). This decision raised an application issue when an investment entity subsidiary/intermediate parent ceases to qualify as an investment entity.  The intermediate parent would be required to consolidate its controlled investees from the date of change in status if it lost its investment entity status (per IFRS 3).  Consequently, the assets and liabilities of these newly-consolidated investees would be recognised at different amounts in the consolidated financial statements of the intermediate parent from the amounts recognised in the consolidated financial statements of the higher-level parent which could create additional costs for preparers. The staff felt that this situation would not occur frequently. Also, if an intermediate parent ceases to qualify as an investment entity, there is currently relief within the scope of IFRS 10 for intermediate parents which provides an exemption from preparing consolidated financial statements if it meets certain conditions.   As such, at the July meeting, the IASB tentatively agreed with the staff’s recommendation not to provide relief when an intermediate parent entity ceases to qualify as an investment entity.

Qualifying for investment entity status

The ED requires an entity that becomes an investment entity to account for the change in its status prospectively by ceasing to consolidate its controlled investments from the date when the change in status occurred.  The staff noted that recognising the change in status to an investment entity as the exchange of an investment in a subsidiary for an investment measured at fair value would result in a gain or loss on the ‘deemed disposal’. The IASB considered three alternatives for recognising this amount at the date of change in status:

Alternative 1: recognise the amount as a gain or loss in profit or loss which reflects the change in the business purpose of the investor as a significant economic event (consistent with gains and losses being recognised in profit or loss in IFRS 10 when control is lost).

Alternative 2: recognise the amount as a gain or loss in other comprehensive income which would avoid a one-off gain or loss being recognised in profit or loss when an entity changes its status.

Alternative 3: recognise the amount as a gain or loss directly through the statement of changes in equity which would also avoid recognising a one-off gain or loss when the entity changes its status.

The IASB tentatively agreed with the staff’s recommendation (Alternative 1) to provide explicit guidance in the final investment entities requirements regarding the accounting for when an entity becomes an investment entity (i.e., the entity should apply the requirements of IFRS 10 for a deemed disposal and any resulting gain or loss should be recognised in profit and loss).

Disclosures on a change in investment entity status

The ED proposed that when an entity’s status has changed, the entity should disclose the change in status and reasons for the change. If an entity becomes an investment entity, it should disclose the effect of the change in status on the financial statements for the period presented, including the effect of the change on the reported amounts of investments as of the date of the change in status and the related effects on profit or loss and total comprehensive income.  The IASB tentatively agreed with the staff’s recommendation to retain this disclosure requirement in the final standard.

Amendments to other IFRSs

As the IASB tentatively decided that in addition to accounting for controlled investees at fair value through profit or loss, an investment entity should also measure its investments in associates and joint ventures in the same way, the IASB tentatively agreed with the staff’s recommendation to draft reassessment guidance for amendments to IAS 28 Investments in Associates and Joint Ventures and IAS 27 Separate Financial Statements which is consistent with the decisions made for the reassessment guidance for IFRS 10.

Disclosures

At the July 2012 meeting, the staff was asked to clarify the scope of the disclosure requirements for Investment Entities.  The staff noted that the objective of the Investment Entities project is to provide an exception to consolidation for the controlled investees of investment entities and instead require that investment entities measure those controlled investees at fair value through profit or loss.  The staff also highlighted that the IASB had previously tentatively decided to introduce a requirement that investment entities measure their investments in associates and joint ventures at fair value through profit or loss.

However, the disclosure objective proposed in the ED required disclosure of information to enable users of an investment entity’s financial statements to evaluate the nature and financial effects of the investment activities in which it engages. The staff noted that there are two potential inconsistencies between the objective of the Investment Entities project and the scope of the disclosure objective for investment entities that was set out in the ED:

Potential inconsistency: The disclosure objective proposed in the ED would apply to all investment entities rather than just investment entities with investments in subsidiaries, associates or joint ventures.

Tentative decision: The IASB tentatively agreed with the staff’s recommendation to clarify that the disclosure requirements should only apply to investment entities with investments in subsidiaries, associates or joint ventures.

Potential inconsistency: The disclosure objective proposed in the ED would apply to all investment activities of an investment entity, rather than just those investment activities relating to an investment entity’s subsidiaries, associates, or joint ventures.

Tentative decision: The staff recommended that an investment entity with one or more subsidiaries, associates or joint ventures should provide information about all its investment activities (i.e., entity wide) rather than just about subsidiaries, associates or joint ventures as it would provide more useful information.  However, the IASB tentatively disagreed with the staff’s recommendation that an investment entity with one or more subsidiaries, associates or joint ventures should provide information about its investments.  Several Board members expressed concern of a scope creep and were not supportive of entity wide disclosures. These Board members also noted that disclosures were included in IFRS 12.

Disclosures

Due to the decision reached above where the IASB tentatively disagreed with the staff’s recommendation that an investment entity with one or more subsidiaries, associates or joint ventures should provide information about its investments, the following questions were deemed to be irrelevant and as such the IASB did not discuss or vote on the following questions.

1. Objective and other statement – the staff recommended that:
   1. The disclosure objective should be retained unchanged;
   2. A statement should be included allowing investment entities to make the required disclosures by cross-reference to some other statement that is available to users of the financial statements, on the same terms as the financial statements, and at the same time.
2. Fair value disclosure
   1. The staff recommended that fair values for individual investments of an investment entity should be included in the list of examples that might be appropriate to meet the disclosure objective.
3. Leverage disclosures
   1. The staff recommended that the leverage ratio, leverage value and method of calculating the leverage ratio be included in the list of examples that might be appropriate to meet the disclosure objective.

The IASB tentatively agreed that in relation to IFRS 7, 12, and 13 that:

• An investment entity should be required to provide the disclosures required by IFRS 7 and 13 in addition to the disclosures requirements for Investments Entities.
• The ‘interests in subsidiaries’ disclosures in IFRS 12 should only apply to consolidated investments of investment entities, except for paragraphs 14 and 16, which should still apply to an investment entity.
• Investment entities with joint ventures and associates accounted for using the fair value method do not need to apply paragraphs 21(b), 21(c), 22(b) and 22(c) of IFRS 12.
• Paragraph B20 should be deleted as it was not necessary to state that disclosures need not be duplicated.

The IASB also tentatively agreed with the staff’s recommendation that an investment entity should be required to disclose that it is an investment entity and as such has not consolidated controlled investees, and how it has met the definition and characteristics to be an investment entity, with specific reasons given if it has not met one or more characteristics.

Transition guidance

The ED proposed prospective application of the exception from consolidation requirements and provided transition guidance for when a reporting entity applies the proposals for the first time.

Developing transition guidance based on retrospective application

The IASB tentatively agreed with the staff’s recommendation to develop transition guidance based on a retrospective approach, consistent with the approach used in the existing IFRS 10 transition guidance.  This represents a change from the ED.

The IASB tentatively agreed with the staff’s recommendations to:

• Require retrospective application for all investees, subject to the existing impracticability exception.
• Require, for the purposes of transition, the assessment of investment entity status only at the date of initial application of the investment entity requirements.
• Allow investment entities to retain the previous accounting for investees disposed of in the comparative period(s).
• Allow the use of fair value that is consistent with fair value as defined by IFRS prior to the effective date of IFRS 13.
• Limit the requirement to present adjusted comparatives to the annual period immediately preceding the date of application of these investment entity requirements, with any unadjusted comparatives being clearly identified.

The IASB tentatively agreed with the staff’s recommendation to draft transition guidance for amendments to IAS 28 Interests in Associates and Joint Ventures and IAS 27 Separate Financial Statements that is consistent with the decisions made for the transition guidance for IFRS 10.

The IASB tentatively agreed with the staff’s recommendations:

• To require retrospective application for all investees, subject to an impracticability exception and IFRS 13 exception.
• To require the assessment of investment entity status at the date of transition to IFRS.
• To allow first-time adopters to apply the consolidation exception in IFRS 10 early, together with the other requirements of IFRSs 10-12.

The IASB tentatively decided that this transition guidance was temporary and would not be necessary for those first time adopters who would have sufficient time to adopt the ED.  The IASB also tentatively decided that an entity would also need to adopt IFRS 10, 11, 12 and IAS 27 and 28 as a package.

Effective date

The IASB tentatively decided that 1 January 2014 would be the effective date for the final amendment with early adoption permitted.  The IASB noted that it wanted to emphasise in the Basis for Conclusions  that a 1 January 2014 effective date would result in a gap between the final amendment and IFRS 10 which is effective for annual periods beginning on or after 1 January 2013.  However, as the final amendment’s requirements will not be finalised till Q2 2012, the IASB felt that sufficient lead time should be provided but noted that early adoption could minimise this gap and improve comparability.  The staff noted that they did not expect investment entities to have difficulty in adopting the amendment as they would typically already have the required fair value information.

Due process considerations

The IASB tentatively agreed that it had performed all the mandatory due process steps (e.g., publishing an exposure draft, reviewing comments made within a reasonable time, and consulting with the Advisory Council) and that it had performed sufficient additional due process steps (e.g., outreach activities, public round tables). The IASB tentatively decided that none of the amendments require re-exposure.

Next steps

The IASB tentatively decided to proceed to ballot the investment entity requirements.  No Board members plan to dissent from the investment entity requirements.

Identifying separate performance obligations

The Boards considered improvements and clarifications to the proposed requirements for identifying separate performance obligations included in the 2011 Revenue Exposure Draft.

The staff noted that while the 2011 Revenue Exposure Draft did not ask a question about the proposals for identifying separate performance obligations, many respondents acknowledged the improvements but requested further clarification or additional guidance and illustrative examples to assist constituents in applying the separation criterion.

The staff recommended that the Boards:

1. Clarify the underlying principle of identifying separate performance obligations;
2. Retain and improve the distinct concept by clarifying and refining the Boards’ intent in paragraphs 28 and 29 of the 2011 Revenue Exposure Draft by indicating that an entity should account for a promised good or service as a separate performance obligation if it would depict the substance of the contract with the customer and achieves two criteria:
   1. Capable of being distinct (principle included in paragraph 28(b)), and
      1. A few IASB Board members expressed concern with the wording and asked the staff to consider drafting changes to better capture the principle.
   2. Distinct in the context of the contract (specify the Boards’ intent of paragraph 29)
      1. An IASB Board member questioned whether it was necessary to state this as this would have been implied. The staff clarified that due to respondents feedback, it seemed that some constituents assumed a hypothetical assessment and the staff wanted the Boards to clarify that distinctiveness should be looked at in the context of the contract. An IASB Board member questioned whether being distinct in the context of the contract would triumph being capable of being distinct. The staff also clarified that while items may be capable of being individually distinct (e.g., building materials, labour etc), it could lose its distinctiveness in the context of the contract (e.g., provide a building) and therefore the second criteria would override the first criteria.
      2. Several FASB and IASB Board members expressed concern with the terminology ‘substance of the contract’ noting that some constituents would interpret this to mean that substance should override the two distinct criteria.  The staff and the Boards confirmed that this was not their intention and suggested draft changes.
3. Clarify the Boards’ intent of paragraph 29 and improve application by including indicators to assist in determining when an entity would assess that a performance obligation would be distinct in the context of the contract.

Both Boards tentatively agreed with the staff’s recommendations above, subject to drafting changes.

Pattern of transfer

The staff noted that many respondents highlighted difficulty understanding the phrase “same pattern of transfer” and whether or not the practical expedient could be applied to consecutively transferred goods or services as well as concurrently transferred goods or services.  The staff commented that while respondents generally understood the practical expedient when applied to concurrently delivered distinct goods or services, the respondents were unclear as to whether the Boards intended for the practical expedient in paragraph 30 to apply to contracts to deliver repetitive services (e.g., cleaning service) or homogenous goods (e.g., energy) delivered consecutively.

The staff noted that it had been difficult to resolve the respondents concerns because there  appeared to be three types of arrangements that could have the same pattern of transfer:

• a) Concurrent delivery of two or more distinct and related goods or services (i.e., two or more different but related goods or services are provided on a single day).
• b) Concurrent delivery of two or more distinct and unrelated goods or services (i.e., two or more different and unrelated goods or services are provided on a single day).
• c) Consecutive, or continuous, delivery of similar goods or services (i.e., good or service was provided first on Day 1, then again on Day 2, and so on).

For arrangements under (a) and (b), the staff recommended that the standard should not explicitly specify a practical expedient for concurrently delivered distinct goods or services that have the same pattern of transfer, whether those goods or services are related or unrelated noting that an entity would not be precluded from accounting for two or more distinct goods or services as if they were a single performance obligation if they have the same pattern of transfer. The staff felt that any such practical expedient will evolve in practice.

For arrangements under (c), the staff recommended incorporating as an indicator the ‘pattern of transfer’ notion into the revenue framework for identifying separate performance obligations which would  eliminate the need for the practical expedient in paragraph 30 of the 2011 Revenue Exposure Draft and optional accounting within the revenue model. The staff felt that any unintended consequences would be mitigated by the use of ‘pattern of transfer’ as an indicator rather than a criterion. This would be consistent with the ‘distinct in the context of the contract’ improvement suggested above and as such, the staff recommended adding an indicator to the determination of whether a performance obligation is distinct in the context of the contract.

Both the Boards tentatively agreed with the staff’s recommendation to: a) remove the ‘pattern of transfer’ practical expedient for concurrently delivered goods or services and b) include a ‘pattern of transfer’ indicator for when performance obligations are distinct in the context of the contract for consecutively  delivered goods or services.

Performance obligation satisfied over time

The Boards considered suggested improvements to the criteria proposed in the 2011 Revenue Exposure Draft for determining whether an entity satisfies a performance obligation over time, and as such, can recognise revenue over time. The Board did not consider the feedback received on how an entity should measure its progress towards complete satisfaction of a performance obligation that meets those criteria.  This will be discussed at a future meeting.

The staff noted that in response to Question 1 of the 2011 Revenue Exposure Draft, most respondents supported the addition of the criteria for determining when a performance obligation is satisfied over time and, as such, when revenue could be recognised over time because the criteria provide guidance on how to assess whether the customer obtains control of a service. Most respondents also supported the concept underlying the criteria in paragraph 35(b) as clarified in the Basis for Conclusions. However, the staff noted that the respondents felt that the criteria appear complex and difficult to apply consistently in practice to contracts beyond the construction and production of tangible goods. These respondents felt that the complexity arose from an overlap in the criteria or concepts that require greater explanation and asked the Boards to:

• clarify the ‘alternative use’ criterion in paragraph 35(b), in relation to the effect that a contractual restriction has on the ability of an entity to readily direct the asset to another customer;
• clarify the application of the criterion in paragraph 35(b)(ii), which considers whether the customer receives a benefit from the entity’s performance on the basis of a hypothetical assessment of whether another entity would need to substantially re-perform the work completed to date;
• clarify the relationship between the criterion in paragraph 35(b)(ii) and paragraph 35(b)(i), which considers whether the customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs; and
• clarify the ‘right to payment for performance to date’ criterion (in paragraph 35(b)(iii)) and the relevance of a right to payment as a necessary, but not sufficient, condition for recognising revenue over time for some, but not all, types of service contracts.

The staff also noted that a few respondents also questioned the conceptual basis for the criteria in paragraph 35(b) and whether those criteria are consistent with the definition of control.

The staff recommended that the Boards:

1. Retain the criterion in paragraph 35(a);
   1. The staff noted that the paragraph 35(a) criterion specifies that an entity satisfies a performance obligation over time if the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. As such, an entity would need to consider the definition of control (paragraph 32) and the indicators of control (paragraph 37) to determine whether the customer controls the asset as it is created or enhanced.
2. Combine the criteria in paragraphs 35(b)(i) and (b)(ii) into a single criterion that would apply to ‘pure service’ contracts; and;
   1. The staff noted that there is duplication between the criteria in paragraphs 35(b)(i) and (b)(ii) because the criteria were designed to apply to ‘pure service’ contracts, i.e., circumstances where the entity’s performance does not create a recognised asset (because the asset that is created is simultaneously consumed by the customer) and the customer benefits from that performance as the entity performs. The staff commented that the intended distinction between those criteria was for paragraph 35(b)(ii) to specify a basis for objectively determining whether the customer receives the benefit from the service as it is provided by the entity whereas paragraph 35(b)(i) would apply to those circumstances where there is clear evidence that the customer benefits from the service as it is provided rather than upon completion.  However, given the confusion this duplication has caused, the staff recommended simplifying this by combining these criteria into a single criterion.
3. Link more closely the ‘no alternative use’ criterion in paragraph 35(b) and the ‘right to payment to performance to date’ criterion in paragraph 35(b)(iii).
   1. The staff noted that determining whether a performance obligation is satisfied over time is often based on applying the criteria of ‘no alternative use’ and the ‘right to payment for performance to date’. As such, the staff recommended that linkage could improve an entity’s understanding and application of those criteria.  One of the IASB Board members questioned whether just having the right to payment criterion would be sufficient and the staff clarified that just having a right to payment criterion was insufficient to meet the criteria.  Several IASB and FASB Board members commented that the enhancements were good and more operational.  An IASB Board member expressed concern over the terminology ‘alternative use’ due to potential comprehension and translation difficulties.  The staff agreed to consider using alternative wording or clarifying the meaning of alternative use in the Basis for Conclusions. A FASB Board member commented as to whether there would be consistent application of the alternative use criterion.
   2. The staff recommended clarifying:
      1. right to payment
         1. The payment schedule specified in the contract does not indicate whether an entity has a right to payment for performance to date.
         2. The right to payment should be enforceable and, in assessing the enforceability of that right, an entity should consider the contractual terms as well as any legislation or legal precedent that could override those contractual terms.
      2. a ‘reasonable profit margin’ should represent either:
         1. a reasonable proportion of the expected profit margin under the contract; or
         2. a reasonable return on the entity’s cost of capital for similar contracts if the contract specific margin is higher than the return the entity usually generates from similar contracts; and
         3. the entity should assess whether, for the entire duration of the contract,  the entity would be entitled to an amount that is intended to at least  compensate the entity for performance completed to date.
      3. assessment of alternative use:
         1. there must be a substantive reason for the presence of a contractual restriction in the contract;
         2. a practical limitation might exist if the entity would face a significant economic loss (through either incurring significant costs of rework or selling the asset at a significant loss) if it redirected the asset to another party;
         3. the assessment of alternative use is made at contract inception and the entity considers its ability throughout the product process to readily re-direct the partially completed asset to another customer.

Both Boards tentatively agreed with the staff’s recommendations above, subject to drafting changes.

Licenses

The Boards considered respondents’ feedback to the 2011 Revenue Exposure Draft and possible refinements to the implementation guidance related to licenses and rights to use.  The Boards did not discuss the appropriateness and applicability of the constraint on the cumulative amount of revenue recognised for licenses of intellectual property at this meeting as it will be addressed later in the redeliberations.

The staff noted that while the 2011 Revenue Exposure Draft did not ask a question about the licenses and rights to use proposed implementation guidance, the staff received feedback from several respondents who thought that either the guidance implied that they would be required to recognise revenue at a point in time for all licenses and rights to use or a lack of clarity on what the on-going performance was where it seemed to relate to maintaining or protecting their intellectual property.

The staff recommended that the Boards refine the implementation guidance for contracts that include a promise to transfer a license or right to use to clarify how an entity would identify separate performance obligations in those types of contracts and how an entity would determine when those performance obligations are satisfied because control has transferred to the customer:

• Clarify that an activity would only represent a promise to the customer when that activity transfers a good or service and that activity is specific to the customer and identifiable within the contract. Such activity may result from an entity’s customary business practice (provided it creates a valid expectation of the customer that the entity will transfer a service).  Several IASB Board members expressed concern over the ‘specific to the customer and identifiable within the contract’ wording as to whether this was intended to be implicit or explicit.
• Clarify that when an entity provides a service in addition to a license that the entity must consider whether the license and service represent a single performance obligation because together they depict the substance of the contract.
• Clarify that paragraphs 35 through 37 should be applied to the separate performance obligation in the contract to determine when revenue should be recognised. The staff noted that the Boards should clarify that restrictions on use of the transferred asset during the term of a license are characteristics of the licensed asset and therefore should not affect the evaluation as to when control transfers. Whereas control of the license cannot be transferred before the beginning of the period during which the customer can use and benefit from the licensed intellectual property.  Various members from each of the Boards discussed what their view was on the effect, restrictions on the use of the transferred asset would have on revenue recognition.  One of the FASB Board members was of the view that if there was a perpetual license but there was a restriction on use (e.g., once a week), then revenue should be recognised over time.  Several IASB Board members were of the view that in this situation, revenue should be recognised at a point in time as the selling entity did not have to perform any further obligations and the customer could use and benefit from the licensed intellectual property.

The IASB tentatively agreed with the staff’s recommendations subject to drafting changes.  However, the FASB Chair asked the staff to do more work by taking the illustrative examples in Supplement Agenda Paper 7D and applying the criteria in paragraphs 32-37 of the 2011 Revenue Exposure Draft (as it would have been applied for any other item) to see if the application was operational and whether the results were sensible.  The IASB tentatively agreed with the FASB’s recommendation.

Identifying onerous losses

The staff recommended that the Boards should retain a requirement to identify and measure onerous losses on contracts with customers (i.e., an onerous test) in the revenue proposals.  This would help to meet the objective of convergence as well as to provide useful information.  The staff noted that Question 4 of the 2011 Revenue Exposure Draft sought respondents’ feedback as to whether they agreed with the scope of the onerous test.  Very few respondents agreed with the proposed onerous test and many respondents suggested removing the onerous test from the revenue proposals because they felt the requirements for recognising onerous losses should be included in other standards.

Several IASB Board members mentioned that existing guidance in IAS 37 provided sufficient guidance for determining when to recognise losses arising from contracts with customers.  Other IASB Board members noted that there were difficulties and complexity in applying the onerous test and that costs should not be dealt with in this project and that the onerous test arose primarily in relation to costs associated with the project. Several FASB Board members expressed concern that such an onerous test would introduce complexity into the revenue standard and could lead to different results. The FASB Board members acknowledged that US GAAP did not an have equivalent to IAS 37 but that onerous provision guidance was currently contained in SOP 81-1, Topic 450 and various industry guidance. Several FASB Board members suggested potentially having a spin-off project to consider the onerous test requirement but expressed concern that this may not be completed in time. A FASB Board member was strongly supportive of the proposal as he felt that this was an opportunity to converge.

At the July 2012 meeting, the Boards did not agree with the staff’s recommendation that an onerous test should be included in the revenue standard.  12 IASB Board members did not agree with the staff’s recommendation whereas 3 IASB Board members agreed with the staff’s recommendation.  4 FASB Board members did not agree with the staff’s recommendation whereas 3 FASB Board members agreed with the staff’s recommendation.

In summary, the Boards tentatively decided that they should apply existing guidance (i.e., IAS 37 and US literature respectively) for the time being and that there would be no onerous test included in the final revenue standard.  The Boards tentatively decided not to amend existing onerous models.   One of the IASB Board members to ask the staff to clarify at what unit of account IAS 37 would assess onerous contracts and the staff confirmed that it would be at a contract rather than performance obligation level.

Due to the tentative decision above, the Boards did not discuss or vote on the staff’s suggested modifications to the onerous test. In relation to not-for-profit entities, the FASB tentatively agreed that the original intent was for a narrow contract-based assessment when applying the onerous test and deferred to industry guidance.

Next steps

The Boards will continue redeliberations in September 2012, focussing on determining the transaction price and constraining revenue recognition and on issues relating to combining and modifying contracts.

The IASB held an IASB only session to discuss the presentation of interest revenue, the application of the proposed expected loss model to assets reclassified from FVTPL, disclosures specific to IFRSs and transition.

Presentation

In previous deliberations, the Boards tentatively decided that interest income for financial assets measured at amortised cost should be determined based on the carrying amount of the asset excluding the amount of the impairment allowance. However, as part of those previous deliberations, the Boards decided to reconsider whether to require disclosure of the effect of the unwinding on the impairment allowance at a later date.

Thus, at this meeting, the IASB considered how the proposed impairment model would apply to financial assets that are reclassified from FVTPL to amortised cost under IFRS 9 and FVTOCI under the proposed classification and measurement project.

Under the proposed impairment model, an entity would move from an impairment allowance of 12 months expected loss to an allowance of lifetime expected losses for financial assets that have deteriorated in credit quality more than insignificantly since initial recognition. Because of the decoupled approach to measuring expected losses, an entity would be permitted to discount expected losses using a rate between the effective interest rate as determined under IAS 39 Financial Instruments: Recognition and Measurement, and the risk free rate. However, to determine the unwind of the discount rate, an entity would be required to identify and track the impairment allowance for each asset, including determining the effect of transfers between the 12 month expected loss and lifetime expected loss.

During staff outreach performed, concerns have been raised by constituents regarding the difficulty of determining the effect of unwinding the discount. Outreach suggested that since the measurement of the impairment allowance is decoupled from the amortised cost measurement, entities would not be able to track the individual impairment allowance related to the financial assets that move into and out of a portfolio, or between buckets (i.e., the measurement would be a point in time measure).

As a result of concerns that users would not be able to piece together information to determine the economic yield of impaired financial assets and that interest revenue will not faithfully represent the economic yield of the impaired financial asset, the staff recommended that the Board reconsider its tentative decision on the presentation of interest revenue.

The Boards tentatively agreed with the staff recommendation to reconsider the presentation of interest revenue.

Thus, the staff outlined an analysis of the objective for interest revenue. They noted that there are some financial assets that have deteriorated in credit quality to such an extent that presenting interest revenue on the basis of the gross carrying amount reflecting the contractual yield would no longer faithfully represent the economic yield. The level of credit quality that would give rise to such a concern, in the staff’s view, would be a lower credit quality than the credit quality that requires recognition of a lifetime expected loss allowance.

This concern ultimately resulted in the Boards’ previous tentative decision that, for purchased credit-impaired financial assets, an entity should adjust the effective interest rate for the expected cash flows estimated at initial recognition (subsequently the impairment allowance balance represents the changes in lifetime expected losses from initial recognition). For other assets, the effective interest rate is calculated ignoring expected losses. For these assets, the model reflects deterioration in credit quality by measuring expected losses based on current information and by moving from an allowance of 12 months expected loss to an allowance of lifetime expected losses for financial assets that satisfy the criteria for recognition of a lifetime expected loss allowance. Based on the tentative decisions to date for these assets, interest revenue is always calculated on an effective interest rate that is not adjusted for initial credit loss expectations and is always computed on the carrying amount without deduction of the impairment allowance. Thus, the presentation of interest revenue does not reflect the deterioration in credit quality and the question arises of how the model should treat interest revenue for originated credit-impaired financial assets and deteriorated credit-impaired financial assets.

Considering originated credit impaired financial assets, deteriorated credit-impaired financial assets and the definition of credit-impaired more broadly, the IASB staff recommended that the accounting treatment of purchased credit-impaired financial assets should be extended to all financial assets subject to impairment accounting that are credit-impaired on initial recognition. For other financial assets subject to the general deterioration impairment model, an entity should present interest revenue calculated on the carrying amount net of the impairment allowance if the asset is credit-impaired as at the reporting date. This evaluation should be made at each reporting date and will be applicable for the following reporting period. Finally, the staff recommended that financial assets should be considered to be credit-impaired if there is objective evidence of the criteria in paragraphs 59(a)-(e) of IAS 39.

Much of the IASB deliberations related to interest revenue presentation for deteriorated credit-impaired financial assets. The staff had proposed two alternatives for calculating the interest revenue to be presented for deteriorated credit-impaired financial assets: a net interest approach which requires revenue to be calculated on the basis of the net carrying amount, or a nil interest approach which reduces the interest revenue presented to nil. Under this approach, an entity would be required to offset interest revenue on the subset of assets with an equal amount of impairment loss.

Many Board members noted that the net interest approach is consistent with current requirements in IAS 39. These same Board members noted that calculating interest revenue on the net carrying amount more faithfully represents the economic yield of the expected cash flows because the contractual effective interest rate is reduced by the unwind of the impairment allowance. Other changes to the estimate of the impairment allowance would be presented separated in the credit loss line item.

However, other Board members noted that the net interest approach is unduly complex. An entity would be required to identify a subset of financial assets and their related impairment allowances and apply the effective interest rate to the net amount; something which is not required under the nil interest approach.

One Board member, outlining the simplicity of the nil interest approach, noted that banks are currently applying the nil interest approach as a proxy to the net interest approach. He noted that banks often stop accruing interest instead of adjusting the effective interest rate.

Many Board members noted that banks which have found the proxy of the nil interest approach to be materially accurate would likely apply a similar approach after the new proposals come into effect. These Board members were concerned with prescribing a nil interest approach, however, as they believed the approach comingled the unwind of the present value of expected cash flows with other impairment losses. They expressed concern that the nil interest approach would understate interest revenue.

When put to a vote, the IASB tentatively agreed with the recommendations set forth by the staff.

Application of the impairment model to assets reclassified from FVTPL

The IASB considered how the proposed impairment model would apply to financial assets that are reclassified from FVTPL to amortised cost under IFRS 9 and FVTOCI under the proposed classification and measurement project.

The staff recommended that the application of the proposed impairment model to financial assets as at the date of reclassification should follow the application of the proposed impairment model to financial assets on initial recognition. They noted that such an approach would be consistent with paragraph 5.6.1 of IFRS 9 that an entity apply the reclassification prospectively from the reclassification date and not restate any previously recognised gains, losses or interest. The financial asset is recognised at fair value and an effective interest rate determined as at the reclassification date as for a newly recognised asset.

Thus, at the date of reclassification from FVTPL, an entity would be required to determine an impairment allowance of 12 month expected losses unless the financial asset meets the definition of credit-impaired on initial recognition. If the financial asset meets the definition of credit-impaired on initial recognition, then the entity would be required to subsequently measure the financial asset using a credit-adjusted effective interest rate.

With no debate, the Board tentatively agreed with the staff recommendation that the application of the proposed impairment model to a financial asset on the date of reclassification from FVTPL should be the same as a financial asset at initial recognition.

Transition

The Board discussed the transition to the proposed expected loss impairment model for IFRSs.

The Board was first asked to consider application of the new model when initial credit quality information does not exist.

The staff noted that the impairment model contains a transfer notion that determines when financial assets are transferred to or from Bucket 1. That is, financial assets would move out of Bucket 1 when there is both:

• a more than insignificant deterioration in credit quality since initial recognition, and
• the likelihood of default is such that it is at least reasonably possible that the contractual cash flows may not be recoverable.

To determine whether the allowance balance for financial assets on transition should reflect lifetime expected losses in accordance with this criteria, an entity needs information about the initial credit quality of an asset. Therefore, ideally on transition, entities would use information about the credit quality of financial assets as at initial recognition, either through historical data that is available despite not having been required for accounting or risk reporting or by another means with comparable integrity.

As IAS 8 would not require information about initial credit quality to be used for existing assets if it is impracticable to do so, a question was raised as to how the expected loss model should be applied on transition without information about the initial credit quality. The staff identified three possible approaches: (a) resetting or deeming the ‘initial credit quality’ to be the credit quality at the date the new model is initially applied; (b) categorising these financial assets in Buckets 2 or 3 until derecognition; or (c) modifying the transfer notion so that the transition provisions require these assets to be evaluated only on the basis of the second criterion in the transfer notion. That is, the assets would be classified in Buckets 2 or 3 on transition to the new impairment model when the likelihood of default at that time is such that it is at least reasonably possible that the contractual cash flows may not be recoverable. This would mean that some financial assets subject to this transition relief would be initially categorised in Bucket 1 even though they have deteriorated in credit quality.

The staff recommended approach (c). The staff recommendation also asked the Board whether entities should be permitted to not use initial credit quality information. For example, should preparers be provided an option to not use initial credit quality information, or should it be based on either an impracticability assessment or undue cost or effort assessment?

One Board member expressed concern that the approaches described by the staff may result in significant variability in operating results between those entities which have access to initial credit quality and those which do not; especially if entities are provided an option to elect to apply initial credit quality information. He noted that an option may result in entities not being incentivised to obtain initial credit quality information in order to record significant gains in profit or loss subsequent to the transition date.

However, through general discussions amongst Board members, most expressed a desire to provide some relief in the form of an undue cost or effort assessment. Some preferred that use of this relief be met with additional disclosure as to those assets to which the relief was provided, while others believed that additional disclosure was not necessary.

When put to a vote, the IASB tentatively decided that an entity should be required to use the credit quality at initial recognition for existing financial assets when initially applying the new impairment model unless obtaining such credit quality information requires undue cost or effort. If the credit quality at initial recognition is not used at the date of initial application, the transition provisions would require these financial assets to be evaluated only on the basis of the second criterion in the transfer notion: the likelihood that contractual cash flows may not be collected is at least reasonably possible.

Other staff recommendations related to transition included:

• Restatement of comparative periods is permitted, but not required, if the information is available without the use of hindsight.
• In considering paragraph 28(f) of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, which requires disclosure of, for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected and, the impact on basic and diluted earnings per share (if IAS 33 Earnings per Share applies):
  • these disclosures should be permitted, but not required, for prior periods if the information is available without the use of hindsight.
  • these disclosures should be required for the current period.

With little debate, the Board tentatively agreed with these recommendations as set forth by the staff.

Disclosure

Following from deliberations on disclosures earlier in the week, the IASB discussed IASB only disclosures as part of the impairment project.

The IASB staff provided a comprehensive overview of disclosures related to IASB only decisions. Those disclosures cover write-offs, discount rate, modifications, financial assets 90 days past due and interest revenue. As a result of this analysis, the staff recommended that an entity disclose the following as part of the impairment project (absent those disclosures previously discussed at joint Board sessions with the FASB):

• qualitative information related to the discount rate elected.
• information regarding financial assets for which an impairment allowance of lifetime expected losses is required that have been modified at any time in their life.
• the gross carrying amount and related allowance of financial assets measured under the impairment model if a default has occurred.
• the balance of financial assets 90 days past due with an impairment allowance measured at 12 months' expected losses.
• the amount of interest revenue and details of how it is calculated (i.e., gross, net, credit-adjusted effective interest rate).

With no debate, the IASB tentatively agreed with the recommendations as set forth by the staff. However, the IASB noted that if any of the above disclosures, including those tentatively agreed in joint sessions with the FASB, are satisfied by disclosures required by other applicable regulations, an entity would be permitted to cross-refer to those disclosures.

Next steps

The IASB is expected to discuss due process considerations and the comment period at a future meeting and intends to publish an exposure draft in the fourth quarter of 2012.

The IASB held an IASB only session to discuss the transition and disclosure requirements as a result of the limited amendments to IFRS 9.

Transition

The IASB discussed how and when the classification and measurement requirements in IFRS 9 should be applied. The IASB also discussed the transition to IFRS 9 as a whole considering the interaction between its phases.

Staff papers for the meeting generally considered:

• how the proposed limited modifications to the classification and measurement requirements in IFRS 9 should be initially applied in relation to modifications to the contractual cash flow characteristics assessment, modifications to the business model assessment as a result of the FVTOCI category for eligible debt instruments and the extension of the existing IFRS 9 fair value option requirements to debt instruments measured at FVTOCI; and
• when the proposed limited modifications to the classification and measurement requirements in IFRS 9 should be initially applied.

Limited amendments to classification and measurement

Regarding transition to the limited modifications to the classification and measurement requirements in IFRS 9, Board members tentatively agreed with the recommendations as set forth by the staff with little debate. Those recommendations included that on transition to the amended classification and measurement requirements, an entity would be required to:

• retrospectively apply the contractual cash flow characteristics assessment as set out in IFRS 9 (2010) where it is impracticable to apply the amended contractual cash flow characteristics assessment retrospectively; and
• disclose the carrying values of the financial assets whose contractual cash flows have been assessed under IFRS 9 (2010) as opposed to the amended classification and measurement requirements due to impracticability until the affected financial assets are derecognised.

No amendments to the existing IFRS 9 transition requirements would be required as a result of:

• the proposed amendments to the business model assessment, or
• the proposed extension of the fair value option for accounting mismatches to debt instruments that would otherwise be measured at FVTOCI.

IFRS 9 as a whole

Regarding general transition guidance on the IFRS 9 project as a whole, many Board members noted the complexity currently present in IFRS 9 as a result of the number of phases involved in the project and the versions of IFRS 9 previously issued. However, they acknowledged that they could not modify past decisions related to early application of IFRS 9.

Board members did express many specific questions and concerns, including:

• Should entities which early applied IFRS 9 (2009) or IFRS 9 (2010) be compelled to early apply the complete package of IFRS 9, once available? Many Board members expressed concern with comparability, and thus, preferred that those applying IFRS 9 (2009) or IFRS 9 (2010) be compelled to adopt the complete version of IFRS 9 early. However, most Board members acknowledged that in issuing previous versions of IFRS 9, the IASB had represented to constituents that they would not force early application of other phases of the project as a result of a decision to early apply IFRS 9 (2009) or IFRS 9 (2010).
• Should comparability trump everything such that entities are no longer able to early apply issued phases of IFRS 9 without early applying the complete package of IFRS 9, once available? Many Board members expressed major reservations with the lack of comparability present in the marketplace. They preferred that early application of any single phase of IFRS 9 no longer be permitted without applying all phases of IFRS 9. However, a few Board members noted that all issued phases of the project are expected to provide for an improvement to financial reporting, and thus, they expressed reservation in prohibiting early application of individual phases of the IFRS 9 project. To limit comparability issues, many Board members expressed a belief that once the limited amendments to IFRS 9 or the impairment project are finalised, entities should no longer be permitted to early apply previous versions of IFRS 9.
• Should early application of the hedging phase of IFRS 9 be allowed? One Board member believed that the hedging project would greatly benefit users of financial statements. Thus, he suggested that the hedging project be spun out from IFRS 9 so as to allow early application of this phase without requiring early application of all phases of IFRS 9. However, most Board members expressed reservations about this approach.
• Can a decision about transition guidance be provided without more specificity as to when all IFRS 9 phases will be completed? Many Board members noted that significant uncertainty existed as to the timing of completion of remaining phases of the IFRS 9 project, and thus, he noted that transition discussions were premature. However, most Board members noted that a principle for transition on IFRS 9 must be established. They noted that this principle would require reassessment as remaining phases of the project were completed.

After voicing these general concerns, Board members considered specific recommendations for transition as outlined in staff papers.

The IASB tentatively decided that entities which have applied IFRS 9 (2009) or IFRS 9 (2010) before applying the limited amendments to IFRS 9 must revoke previous fair value option elections if an accounting mismatch no longer exists at initial application of the amended classification and measurement requirements. Entities would be permitted to apply the fair value option to new accounting mismatches created by the initial application of the amended classification and measurement requirements.

The IASB tentatively decided that once the limited amendments to IFRS 9 or the impairment project are finalised, entities would no longer be permitted to early apply previous versions of IFRS 9. Those entities which applied a previous version of IFRS 9 prior to the publication of the complete version of IFRS 9 would be permitted to continue applying that version until the mandatory effective date of IFRS 9.

The IASB also tentatively decided that early application of the entire IFRS 9 would be permitted once all of the requirements are issued.

Finally, the IASB tentatively decided to reaffirm that restatement of comparative classification and measurement information would not be required. Entities would be permitted to restate comparative information only if the information is available without the use of hindsight.

Disclosure

The IASB also discussed presentation and disclosure requirements due to the proposed limited amendments to IFRS 9 and the interaction of proposed disclosures in the classification and measurement project with disclosures proposed in the impairment project.

Regarding the amended contractual cash flow characteristics assessment, the IASB staff recommended:

• The judgement involved in the assessment of contractual cash flow characteristics should be added to IAS 1 Presentation of Financial Statements as an example of a judgement that could have a significant effect on the amounts recognised in the financial statements.
• Quantitative disclosures should be required when judgements about modified principal and interest have a significant effect consistent with the requirements of paragraph 122 of IAS 1. The staff believed that the following quantitative disclosures could provide useful information to enable a user to assess the impact on financial statements: the carrying value of financial assets (split by amortised cost and FVTOCI); for financial assets measured at amortised cost, the respective fair value; and for financial assets measured at FVTOCI, the respective gain or loss recognised in OCI for the period.

Relating to the proposed addition of a FVTOCI category for eligible debt instruments, the IASB staff recommended:

• No new requirements should be added related to the presentation of gains or losses arising from the derecognition of debt instruments measured at FVTOCI.
• The impairment disclosures for debt instruments measured at FVTOCI should be consistent with those for assets measured at amortised cost, including disclosure of an accumulated impairment amount.
• Presentation of an allowance balance on the face of the statement of financial position should be prohibited for debt instruments measured at FVTOCI.
• No allowance rollforward should be required for FVTOCI debt instruments.

Board members generally agreed with the recommendations outlined by the staff. However, two concerns were expressed with the staff recommendations.

First, regarding the amended contractual cash flow characteristics assessment, many Board members believed that quantitative disclosures should not be required when the assessment of contractual cash flow characteristics could have a significant effect on the amounts recognised in the financial statements. Board members questioned the significance of modifications to the principal and interest.

Secondly, relating to the proposed addition of a FVTOCI category for eligible debt instruments, many Board members did not support the staff recommendation that no allowance rollforward should be required for FVTOCI debt instruments. Board members saw value in separating the fair value adjustment for FVTOCI debt instruments between market movements and movements in expected losses in order to establish an overall fair value carrying amount.

When put to a vote, Board members tentatively supported staff recommendations as outlined above, with the exception that quantitative disclosures should not be required when the assessment of contractual cash flow characteristics could have a significant effect on the amounts recognised in the financial statements and an allowance rollforward should be provided for FVTOCI debt instruments.

Next steps

The IASB is expected to discuss due process considerations at a future meeting and intends to publish an exposure draft in the fourth quarter of 2012.