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The IASB and the FASB met for a special joint meeting in London to discuss issues related to several joint projects. Several IASB members, FASB members and FASB staff joined the meeting via video link or teleconference.
Agenda for the meeting
Wednesday 10 February 2010
IASB-FASB joint meeting (12:00-14:00)
Replacement of IAS 39 — Classification and measurement
The Board discussed three issues that were originally part of the Annual Improvements ED published in August 2008.
The Board discussed three issues that were originally part of the Annual Improvements ED published in August 2008:
bifurcation of embedded foreign currency derivatives;
application of fair value option; and
impairment of investments in subsidiaries, jointly controlled entities, and associates in the separate financial statements of the investor.
The Board felt the proposed amendments are too narrow in scope and do not address situations that exist in practice. The Board also concluded that those issues should be considered as part of the wider project to replace IAS 39 and, therefore, confirmed the IFRIC's recommendation to formally remove these items from the annual improvement project.
The Board discussed IFRS 1, IFRS 3, IFRS 7, IAS 28 and IAS 34.
The IASB deliberated the IFRIC's recommendations on the annual improvements project issues the IFRIC discussed at its Meeting in January 2010.
IFRS 1 - Fair value or revaluation as deemed cost exemption
The Board deliberated whether to require that any adjustments resulting from an event-driven revaluation after the date of the transition to IFRSs (but during the period covered by the first IFRS financial statements) be recognised in retained earnings or allow recognition in another category of equity, if deemed appropriate. The Board confirmed that allowing recognition in another category of equity in certain circumstances is consistent with the general guidance in IFRS 1 relating to transition adjustments.
The Board also confirmed the amendment to the effective date paragraph to clarify that entities that applied IFRS 1 in a previous period are permitted to apply the amendment to paragraph D8 retrospectively in the first annual period after the amendment is effective.
IFRS 3 - Transition requirements for contingent consideration from a business combination that occurred before the effective date of the revised IFRS 3
The Board confirmed the proposed amendment to clarify that for existing users of IFRSs, the financial instrument standards do not apply to contingent consideration arising from a business combination for which the acquisition date preceded the application of IFRS 3 (2008). Without much deliberation, the Board further agreed to delete the reference to IFRS 3 (2004) and to reproduce those requirements within the transition section of IFRS 3 (2008).
IFRS 3 - Measurement of non-controlling interests
The Board discussed the clarification that the choice for measuring the non-controlling interest (NCI) in an acquiree applies only to 'components of non-controlling interest that are present ownership instruments and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation'. Without discussing the matter, the Board confirmed the proposed clarification and agreed that other present ownership instruments that are classified as NCI should be measured at fair value unless another measurement basis is required by IFRSs.
IFRS 7 - Clarification of disclosures on the nature and extent of risk arising from financial instruments
The Board confirmed the IFRIC's recommendation to include a paragraph to emphasise the interaction between qualitative and quantitative disclosures and how it contributes to the disclosure of information in a way that enables users to evaluate an entity's exposures to risks.
The Board's discussion then focused on the credit risk disclosures and the proposal to remove the requirements to disclose the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated (par 36(d) of IFRS 7).
Two Board members were opposed to the immediate deletion of the requirement, as the information is very useful for analysts and investors, albeit that it was worded poorly. Those Board members requested the deferral of the decision to delete the requirement and explore possibilities of improving the wording as part of the Impairment or Derecognition projects.
Other Board members did not agree and when put to a vote, the majority of members supported the proposed deletion.
IAS 28 - Partial use of fair value for measurement of associates
The Board confirmed the IFRIC's recommendation to amend IAS 28 in order to clarify that different measurement bases can be applied to portions of an investment in an associate when part of the investment is designated at initial recognition to be measured at fair value through profit or loss in accordance with the scope exclusion in IAS 28. One Board member questioned whether the consequences of subsequent measurement resulting from the proposed amendment have been thought through and noted that it may lead to opportunities for earnings management. Some other Board members had similar concerns but agreed that those concerns do not stem from this proposed amendment and should be addressed somewhere else.
The Board also agreed to include minor modifications to clarify that an entity first determines whether it has significant influence over an entity in accordance with the requirements of IAS 28. Only after significant influence has been evidenced does an entity measures the portion of the investment to which the scope exemption applies at fair value. The remaining interest in the associate should be accounted for using the equity method.
IAS 34 – Significant events and transactions
Without much deliberation the Board confirmed the proposed amendment to emphasise the existing disclosure requirements in IAS 34 and to add guidance to illustrate how those requirements should be applied. The Board also agreed to include an explanation in the Basis for Conclusions setting out the reasons for the removal of paragraph 18 of the current Standard dealing with disclosures required when the interim financial report only includes condensed financial statements.
The Board discussed accounting for reinsurance contracts.
The Boards have been presented with a model of accounting for reinsurance contracts based on the proposed 'building blocks' insurance contracts recognition and measurement model. Accounting by both the reinsurer and the cedant was considered.
Accounting by reinsurers
Because reinsurance contract is a type of insurance contract purchased by an insurer, the Boards unanimously approved the staff recommendation for reinsurers to use the same recognition and measurement principles for issued reinsurance contracts as insurers use for issued insurance contracts. Board members noted that in applying the same principles to measuring contract liability, the reinsurer and the cedant would still have different assumptions resulting in different amounts being recognised in their financial statements.
Accounting for reinsurance asset by cedants
The Boards considered a proposal to measure the reinsurance recoverable asset as:
a) the present value of expected future cash flows required to fulfil the reinsurance portion of insurer's obligation
b) plus the risk margin (but not residual margin) that is included in the measurement of the reinsured portion of the contract obligation
c) plus residual margin arising from the reinsurance contract
d) less the impact of possible impairment of reinsurance asset due to credit losses and coverage disputes measured on an expected value rather than on incurred loss basis
The staff clarified that the risk margin to be included in the measurement of reinsurance asset is the reinsured portion of the cedant's risk margin on its direct insurance liability. The Board members questioned why this risk margin increases the value of the asset. The staff explained that this margin simply mirrors the effect of the uncertainty around the insurer's direct contract liability that was passed to the reinsurer, and it can be viewed as protection asset.
In discussing the reinsurance asset residual margin, the staff clarified that this margin is not linked to the residual margin on the initial direct insurance contract. It is also not the residual margin that reinsurer would recognise in its own financial statements. Instead it represents the balancing figure between elements (a) and (b) and the premium paid under the reinsurance contract. The question of whether this margin can be negative is yet to be discussed.
The proposed adjustment for impairment raised questions of potential double counting. One question was whether, if the insurer expects to receive only the present value of expected cash flows (element a), then does that mean that both margins need to be written off immediately as impairment? The staff explained that adjustment for impairment is to incorporate future credit losses expected to take place after inception and not on initial recognition. Staff will bring back, for discussion at a future meeting, the potential issue of double counting, better wording for the impairment adjustment, and some examples of reinsurance asset calculations. Leaving aside the potential need for rewording of impairment adjustment, the Boards approved the proposed measurement model.
The Boards unanimously voted not to allow offsetting of reinsurance recoverable (assets) against insurance liabilities either in the balance sheet or in profit or loss unless there is a legal right of offset.
The Boards unanimously agreed that reinsurance does not result in derecognition of related insurance contract liabilities unless the obligation specified in the insurance contract is [legally] discharged, cancelled or expired.
Accounting for ceding commissions by cedant
The staff proposed that the cedant should treat ceding commission received from the reinsurer consistently with proposed accounting for acquisition costs. The Boards have tentatively agreed in the past to expense insurance contract acquisition costs as they are incurred. Therefore, the ceding commissions received would also be recognised in profit or loss. Because the ceding commissions would result in recognition of income by the cedant, there was a general concern for reinsurance contract structuring opportunities to affect the split between ceding commission and reinsurance premiums.
The Board members questioned whether ceding commissions only relate to proportional reinsurance, where the link to the underlying direct insurance contract's cash flows is clearer. The staff will research the issue further for non-proportional reinsurance. For proportional reinsurance only the Boards unanimously approved the staff recommendation for the cedant to recognise ceding commissions in the same way as acquisition costs.
Issues of symmetry
The Boards deliberated the issue of symmetry in accounting for cedant's reinsurance asset and insurance liability. Board members agreed that proposed model would result in the same measurement method applied to both reinsurance asset and insurance liability, except that reinsurance asset includes an impairment adjustment while insurance liability does not include insurer's own credit risk. The Boards also looked at the issue of symmetry in accounting for the reinsurance liability by the reinsurer and the reinsurance asset by the cedant, but decided not to proceed further with this question.
The staff have looked at whether the proposed insurance model can be applied to policyholder accounting and what issues, if any, can this highlight for accounting by insurers. Overall, the staff propose that the building blocks insurance model can be applied to policyholder accounting but would need further research. Of the particular issues reviewed for policyholder accounting, only two were highlighted as potentially impacting on insurer's accounting as well, if symmetry between insurer and policyholder accounting models is important. Those issues were the tentative decisions on expensing of acquisition costs under both IASB and FASB models and on participating rights under FASB model. From policyholder's point of view, all premiums paid would represent an asset including the acquisition costs. This would not be symmetrical with insurer's accounting. The FASB model proposes to recognise participating features as part of insurance contract liability only if there is a legal or constructive obligation to pay these cash flows; otherwise they would be a component of equity. From the policyholder's point of view the higher premium paid for the participating feature would represent an asset, highlighting the difference from the insurer's accounting. The Boards agreed (FASB - unanimously, IASB - all but one member) not to consider further, at this stage, the issues of symmetry between insurer's and policyholder accounting other than to review the treatment of acquisition costs and participating rights.
A further question was whether the exposure draft (ED) should include policyholder accounting. The boards agreed not to include policyholder accounting in the scope of the ED. However, the definition of insurance would apply equally to insurers and policyholders.
The Boards considered both IASB and FASB models of classifying financial liabilities to establish common categories that under both models.
Classification and measurement of financial liabilities
The Boards considered both IASB and FASB models of classifying financial liabilities to establish common categories that under both models. These categories are:
Category A - instruments that are not held to pay contractual cash flows (this would include all standalone derivatives and all liabilities held for trading);
Category B - instruments that are held to pay contractual cash flows and have 'non-vanilla' (structured) contractual cash flow characteristics. (such as issued bonds with leveraged interest or index-linked issued bonds); and
Category C - instruments that are held to pay contractual cash flows and have vanilla contractual cash flow characteristics.
The discussion then focussed on categories A and B, with the Boards acknowledging that there is a difference in accounting for category C instruments under the current IASB and FASB models. The Boards confirmed unanimously that instruments in category A should be accounted for at fair value through profit or loss (FVTPL).
The instruments falling into category B would be slightly different under IASB and FASB models. The IASB would include instruments with cash flows that are not solely payments of interest and principal, while the FASB would include instruments with embedded features not 'clearly and closely related'. However, overall the two models overlap sufficiently to look at measurement jointly for this category. Based on the results of the users questionnaire, the Boards were presented with four potential measurement models, all aiming to avoid accounting for own credit risk in profit or loss:
Isolate the effects of changes in own credit risk and account for that amount differently than other components of fair value (for example, account for this amount in OCI or using 'adjusted' fair value (the 'frozen credit spread' approach));
Bifurcate the instrument into a host and the embedded features;
Measure the entire instrument at amortised cost and disclose fair value on the face of the balance sheet in brackets;
Measure the entire instrument at fair value through OCI;
Measurement of the instrument at amortised cost presented some practical difficulties for instruments with 'non-vanilla' features. Recycling questions arose if the entire instrument is measured through OCI. Results of the questionnaire showed little support for splitting out portion of fair value relating to own credit risk. The staff therefore recommended to bifurcate the liability into a host and embedded features. Whether to base bifurcation on existing IFRS and US GAAP requirements or to develop a new method using the 'basic features' and 'entity business model' concepts of IFRS 9 was not yet discussed. Further, under IAS 39, many entities avoid bifurcation by using the fair value option. Fair value option accounting also has not yet been discussed. The staff was looking for directional guidance and will develop a more detailed approach at a later stage. They will also consider specifically the accounting for regulatory instruments with deferred interest payments and whether these should be at amortised cost.
The IASB has unanimously approved the staff's recommendation to pursue bifurcation.
The FASB members pointed out that the current proposal is based more on the IASB rather than on FASB's model. The FASB would await the decision on the fair value option and look at this issue again then.
The Boards discussed where to address contingent consideration and partial use of fair value for measurement of interest in joint ventures.
Where to address contingent consideration
The Board was asked to consider bringing the requirements for contingent consideration that is a financial instrument together in one Standard. The Board voted in favour of the recommendation and asked the IFRIC to explore the matter further and provide feedback at a future meeting.
Partial use of fair value for measurement of interest in joint ventures
In the light of the Board's agreement to amend IAS 28 to allow the use of different measurement basis when accounting for associates, the Board was asked to consider whether equivalent guidance should be included in the IFRS replacing IAS 31.
The Board did not agree with the staff's recommendation, and no resulting changes will be made in the forthcoming IFRS on joint ventures.
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