Please read our cookie notice for more information
on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version. Please upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.
The IASB considered the effective date and early application of the forthcoming IFRS 10, IFRS 11, IFRS 12, IAS 27 (revised 2011) and IAS 28 (revised 2011), unanimously agreeing to require an effective date of 1 January 2013 with early application permitted if all five standards are early adopted and limited retrospective application.
Effective date and early application of forthcoming IFRS 10, IFRS 11, IFRS 12, IAS 27 (revised 2011) and IAS 28 (revised 2011)
The IASB is finalising drafting of the pending standards IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Involvement with Other Entities, IAS 28 (revised) Investments in Associates and IAS 27 (revised) Separate Financial Statements. However, the IASB had delayed discussion on effective date for the five pending standards until the comment period on the Request for Views Effective Date and Transition Methods closed on 31 January 2011.
The preliminary summary of the feedback received in the request for views was that consolidation and joint ventures would generally not represent a significant cost to implement, except for those in the energy, financial services and asset management industries. Respondents also generally supported linking the five standards so that their effective dates were synchronised. Respondents also generally supported permitting early application and requiring limited retrospective application in accordance with IAS 8.
Based on the feedback received in the request for views and the fact that the consolidation and disclosures standards were driven by the financial crisis at the request of the G20, the staff recommended an effective date of 1 January 2013 with early application permitted provided that all of the five standards were also early applied (with an exception for the disclosure requirements in IFRS 12) and require limited retrospective application in accordance with IAS 8 for IFRS 10 and IFRS 11.
Several Board members asked the staff about the related project on consolidation for investment companies. They stated their support for including the effective date of that potential standard at the same time as the other five related projects rather than having one year of one approach and another approach applied the following year. The staff mentioned their intention is for the exposure draft on investment companies to be issued in April with redeliberations beginning during the summer. They felt that it is possible that a final standard could be issued during 2011 giving entities at least one year to prepare for adoption.
One Board member questioned the staff's proposal that would allow for any of the disclosures required under IFRS 12 to be included in financial statements prior to the effective date. He specifically asked about the inconsistency as some of the disclosure requirements in IFRS 12 use terminology included in the new standards (e.g., joint arrangements). The staff clarified their intention is that, in accordance with IAS 1, entities would be permitted to disclose additional information above those required. They were concerned that not including specific language to that effect may result in entities believing they were prohibited from including those disclosures unless all the other four standards were also early adopted. They also clarified that any or all of the IFRS 12 disclosures could be provided prior to adoption of all five standards.
The Board unanimously agreed to require an effective date of 1 January 2013 with early application permitted if all five standards are early adopted and limited retrospective application. The staff also mentioned they would post to the IASB website a "not before date" of when the five standards will be issued to assist companies with their IAS 8 disclosures, but the intention is that they would be issued in early March.
The IASB considered the following topics: (1) p resentation of remeasurements (2) feedback on tentative decisions to date (3) project status (4) effective date of any amendments and transitional requirements.
As part of its continual deliberations surrounding the Exposure Draft Defined Benefit Plans published 29 April 2010, the Board considered the following topics:
As part of its 21 January 2011 meeting, the Board tentatively decided that:
although remeasurements should be presented in other comprehensive income, in some circumstances it would be appropriate to allow an entity to elect to present remeasurements in profit or loss (primarily to address accounting mismatches) for a given plan
the election to present remeasurements in profit or loss would need to be irrevocable
when an entity makes that election, amounts previously recognised in other comprehensive income should not be reclassified to profit or loss.
As a result of the Board's tentative decision that an election to present remeasurements in profit or loss would be on a plan-by-plan basis and would be irrevocable, the staff performed outreach and identified challenges to this presentation, including when a change in facts and circumstances would trigger reassessment of the irrevocable election to present remeasurement in profit or loss.
Accordingly, the staff asked the Board to reconsider its previous tentative decision that would allow an election and instead confirm the proposal in the Exposure Draft that the remeasurements component should be presented in other comprehensive income, as, in the staff's view, this would be the simplest, most understandable alternative and has received wide support from respondents to the Exposure Draft.
In evaluating this proposal, the Board noted certain drawbacks with the proposal in the Exposure Draft, including:
introducing an accounting mismatch for a small number of entities
expanding the use of other comprehensive income when the Board has yet to consider the presentation of the statement of comprehensive income more broadly
proceeding with changes to the presentation of defined benefit cost when the Board has yet to consider the measurement of defined benefit plans
eliminating presentation in profit or loss for first-time adopters who currently recognise all defined benefit cost through profit or loss.
The Board noted, however, that limiting the choice of presentation would improve the comparability of financial statements; a fundamental objective of the Exposure Draft serving to reduce the current options in IAS 19.
Likewise, the Board concluded that although the changes included in the remeasurement component may provide information that assists with an assessment of the uncertainty of future cash flows, many regard those changes as not providing useful information about the likely amount and timing of future cash flows. Therefore, inclusion of the remeasurement component as an item of other comprehensive income would provide further clarity in distinguishing the remeasurement component from service and finance costs.
As a result of this discussion, the Board reversed its previous tentative decision from the 21 January 2011 meeting that would have allowed for an irrevocable election on a plan-by-plan basis to present the remeasurement component in profit or loss or other comprehensive income; instead confirming the proposal in the exposure draft that the remeasurement component should be presented in other comprehensive income by an eight-to-seven vote.
Feedback on tentative decisions to date
In prior Board meetings, the staff was asked to gather feedback from the Employee Benefits Working Group members on tentative decisions to date, inclusive of any staff recommendations for necessary amendments to tentative decisions reached.
As a result, discussion points included:
disclosure of risk exposure
disaggregating the defined benefit obligation
disclosure of information about the maturity profile of the defined benefit obligation
presentation of administrative costs.
As a result of discussions, the Board confirmed:
no change is required to the tentative decision to focus the disclosure of risks that the participation in a defined benefit plan exposes the entity to risks that are unusual or specific to the entity, without requiring excessive detail about generic risks;
disaggregation of the defined benefit obligation would be required at a minimum when an actuarial valuation is performed, and that entities are required to carry forward this information in periods when no actuarial valuation is performed, with related disclosure of the date of last actuarial valuation;
an entity should disclose the duration of the liability by outlining the weighted average duration of the liability, with clarity surrounding any unique maturity profile components
costs related to managing plan assets should be deducted from the return on plan assets with no specific requirements for the presentation of other administrative costs.
Several Board members expressed concern about the prescriptive nature of the disaggregation requirements. The Board members would prefer the inclusion of factors that should result in disaggregation of the defined benefit obligation. This view was confirmed by the majority of Board member, and the staff will consider such recommendations in future updates.
All tentative decisions to date were summarised for Board member review, with Board members asked to comment as to whether they intend to dissent from the amendments to IAS 19 based on tentative conclusions reached. Three Board members expressed potential intention to dissent, for reasons including failure to present pension-related costs within profit or loss, as well as concerns with respect to net reporting and other comprehensive income reporting without recycling, as outlined in the Exposure Draft.
Effective date of any amendments and transitional requirements
In conjunction with discussion above, as well as previous Board meetings, the Board discussed the potential effective date of the amendments to IAS 19, as well as the transition timeline and requirements surrounding such amendments.
The Board confirmed that the effective date of required amendments to IAS 19 will be no earlier than 1 January 2013, but no consensus was reached on the effective date because the Board will consider the effective date and early adoption considerations as part of its broader considerations of the feedback received from the request for views on effective dates and transition consultation.
Transition requirements, like the effective date, will be discussed at a future meeting; however, the following tentative decisions were reached:
for entities already applying IFRSs, the amendments to IAS 19 should be applied retrospectively in accordance with the general requirements of IAS 8, except that:
the Board specify that the carrying amount of assets outside the scope of IAS 19 need not be adjusted for changes in employee benefit costs that were included in the carrying amount before the beginning of the financial year in which this amendment; and
the Board specify comparatives need not be presented for the disclosures for the sensitivity of the defined benefit obligation for the year of initial application of the amendments to IAS 19.
for entities adopting IFRSs for the first time, the amendments to IAS 19 should be applied retrospectively in accordance with the general requirements of IFRS 1, except that:
the Board allows a temporary exemption for entities adopting IFRSs with a date of transition before the effective date of the amendments to IAS 19 that comparatives need not be presented for the disclosures for the sensitivity of the defined benefit obligation.
The IASB discussed some of the disclosures included in the original exposure draft, including the stress testing requirement and disclosures on the credit quality of financial assets and vintage information.
The IASB's appendix to the joint Supplement of ED/2009/12 included disclosure proposals specifically related to impairment. During today's meeting, the Board discussed the remaining disclosure proposals from ED/2009/12 not addressed in the appendix, specifically the stress testing requirement and disclosures on the credit quality of financial assets and vintage information.
Disclosures — Write-off policy
ED/2009/12 included a proposal that an entity disclose its write-off policy and a definition for "write-off" that focused on an entity having no reasonable expectation of recovery and ceasing further enforcement activities. The IASB and FASB will be discussing the definition of "write-off" later in the week, but this meeting was to address user comments that they wanted information about assets still subject to recovery efforts after write-off.
The staff proposed expanding the original ED's disclosure requirement to provide information on an entity's write-off policy by incorporating discussion of whether written-off assets are still subject to enforcement activity and disclosing the nominal amount of written-off assets where collection is still being pursued. Additionally, recoveries of written-off amounts would be required to be shown in a separate line item in the reconciliation of changes in the allowance account.
Some Board members mentioned that providing qualitative information on the collection efforts was important to disclose, but that quantitative information should not be required. Ultimately, 10 Board members agreed to require of whether written-off assets are still subject to enforcement activity and disclosing the nominal amount of written-off assets where collection is still being pursued and 14 agreed to require recoveries in a separate line item in the reconciliation of changes in the allowance account.
Disclosures — Stress testing
ED/2009/12 proposed requiring information on stress testing when an entity performs this analysis for internal risk management purposes. Financial statement preparers and other comment letter respondents had several issues with this disclosure requirement including that it was only required for certain entities, it was difficult to isolate credit risk from other macroeconomic factors in stress test scenarios and the fact that requiring stress tests was the role of regulators rather than accounting standard setters. Financial statement users did support the disclosure requirement but stated it was the least important of the required disclosures.
Only one Board member expressed some level of support for retaining the stress testing disclosure requirement. The Board tentatively agreed to not require stress testing as part of the disclosure requirements.
Disclosures — Credit quality of financial assets
ED/2009/12 included a specific definition for the term "non-performing" assets as assets greater than 90 days past due and required a rollforward of changes in non-performing assets during the period.
The 'bad book' concept in the joint Supplement is based on management's credit risk management process rather than a specific bright-line such as 90 days past due. The Supplement also includes specific disclosure for the 'bad book' similar to those proposed for non-performing assets in ED/2009/12. However, because the 'bad book' concept does not have a specific requirement for transfers to the 'bad book' the staff recommended providing a disclosure for assets greater than 90 days past due for assets in the 'good book' (in case there are assets in this category that management has not identified as being managed through the 'bad book'). This requirement, along with the disclosures for the 'bad book' would provide users with comparable information to that originally proposed in ED/2009/12. The disclosure recommended by the staff would include information on 1) increases from loans becoming greater than 90 days past due during the period, 2) increases from acquisitions of loans already greater than 90 days past due, 3) decreases from recoveries of assets that were greater than 90 days past due but not included in the 'bad book', 4) renegotiations and 5) write-offs.
One Board member questioned the purpose of the staff recommendation and felt there was an inherent inconsistency in that the 'bad book' required disclosures were based on management's credit risk management while the proposed disclosure for 'good book' assets greater than 90 days past due is based on an arbitrary bright-line. Another Board member mentioned her concern with the 90 day bright-line.
One Board questioned the part of the proposal to include assets acquired greater than 90 days past due as he felt that the purchase price would include a significant discount for credit quality and therefore providing disclosure for these assets may be misleading.
The Board tentatively agreed with the recommendation to require disclosure for assets in the 'good book' greater than 90 days past due including information on 1) increases from loans becoming greater than 90 days past due during the period, 2) decreases from recoveries of assets that were greater than 90 days past due but not included in the 'bad book', 3) renegotiations and 4) write-offs. The Board agreed to hold off on any decisions for disclosure of purchased assets until purchased assets were discussed more broadly.
Disclosures — Vintage information
ED/2009/12 proposed specific disclosure of asset by year of origination and year of maturity. These disclosures were closely tied to the loss triangle disclosures which were replaced in the Supplement with information of backtesting.
Financial statement preparers had significant concerns with both the vintage information and loss triangle disclosures as they stated in open portfolios, credit risk is not managed on a vintage basis and therefore retaining and tracking this information would require systems modifications. Financial statement users were supportive of the disclosure proposals as they stated it helped in their analysis of credit quality for particular vintages and when underwriting standards had relaxed.
The staff noted these disclosures could provide relevant information in certain scenarios, such as mortgage loans, but would not provide meaningful information in other scenarios such as corporate debt or collateralised debt obligations where the underlying collateral pool comprises assets from various vintage periods.
Two of the three Board members representing the financial statement user community supported retaining the vintage disclosure in some form. One supported an approach that would limit the disclosure for vintage information to instances when it would be most useful to investors. The other requested that origination, provision and write-off information be tracked by vintage and questioned why entities would not have this information. The staff clarified that origination and write-off information could be tracked, but the provision was calculated at the portfolio level rather than the asset level and therefore an allocation of the provision to various vintages in the portfolio was not possible. However, the third Board member representing financial statement users acknowledged the difficulty in tracking vintage information for the provision and that providing origination information in isolation was not worth the costs and efforts preparers would incur in proving the information.
Eleven Board members tentatively agreed not to require the vintage information proposed in ED/2009/12.
The IASB and FASB: (1) continued their discussion on identification of performance obligations from the January 2011 Board meetings, considering a revised objective and criteria for identifying separate performance obligations (2) continued their discussion over revenue recognition for service arrangements.
Identifying separate performance obligations
The Boards continued their discussion on identification of performance obligations from the January 2011 Board meetings. During that meeting, the Boards had asked the staff to further clarify the attributes for a distinct good or service and apply those attributes to example scenarios.
The staffs presented the Boards with a revised objective and criteria for identifying separate performance obligations. The objective for identifying separate performance obligations would be to faithfully depict an entity's performance by recognising revenue at an amount that reflects the profit margin that is attributable to the goods or services that have been transferred to the customer. Under the staffs' proposal, a separate performance obligation would occur when 1) the good or service is distinct and 2) the good or service is transferred to the customer at a different time from the transfer of other goods or services promised in the contract, or for contracts with multiple services are transferred continuously to the customer over the same period of time, the entity selects different methods to best depict the transfer of those services to the customer.
The staffs also clarified that a good or service is distinct if it has a distinct function or is subject to separate risks and provided additional details on each of those criteria. A distinct function would occur when a good or service is either sold separately or the customer can use the good or service either on its own or together with resources that are readily available to the customer. Separate risks would occur when the risks the entity assumes in providing the good or service are largely independent of the risks of providing the customer with the other goods or services promised in the contract. The staffs also suggested indicators for identifying separate risks including 1) the entity selling the good or service separately, 2) the entity and the customer negotiated the sale of good or service separately from the other goods or services promised in the contract, and 3) the entity manages its promise to provide the good or service to the customer independently from its promise to provide other goods or services to the customer.
The staffs also developed various examples in which the above concepts were applied to determine whether separate performance obligations existed.
Several Board members expressed concern with the incorporation of a profit margin concept in the objective for identifying separate performance obligations. One Board member mentioned the focus should be on timing of revenues than on the profit margin itself. The staff acknowledged based on the comments received by various Board members they would consider removing the mention of profit margin from the objective.
The Board was in general agreement that the criteria for identifying a separate performance obligation would be if the pattern of transfer of the good or service is different from other promised goods or services and the good or service is distinct. However, when discussing the criteria for what would constitute a distinct good or service the Boards were less supportive of the staff proposals. Members from each Board raised the issue that the indicators for separate risk contain duplicative concepts to the distinct function criteria (e.g., selling the good or service separately). They suggested the removal of the separate risks criteria and instead combine the concept under the distinct function criteria. Other Board members also expressed concern with the separate risk criteria, including the use of the term risk as they envisioned this may result in confusion during application.
One FASB Board member asked the staffs if they could consider some alternative language for distinct goods or services and the Boards could continue their discussion during Thursday's scheduled revenue recognition session.
Revenue recognition for services
Determining whether a performance obligation is satisfied continuously
The Boards also continued their discussion over revenue recognition for service arrangements from the January 2011 Board meetings. During that meeting, the staffs had proposed that a performance obligation would be satisfied continuously if 1) the customer controls the work-in-process, 2) another entity would not need to reperform the task if that other entity were required to fulfil the remaining obligation to the customer, or 3) the entity has a right to payment for the performed task and the entity's performance to date does not have an alternative use to the entity. After the January meetings, the staffs performed outreach on these criteria to see whether they could be applied and found that while preparers supported the general direction, there were various concerns with each of the three criteria.
Based on the feedback received, the staff suggested revised criteria for when a performance obligation is satisfied continuously. The proposed criteria are that 1) the entity's performance creates or enhances as asset that the customer controls or 2) the entity's performance does not create an asset with alternative use to the entity and at least one of the following is met: a) customer immediately receives a benefit from each task that the entity performs, b) another entity would not need to reperform the task performed to date if that other entity were to fulfil the remaining obligation to the customer, or c) the entity has a right to payment for performance to date even if the customer could cancel the contract for convenience.
One IASB member questioned why the first criteria needed the term 'immediately'. The staff mentioned the term was included to reinforce the concept of continuous rather than the benefit is received only upon completion. The FASB Chairman suggested language of "the customer receives a benefit as each task is performed" rather than using the term immediately to which the IASB member and staff seemed to agree would address both of their concerns.
One FASB Board member suggested revising the language on the first criteria to read "the entity's performance creates or enhances an asset that the customer controls as the asset is being created or enhanced" to also reinforce the sense of continuous service.
The Boards both tentatively agreed to the staff proposals subject to language modifications as discussed during the meeting.
Measuring progress toward complete satisfaction of a performance obligation
After the determination is made that a performance obligation is satisfied continuously, an entity would select the appropriate method for recognising revenue by measuring the progress towards completion. During the January 2011 Board meetings, the Boards asked the staffs to provide additional guidance around what circumstances would one method be preferable to another.
During this meeting, the Boards tentatively agreed that the staffs would carryforward the guidance in the Exposure Draft as well as emphasise the objective of measuring progress towards completion is to faithfully depict the entity's performance and enhance the description of the output and input methods.
Measuring progress for uninstalled materials
The Boards discussed the recognition method for those instances when materials are delivered to the customer but a significant delay occurs before the service occurs (i.e., installation). The staffs presented three possible scenarios for the Boards to consider based on current practice. The first method would have the entity measure progress based on a labour hours input method (effectively resulting in no recognition of revenue as the service has not yet occurred). The second method would have the entity measure progress based on a cost-based input method (effectively resulting in a contract wide profit margin recognised for transferring the materials). The third method would have the entity measure progress on a modified cost-based method (effectively resulting in recognising revenue for the transfer of the materials in an amount equal to the cost of the materials).
The staffs had recommended the use of the third method (modified cost-based method) as they felt the first method would result in the entity retaining inventory even though transfer has occurred. They also felt that recognition of a profit margin in the second method was not appropriate.
The Boards viewed the third approach as an exception and disagreed with the staff recommendation. The Boards preferred that for uninstalled materials they frame the issue as a clarification of how to use the input method rather which could permit entities to recognise a profit margin for uninstalled materials.
The IASB and FASB held an education session to understand the effect, costs and benefits of separating insurance contracts into insurance and non-insurance components, referred to as 'unbundling'.
Education session on 'unbundling'
The Boards held an education session to understand the effect, costs and benefits of separating insurance contracts into insurance and non-insurance components; referred to as 'unbundling', in which external presenters outlined practical considerations in response to the unbundling proposal set forth within the IASB's Exposure Draft and FASB's Discussion Paper.
In providing relevant examples, including simplified unit-linked insurance contract examples, external presenters suggested certain potential concerns with current unbundling proposals, including:
Significant amounts of time and costs involved in unbundling, although no distinction of anticipated costs were made
Application of judgement to allocate acquisition costs and surrender charge income to the different components of a contract in unbundling, whereby the treatment of acquisition costs may be different between current proposals within financial instruments, revenue recognition and insurance contracts
Application of judgement by insurers in determining how much of the portfolio's expense cash flows should be attributed to the investment management of any unbundled component and how much relates to the insurance component
The lack of explicit investment management fee specificity within insurance contracts leading to application of further judgement in either allocating the fee or treating the whole balance as related to the financial liability
Profit profiles for insurance components depending on amortisation of residual margins, which may not be significantly different from unbundled account balance
Different measurements for contracts that are similar economically if some are unbundled and others bundled.
Noting the above, certain possible benefits for unbundling were noted, including:
The consistent treatment of financial instrument elements within insurance contracts to that of standalone financial instruments
The possible reduction of accounting mismatches associated with deposit elements, embedded derivatives.
Certain members of the Boards considered whether variances in bundling / unbundling, by way of examples provided by the external presenters, were the result of economic or accounting consequences, while also considering if more value would be provided by disclosing the source of earnings within the financial statements as opposed to applying the unbundling proposal. Other members noted that unbundling often limits the variability in reporting, while also providing further clarity as to underlying costs and earnings in the period.
No decisions, however, were sought or reached at this meeting.
Based on feedback received from interested parties, the IASB and FASB were asked to consider: (1) initial measurement of options to extend or terminate a lease (2) reassessment requirements associated with options to extend or terminate a lease (3) symmetry between lessee and lessor accounting.
As part of continual deliberations surrounding the Exposure Draft Leases published 17 August 2010, the Boards considered the accounting for options to extend or terminate a lease, in which the Exposure Draft proposed that an entity should account for options to extend or terminate a lease by defining the lease term as the longest possible term that is more likely than not to occur (see paragraphs B16-B20 of the Exposure Draft), in a definition applicable to both the lessee and the lessor.
In outlining feedback including comment letters and other outreach, the staff noted:
Many respondents agreed with the Boards that options to extend and terminate leases affect the economics of lease contracts and supported a consistent approach for applying the lease term definition to both lessees and lessors
Many respondents acknowledged the boards' concerns relating to the structuring risks associated with options to extend and terminate leases
Many respondents and workshop participants questioned the practical application of the proposals, questioning how the lease term would be determined in situations in which a lease contract includes, for example, month-to-month extension terms/open-ended/'pay-as-you-go' contracts, a right of first refusal, or terms permitting termination by either the lessee and/or the lessor.
Generally, respondents encouraged the Boards to consider whether the objective of the lease term definition is to focus on (1) contractual future lease cash flows, (2) estimating all future lease cash flows or (3) in-substance contractual future lease cash flows.
Based on feedback received from interested parties, the Boards were asked to consider the following topics:
Initial measurement of options to extend or terminate a lease
The staff proposed three alternatives to the initial accounting for lease term options:
A majority of the staff recommended Approach C; citing that factors such as past practice and management intent would not influence the determination of a reasonably certain lease term at inception. The staff believed this approach was more objective because it does not depend on the assessment of future business conditions or management intent, which could easily be altered by external economic circumstances. Other staff members external to the above majority cited approval for Approach B, because including all factors that may affect the potential lease term, such as past practice and management intent, would more closely reflect the expected future cash flows associated with the lease, and thus, be more responsive to the needs of the users of the financial statements.
In deliberations on the above three initial measurement approaches, the majority of the Boards (absent three members of the Boards) tentatively approved Approach C, with clarification of the wording applied thereto, as summarised below:
The use of the reasonably certain threshold applied in Approach C. Multiple members of the Boards debated the use of the term, 'reasonably certain' as a threshold outlined in Approach C; questioning whether this term suggested too high a threshold, and likewise, how this threshold should be viewed in industry practice.
While certain members of the Boards supported the use of the 'reasonably certain' criterion, as it deters judgement on the part of management to manipulate a company's financial position, the majority of the Boards tentatively concluded that any future amendments should consider revised wording to more appropriately define the level of certainty required in recognition of an initial option to extend or terminate. A proposed wording, as agreed by the majority of the Boards, stated that the term 'reasonably certain' should be replaced by the phrase, 'clear economic incentive to exercise the options.' The staff agreed to review such wording at a future meeting.
The tentative decision of application of Approach C was reached after considering:
Approach C provides more objectivity, as it does not depend on the assessment of future business conditions or management intent
Approach C is responsive to concerns that it may be misleading to include amounts in the lessee's liability that the lessee has genuine flexibility to avoid because there is no economic incentive to renew
Approach C would result in more consistent reporting and less volatile financial reporting.
Reassessment requirements associated with options to extend or terminate a lease
The Exposure Draft proposed that lessees and lessors should adjust the lease liability/asset after initial recognition if facts or circumstances indicate that there would be a significant change in the lessee's liability to make lease payments or in the lessor's right to receive lease payments. When such indications exist, the lessee and lessor are required to reassess the length of the lease term.
After receiving respondent feedback that the reassessment is overly complex and burdensome, the staff identified two approaches to subsequent measurement relating to the lease term:
The staff supported Approach A, requiring a reassessment of the lease term on a basis consistent with the initial determination of lease term.
In deliberations amongst the Boards, the Boards tentatively concluded with the view of the staff. One member of the Boards expressed concern that the current language in the Exposure Draft suggests continual reassessment, and as such, it was suggested that the staff provides further clarity that continual reassessment without changes in underlying circumstances in not required.
The tentative decision was reached after consideration by the Boards that requiring reassessment of the lease term provides useful information to users because the lease term is determined on a consistent basis over the duration of the lease contract.
Symmetry between lessee and lessor accounting
The Exposure Draft does not make a distinction between a lessee and a lessor in the way term options are accounted for. However, because the lessee and the lessor may have different information on whether the lessee will extend or terminate the lease, the lessee and the lessor may not determine the same lease term.
In this regard, the Boards considered whether the definition of lease term should be consistent between the lessee and the lessor.
As part of this assessment, the staff highlighted the following reasons that support differences in the accounting for options to extend or terminate a lease between a lessee and a lessor:
The information known to the two parties of the lease will be asymmetrical
The lessee is usually the party that holds the option and exercise of the option is usually within the control of the lessee, but outside of the control of the lessor
For a lessor applying the derecognition approach, reassessment of the lease term results in the recognising revenue and/or reversals of revenue based on a subjective determination by the lessor. Because there is an impact on revenue resulting from a reassessment, the recognition principle for a lessor applying the derecognition approach may need to be more restrictive.
In contrast, the staff highlighted the following reasons that do not support differences in the accounting for options to extend or terminate a lease between a lessee and a lessor:
Less complex to apply and understand, which may be helpful to users of financial statements
Easier to account for subleases and related party leases.
Consistent with the tentative decision of Approach C, above, within the initial measurement of options to extend or terminate a lease, the Boards cited that under Approach C, the accounting for the lease term requires both parties to assess the lease term based on the lease contract and the leased asset, rather than business and other factors, and as such, there would usually be symmetrical information available to both parties. As both parties are assessing the same contract at the same time (lease inception) to determine the lease term, it is more likely that the lessee and lessor would determine the same lease term.
As a result, the Boards had unanimously decided that it is appropriate to have a consistent definition of lease term between the lessee and the lessor.
Topics to be discussed at future meetings
The staff intend to discuss the following related topics in a future meeting:
Accounting for purchase options
Presentation impact of changes from a reassessment of lease term
Disclosures regarding options to extend or terminate a lease.
In a second session on revenue for the day, the IASB and FASB discussed (1) principles on when multiple contracts should be combined and accounted for as a single contract (2) when to account for a contract modification as a separate contract, or as part of the original contract.
The Exposure Draft on revenue recognition included guidance on when multiple contracts should be combined and accounted for as a single contract. The guidance used the principle of 'price interdependence' in making this assessment. However, some respondents to the Exposure Draft felt the concept of 'price interdependence' was confusing. Some suggested using the principle in IAS 18 that contracts "are linked in such a way that the commercial effect cannot be understood without reference to the series of a transaction as a whole". A few respondents also raised the concern that it could be difficult to determine whether a discount for a particular contract was a result of price interdependency with another contract or because of a pre-existing customer relationship.
Based on consideration of the feedback received, the staffs proposed the final standard include a principle on when multiple contracts should be combined and accounted for as a single contract, supported by a list of indicators for when it may be appropriate to combine contracts. The principle they proposed was that an entity would account for two or more contracts as a single contract if the contracts were entered into at or near the same time and the amount of revenue recognition would differ depending on whether the entity accounts for the contracts together or separately.
One FASB member felt that the proposed principle involved a level of circularity; you have to determine if the revenue would be recognised differently to determine whether the contracts should be combined, in order to determine how the revenue should be recognised. He recommended that the principle and the indicators be combined. Other Board members agreed and suggested that the indicator of contracts being with the same, or a related party should also be included in the lead-in to the indicators.
Both Boards tentatively agreed on a principle of contracts that are interrelated should be combined, if they are entered into at the same time and generally with the same party (or a related party). Indicators of an interrelationship could include 1) the contracts were negotiated as a package with a single commercial objective, 2) the amount of consideration received in one contract depends on the performance of the other contract, or the goods and services in the contracts are closely interrelated or interdependent in terms of design, technology, or function.
Modifications of contracts
The Exposure Draft also included the concept of 'price interdependence' for determining whether to account for a contract modification as a separate contract or as part of the original contract. However, many comment letter respondents felt the proposals guidance on 'price interdependence' was confusing and would not be capable of being applied consistently.
Based on the comments received, the staff recommended an approach where if the modification only related to price, then the change would be allocated to the transaction price. However, if the contract modification added goods or services that are 1) distinct and 2) priced at their standalone selling price then those would be accounted for as additional goods or services. If those two criteria are not met, then the entity would re-evaluate all performance obligations and reallocate the transaction price.
The Boards generally had issues with the staffs' recommendation. One IASB Board member questioned what was meant by 'standalone selling price'. The staffs referenced the agenda paper which provided that a standalone selling price would consider an entity's relationship with a particular customer. Several Board members questioned whether that is truly a standalone sales price if customer relationships are taken into consideration.
The Boards then discussed an example of a home builder who is asked to build a separate stand alone garage and whether that would be considered a modification or a separate contract. The Boards mentioned there may be a variety of reasons that the home builder may charge the customer less then he would another party. A variation of that example was also discussed where the homeowner requested a modification in the plans to the house and the homebuilder was able to charge a premium based on the modifications.
One FASB member suggested that the performance obligation concept should be utilised rather than price interdependence. The Boards generally supported incorporation of the performance obligation concept and requested the staff to further consider the criteria based on indicators previously agreed upon for combining contracts.
The IASB and FASB considered how to distinguish between leases and services, including the types of leases and the principles relation to the definition of a lease (the concepts of 'specified asset', 'right to control' and 'use of an asset').
As part of continual deliberations surrounding the Exposure Draft Leases published 17 August 2010, the Boards considered the following topics given feedback received as part of comment letter and outreach activities:
Distinguishing between leases and services, including:
the concept of the right to control the use of an asset.
Following outreach activities discussed during the January 2011 joint Board meeting, the staff highlighted consideration as to whether there should be more than one lease model for both lessees and lessors, and specifically, the profit or loss effects of the proposed right-of-use model for both lessees and lessors. In this context, the following overriding questions were raised to the Boards:
Are there different types of leases; a concept unique from the current Exposure Draft which suggests one type of lease?
If there are different types of leases, should all leases have the same profit or loss recognition pattern or should there be differences in profit or loss recognition?
If there are different types of leases, what are the indicators that distinguish one type from another?
Types of leases
The staff recommendations as part of this meeting included:
Tentative acknowledgement that there are two different types of leases, with a plan to establish a targeted approach for outreach on underlying topics derived from this tentative acknowledgement.
If there are different types of leases, that each type have a different profit or loss recognition pattern for both the lessee and lessor. Specifically, there is a lease that is:
A finance lease that is akin to an instalment purchase / sale in which the financing element is significant and should be reflected in the pattern of profit or loss recognition of both lessees and lessors. The profit or loss of a finance lease has a profit or loss pattern consistent with the proposals in the Exposure Draft and includes interest expense / income (using the effective interest method), and would usually reflect the lessee consuming the right-of-use asset on a straight-line basis, or
An 'other-than-finance lease' that is a lease transaction in which the financing element is not considered significant. The profit or loss pattern of an other-than-finance lease is characterised by straight-line recognition consistent with today's US GAAP / IFRS operating lease accounting
Indicators to make a determination between the two proposed types of leases, including (a) residual asset, (b) potential ownership transfer, (c) length of lease term, (d) rent characteristics, (e) underlying asset, (f) embedded or integral services and (g) variable rent.
The concept of the appropriate presentation for leases will be subject to deliberation at a future meeting.
The Boards, in deliberation of the concept of two different types of leases in the Boards' right-to-use model, tentatively confirmed the staffs' conclusions, including that of targeted outreach activities, highlighting:
Certain types of leases provide for a financing element which is not significant as the lessee enters into a rental transaction to use the asset rather than a transaction that is similar to financing the acquisition of the asset; in substance, a lease not entered into for the purpose of financing, but rather, to create flexibility, mitigate the risk of ownership and /or outsource activities related to maintenance and administration
Certain types of leases have varying levels of ancillary services combined in the arrangement which may differentiate the form of a lease
The distinction of two types of leases is not inconsistent with the Boards' stated purpose of providing users of financial statements with a complete and understandable picture of an entity's leasing activities.
In reaching the above tentative confirmation, the Boards also tentatively confirmed the staffs' views regarding a different profit or loss recognition pattern for both the lessee and lessors, citing:
Different entities engage in lease transaction for different reasons, including those of a financing nature and other of an other-than-financing nature, as described above.
Multiple members of the Boards suggested further development and discussion regarding the profit and loss recognition patters applied in an effort to provide linkage between the assets and liabilities derived under lease transactions.
In contemplation of the distinction of leases noted above, the Boards considered what indicators should be used to distinguish one type of lease from another; generally concluding that new indicators should be identified independent of those outlined in current standards, although the indicators recommended by the staff, as specified above, consider current guidance in IAS 17 and ASC 840, as well as feedback received from comment letters and outreach activities.
Certain members of the Boards expressed concerns regarding the indicators expressed by the staff including:
Defining a 'by-exception' model for finance lease classification, whereby indicators outlined herein may be viewed in isolation. Specifically, multiple members of the Boards expressed reservation that the applicability of one of the indicators for finance lease distinction should not be viewed as conclusive evidence of the appropriateness of a finance lease distinction. Further, multiple members of the Boards deliberated as to whether two indicator lists should be produced to distinguish indicators to be considered in finance lease distinction, independent of indicators for other-than-finance lease distinction, as well as if a hierarchical approach to the indicators should be provided.
Inconsistencies in application of the right to acquire 'substantially all' the risks and rewards incidental to ownership. Current guidance expresses finance lease determination based on the transfer of substantially all the risks and rewards incidental to ownership; however, no certain members of the Boards felt no clear indicators exists in defining the significance of risk and reward distinction among the two lease types (akin to the "90% test" outlined in paragraph 10(d) of IAS 17 and ASC 840-10-25-1(d).
Future deliberation on the above topic will continue at a future meeting.
Principles relating to the definition of a lease
In application of the definition of a lease expressed within the Exposure Draft, as generally consistent with current IFRS and US GAAP literature, and considering feedback from comment letter and outreach sessions, the staff focused its proposals to the Boards on the concepts of specificity of assets and the right to control; considering the following:
Specificity of an asset
Should the definition of a lease refer to a specific or specified asset (e.g., uniquely identified asset or an asset of a particular specification)?
Should the final standard clarify whether an asset can be a portion of a larger asset?
Should the final standard address assets that are incidental to the delivery of specified services?
Right to control
Should the concept of control apply the principles already in IFRIC 4 and ASC Topic 840, but change to the wording of paragraph B4(c) to clarify the principle underlying those words?
Should the concept of control be consistent with the concept of control included in the revenue recognition Exposure Draft?
The staff recommendations as part of this meeting included:
No definitive recommendation as to whether an asset should refer to a specific or specified asset. The staff recommended targeted outreach in this area
No definitive recommendation as to clarifying whether an asset can be a portion of a larger asset, but highlighting two likely approaches: (a) applying current IFRIC 4 and ASC Topic 840 guidance without additional amendment, which clarifies that a physically distinct portion of a larger asset can be a specified asset or (b) clarifying whether a physical or non-physical (e.g., capacity) portion of a larger asset can be a specified asset. The staff recommended targeted outreach in this area
The inclusion of working regarding assets that are incidental to the delivery of specified services, which is generally consistent with paragraph B1 of the Exposure Draft that 'an entity shall determine whether the contract is, or contains, a lease on the basis of the substance of the contract...'.
Specificity of an asset
The Boards, in response to whether the definition of a lease refers to a specific or specified asset, expressed a relatively split view, with the majority of the Boards supporting that a 'specified asset' should be viewed more broadly as an asset of a particular specification (e.g., copier machines under a leasing arrangement can be substituted with consistent models, assuming no disruption of service). Deliberations underlying this tentative decision considered that a more broad views considers that a customer has received the same benefits and functionality throughout the lease term, while the opposing view highlights that a broad view may result in variances in accounting between the lessor and lessee, whereby a lessor must identify a specific asset to enable practical application of the derecognition model within the Exposure Draft.
The Boards agreed to tentatively confirm the broad 'specific asset' application while taking both approaches for targeted outreach.
In evaluating the concept of whether assets can be a portion of a larger asset, the majority of the Boards confirmed that any amendments should clarify whether a physical or non-physical (e.g., capacity) portion of a larger asset can be a specified asset.
Focusing on the concept of non-physical asset distinction as a lease, the majority of members of the Boards noted that a non-physical portion of a larger asset could be a specified asset, as this was conceptually consistent with the right-of-use model proposed in the Exposure Draft and an approach of viewing an underlying asset as a bundle of rights. The staff expressed concerns about the implications and possible unknown consequences of expanding the application of the definition of a lease to non-physical portions of a larger asset and acknowledged that, for cost / benefit reasons, it may be appropriate to clarify that non-physical portions of a larger asset would unusually not meet the definition of a specified asset. Therefore, the staff recommended that the Boards seek input through targeted outreach on both of the likely approaches set forth by the staff.
The Board confirmed the recommendation of the staff.
In evaluating the concept of assets incidental to the delivery of specified services, such as season tickets to a sporting venue or a cable box provided when a customer contracts to have viewing rights to particular television channels, the Exposure Draft was silent on such examples. The staff provided preliminary draft wording to the definition of a lease to capture assets that are incidental to the delivery of specified services, noting consideration as to the 'incidental' nature of the asset.
Under preliminary draft wording provided by the staff, an asset was considered likely to be incidental to the provision of a service when (a) specification of the asset is determined by the supplier as a mechanism for providing a specified service requested by the customer in the contract; or (b) the asset component of the contract is insignificant in terms of its benefit to the customer when compared to the service components of the contract.
The majority of the Boards agreed with this definition amendment, but noted that the term 'insignificant' should be clarified as whether such an assessment underlies economics or other benefits. A minority of members of the Boards considered whether time should be a component of the definition (e.g., a time charter of one day versus five years), but no consensus was reached.
Right to control
The current definition of a lease within the Exposure Draft raises the concept of a right to control, whereby a contract is said to convey the right to use an asset if it conveys to an entity the right to control the use of the underlying asset during the lease term. Control, in the context of a lease, is considered to provide for either (a) the active ability to operate or control physical access to an asset as well as the right to obtain some output or other utility of the asset; or (b) having the right to obtain all but an insignificant amount of the output or other utility of the asset as long as the pricing is such that the customer is paying for the right to use the asset, rather than for actual use or output.
Comments from respondents around the control provision questioned the following key concepts: (a) how should the 'ability or right to operate' concept be applied when a customer relies on personnel employed by the supplier to receive benefits from use of the specified asset; (b) what does 'output', 'insignificant', 'contractually fixed per unit' and 'current market price' mean within paragraph B4(c) of the Exposure Draft; (c) why would the concept of control applied when a customer obtains the right to control the use of an asset be different from the concept of control applied when a customer obtains control of a good?
In response to the main comments raised, the staff expressed two possible approaches:
Retain the concept of control already in IFRIC 4 and ASC Topic 840 regarding the right to control the use of a specified asset, but change to the wording of paragraph B4(c) to clarify the principle underlying those words
Revise the description of control in the lease standard to be consistent with the concept of control included in the revenue recognition Exposure Draft.
The staff recommend a targeted outreach of the above approaches, while also further deliberating any potential unintended consequences of applying the revenue recognition concept to the leasing environment. Certain members of the Board expressed the need for consistency in the use of the term 'control,' while a minority noted the unique nature of the revenue environment to that of the leasing environment.
The proposal provided by the staff provided preliminary draft wording relating to the definition of a lease in this area, including application of the revenue recognition Exposure Draft to the leasing environment.
Relevant deliberations included determination as to whether the entity has the ability or right to operate the asset or direct others to operate the asset in a manner that it determines while obtaining or controlling more than an insignificant amount of the potential cash flows from use of the asset, the ability or right to control physical access to the underlying asset while obtaining or controlling more than an insignificant amount of the potential cash flows from use of the asset, and rights to obtain substantially all the potential cash flows from use of the asset throughout the term of the lease.
The Boards expressed concern that use of the term, 'cash flows' should be broadened to include any benefit derived from use of the assets. The staff will consider revised wording in a future meeting.
The Boards confirmed the staffs' recommendation to field test the above approaches, with a majority preference of consistency between control defined within the revenue Exposure Draft and that of the leasing proposal. The Boards also asked the staff to consider unintended consequences of a consistent modelling within revenue and leasing in this area.
The IASB and FASB discussed the definition of the term 'write-off'.
Definition of the term 'write-off'
The Boards discussed the definition of the term 'write-off'. Each Board's original exposure draft defined 'write-off' and the definitions were largely similar although the IASB's definition included that "the entity has ceased any further enforcement activities". The IASB included that phrase in their definition as they were told by financial statement users that information on amounts that could still be recovered after being written-off was important information. As a result, the IASB's definition of a write-off extended the period when a balance could be written off so that information about potential recoveries continued to be reported in the required disclosures. However, responses to the financial statement user questionnaire on the IASB's original exposure draft noted that users believe a loss should be written off when it is incurred, regardless if the legal means of recovery have not expired.
The Boards tentatively agreed to provide a definition in the defined terms that a write off is "a direct reduction of the amortised cost of a financial asset resulting from uncollectibility". Additionally, the Boards tentatively agreed to include guidance that an asset is considered uncollectible if the entity has no reasonable expectation of recovery and therefore an asset should be written off, partially or fully, in the period in which the entity has no reasonable expectation of recovery.
The IASB and FASB discussed (1) the identification of separate performance obligations (2) breakage on prepayments (i.e. how to recognise revenue for unused gift cards or other prepaid services) (3) onerous performance obligations.
Identification of separate performance obligations
Continuing the previous days' discussion on how to identify separate performance obligations, the staffs provided the Boards with two additional alternatives in additional to the proposal discussed yesterday.
The first alternative would account for a good or service, or a bundle of goods or services, as a separate performance obligation if 1) the good or service is distinct and 2) the good or service has a different pattern of transfer to the customer. This alternative would provide a list of indicators of when a good or service may be distinct including 1) the entity regularly sells the good or service separately, 2) the customer can use the good or service either on its own or together with resources that are readily available to the customer, 3) the entity and the customer negotiated the sale of goods or services separately, or the entity is not providing a significant service of integrating the promised goods or services into a single item that the entity provides to the customer.
The second alternative would account for a good or service, or a bundle of goods or services, as a separate performance obligation if 1) the good or service has a different pattern of transfer to the customer and 2) the customer can use the good or service either on its own or together with resources that are readily available to the customer. However, one would account for a bundle of promised goods or services as one performance obligation if the entity provides a service of integrating those goods or services into a single item that the entity provides to the customer.
The Boards generally viewed the two alternatives as more favourable to the original staff proposals (only one FASB member expressed support for the original staff proposals). However, several members from each Board preferred certain aspects from each of the models rather than one model in its entirety. Specifically mentioned was the overriding requirement from the second alternative that one would account for a bundle of promised goods or services as one performance obligation if the entity provides a service of integrating those goods or services into a single item that the entity provides to the customer rather than having a similar criteria as only an indicator in the first alternative. However, there was support for the first alternative because it incorporated the concept of distinct which many felt preparers could understand and apply.
The Boards tentatively agreed to incorporate aspects of both alternatives into the model for identifying a separate performance obligation. The model would first consider if the entity provides a service of integrating a bundle of goods or services into a single item that the entity provides to the customer. If so, the entity would account for the bundle as a single performance obligation. If not, the entity would account for a promised good or service as a separate performance obligation if 1) the good or service is distinct and 2) the good or service has a different pattern of transfer to the customer. The model would also include indicators of what would be considered distinct, including 1) the entity regularly sells the good or service separately, 2) the customer can use the good or service either on its own or together with resources that are readily available to the customer, and 3) the entity is not providing a significant service of integrating the promised goods or services into a single item that the entity provides to the customer.
Existence of a contract and definition of a performance obligation
The revenue recognition exposure draft defined a performance obligation as "an enforceable promise (whether explicit or implicit) in a contract with a customer to transfer a good or service to the customer". Certain comment letter respondents questioned the inclusion of the term 'enforceable promise' as that could result in an entity not accounting for promised goods or services that the customer reasonably expects to receive. They recommended expanding the definition of a performance obligation to include constructive obligations where an entity's specific statements or past practices establish a valid expectation that performance will occur.
The Boards discussed the example of as software provider who provides both 'bug' fixes as well as software updates to its customers. One IASB member mentioned that the 'bug' fixes would only be bringing the product back to its original specification and therefore would not be a separate performance obligation. However, other Board members acknowledged that the providing of 'updates' could be viewed as delivery of a separate performance obligation even though no contractual requirement may be in place.
The Boards tentatively agreed to remove the term enforceable from the definition of a performance obligation to provide clarity that other non-contractual arrangements could be identified as performance obligations.
Breakage on prepayments
The Boards also discussed the topic of breakage on prepayments (i.e. how to recognise revenue for unused gift cards or other prepaid services). The revenue recognition exposure draft provided that an entity would recognise a contract liability upon receipt of any prepayment from a customer for its performance obligation to provide goods or services in the future and derecognise the liability (and recognise revenue) when the good or service is transferred.
While, the exposure draft did not specifically address how to recognise revenue for breakage on prepayment, the staffs believe the accounting is similar to the proposals for contract options for additional goods or services. Under those proposals, an option is accounted for a separate performance obligation only if the option provides the customer with a material right that the customer would not receive without entering into that contract. If the option provided a material right, then the entity recognises revenue when it transfers those future goods or services or when the option expires. The exposure draft also included an example (example 26) that illustrated the guidance in the context of a customer loyalty programme and how an entity would recognise revenue based on a pattern of redemption of the loyalty points.
The staffs proposed that revenue for breakage should be recognised in proportion to the pattern of rights being exercised by the customer (the proportional model), but if an entity cannot reasonably estimate breakage then revenue should be recognised when the likelihood of the customer exercising their right becomes remote (the remote model). The staffs believe this is consistent with the guidance on options already included in the exposure draft.
The Boards discussion on breakage began with most Board members seemingly opposed to the staffs' recommendation. Some preferred only permitting the remote method while others preferred recognising immediately if an amount can be reasonably estimated and utilising the remote method when an estimate cannot be reasonably estimated. Some also preferred that recognition of breakage be classified as a 'gain' rather than as revenue.
The staffs reiterated their position that the proposal is consistent with the Boards position on the accounting for options. They also commented that classification as a 'gain' would result in reporting that is significantly more difficult that what is included in the exposure draft and over current practice.
The Boards were ultimately swayed by the staffs' arguments. The IASB tentatively agreed with 10 Board members supporting the proposal for the proportional method when a pattern can be estimated but the remote model in other instances. The FASB did not reach a majority supporting the proposal (2 votes) but 4 Board members agreed "not to object".
Onerous performance obligations
The Boards also began discussions on onerous performance obligations. Because of time limitations, the Boards were only able to address the first topic of whether the onerous test should be performed at the contract of performance obligation level. The Boards were not able to discuss the topics of whether subsequent contracts should be linked in determining whether to recognise an onerous liability and what costs should be included in the onerous test. Both of these issues will be addressed at a future joint board meeting.
The revenue recognition exposure draft proposed that an onerous liability be recognised when the present value of the probability weighted costs that relate directly to satisfying that performance obligation exceeds the amount of the transaction price allocated to that performance obligation. The Boards proposed that the onerous test be performed at the performance obligation level in order to provide transparency for margins on each performance obligation and to provide timely information by recognising changes in circumstances impacting a performance obligation at the time it becomes loss-making.
Almost all comment letter respondents who commented on the onerous test opposed the proposals in the exposure draft that the test be performed at the performance obligation level. They cited various reasons for performing the test at a higher level unit of account than the performance obligation, including that items are often not priced at the performance obligation level, it is misleading to recognise a loss on a part of the contract when the overall contract is profitable, and that costs are not necessarily tracked at the performance obligation level which would make the test difficult to apply.
The staffs believe that some of these issues may be addressed through other changes to the revenue recognition proposals currently under discussion. However, they also acknowledged the issues identified by comment letter respondents. The staffs proposed that the onerous test be performed at the contract level and clarify that would be the remaining performance obligations in the contract.
A few members from each Board opposed the staff recommendation but the majority of both Boards seemed supportive of the proposals. One IASB member asked the staff what disclosures were planned to supplement the decision to apply the onerous test at the contract level. The staff responded that the exposure draft included disclosures for onerous contracts but that all disclosures would be reassessed as part of the current discussions.
The Boards tentatively decided that the onerous test would be performed at the contract level rather than the performance obligation level as was proposed in the exposure draft (twelve IASB members and three FASB members supported the decision).
The IASB and FASB held an education session held an education session to understand and evaluate different ways of addressing the uncertainty that arises when (1) an asset or a liability is measured by reference to future cash flows (2) the future cash flows are uncertain (e.g., there is a range of possible outcomes).
The Boards held an education session to understand and evaluate different ways of addressing the uncertainty that arises when:
an asset or a liability is measured by reference to future cash flows
the future cash flows are uncertain (e.g., there is a range of possible outcomes).
To measure the asset or liability, it is necessary to reduce the range of possible outcomes to a single measure, and to this end, the education session compared different measures potentially available to:
provide the most relevant information to users, or
be a reasonable proxy for other measures on cost-benefit grounds.
The session compared six different measures described in current accounting literature:
maximum amount that is more likely than not to occur
most likely outcome
minimum or maximum amount in range of possible outcomes
midpoint of range of possible outcomes
possible outcome nearest to expected value.
A noticeable exclusion to the above list, best estimate, was excluded as it is described differently in different contexts and there is no common understanding of its meaning.
In presentation and discussion of the above measures, consideration was placed on the appropriateness of use of each of these measures and potential consequences of use.
Certain members of the Boards expressed concern as to how the above models could be used in practice, whereby multiple measures represented an 'ideal' where significant data would be required for assessment of such a measure. Other members of the Board noted the importance of including this information in the context of the conceptual framework across all areas of accounting literature.
No decisions, however, were sought or reached at this meeting.
In a second session on leases for the day, the IASB and FASB discussed accounting for variable lease payments, including other considerations such as residual value guarantees and term option penalties.
In a subsequent deliberation session held on 17 February 2011 surrounding the Exposure Draft Leases, the Boards considered the following topics given feedback received as part of comment letter and outreach activities:
The Exposure Draft Leases identified that in some leases, the amount of each contractual lease payment is variable rather than fixed. That variability can arise because of features such as, but not limited to, residual value guarantees, penalties for failure to renew, and contingent rentals. The Exposure Draft Leases proposes that at the date of commencement of a lease, a lessee should recognise a liability to make lease payments and a lessor should recognise a right to receive lease payments (lease receivable) in the statement of financial position. Payments arising under a lease include fixed payments as well as all variable payments. The Exposure Draft proposes that an entity should measure the liability to make lease payments and the lease receivable using an expected outcome technique. Expected outcome is the probability-weighted average of the cash flows for a reasonable number of possible outcomes. In addition, the Exposure Draft proposes that a lessor should include variable lease payments in the measurement of the lease receivable only if those payments can be reliably measured.
In assessing feedback from comment letters and outreach activities, users had mixed views on the treatment of variable lease payments, whereby most supported additional information relating to variable lease payments, but views on the appropriate recognition pattern within the financial statements varied. Such views included concern as to judgement applied in measurement of variable lease payments that depend on future performance or usage, as well as the volatility and challenge of measuring reliably variable lease payments using an expected outcome technique.
In consideration of the above, the staff recommendations as part of this meeting included:
The majority of the staff recommended that variable lease payments should be included in the measurement of a lessee's liability to make lease payments and a lessor's lease receivable only if those variable lease payments depend on an index or a rate.
The minority of the staff recommended that all variable lease payments that are "probable" or "reasonably assured/certain" should be included in the measurement of a lessee's liability to make lease payments and a lessor's lease receivable.
Disclosures would be required for variable lease payments; however, relevant disclosures will be subject to a future meeting.
A reliability threshold should be included in the proposal for the measurement of variable lease payments for both lessees and lessors.
Taking each in hand, in evaluating which variable lease payments should be included in the measurement of a lessee's liability to make lease payments and a lessor's lease receivable, the majority of the staff detailed inclusion only if those variable lease payments depend on an index or a rate; noting the following key advantages:
May avoid concerns relating to the accuracy or provision of measurement;
More consistent accounting between the lessor and lessee in cases in which the lessor would otherwise be unable to estimate variable lease payments reliably;
May better reflect the fact that variable lease payments based on usage or performance provide lessees with flexibility and reduce their business risk.
A minority of the Boards noted that in such an application, the lessee's measurement of the liability and lessor's measurement of lease receivables would not reflect the amounts that an entity has the ability to avoid, whereby such accounting may depict understated lessee obligations and lessor receivables when future cash flows are highly likely to occur. Further, certain members of the Boards were concerned that such an appropriate would create structuring opportunities.
Support from the Boards regarding the above approach cited that such an approach promotes consistency in application and reduces judgement and variability. Further, the approach was believed to capture residual value guarantees and term option penalties (or obligations to retire the leased asset), which is consistent with the definition of minimum lease payments under IAS 17 and ASC Topic 840.
In application of a principle that all variable lease payments that are "probable" or "reasonably assured/certain" should be included in the measurement of a lessee's liability to make lease payments and a lessor's lease receivable noted the following key advantages:
May give a more faithful depiction of the rights received by the lessor and the obligations incurred as it may be more reflective of actual cash flows.
A majority of the Boards questioned whether such an approach would lead to highly subjective estimates, and likewise, concerns were expressed over the definition of "probable" or "reasonably assured/certain" as applied in the recommendation. One member of the Boards deliberated as to whether the concept of the "foreseeable future" should be considered in modelling, whereby assessment of probability is limited to the period management considers being "foreseeable" based on budgets and forecast modelling.
Support from the Boards regarding the above approach cited that such an approach addresses the operational and reliability concerns expressed by preparers, while providing more useful information to financial statement users to assess amounts, timing and uncertainty of cash flows.
In final deliberations, the majority of the Boards confirmed, in relation to which variable lease payments should be included in the measurement of a lessee's liability to make lease payments and a lessor's lease receivable, the following items for inclusion:
Variable lease payments that depend on an index or a rate;
Variable lease payments that are "reasonably assured/certain," in which such a term will be defined in a later meeting;
"In-substance" / "phoney" leases which are provided at off-market terms;
Elevated disclosure within the notes of contingent rate leasing arrangements, which will be discussed in a later meeting.
In assessing a reliability threshold for inclusion in the proposal for the measurement of variable lease payments for both lessees and lessors, the staff recommended that the initial measurement of the variable lease payments that depend on an index or rate to be based on a prevailing rate (or spot rate), with subsequent update of this rate at each reporting period. This approach was considered to be a practical approach to avoid incomparability between entities.
The majority of the Boards tentatively confirmed the recommendation of the staff, noting the simplicity of the model as compared to use of forward rates and indices. Further, members of the Boards questioned whether forwards rates would result in incomparability and misleading information. Such a conclusion contradicts the Exposure Draft Leases proposal that when determining the present value of lease payments payable, variable lease payments that depend on an index or rate should be determined using readily available forward rates or indices.
Other variable lease payment consideration
The following topics were considered in relation to the recognition and measurement of the lessee's liability to make lease payments and a lessor's lease receivable for other lease payment considerations, absent those general considerations set forth above:
Residual value guarantees ("RVGs")
Third party RVGs
Term option penalties
Given a lack of clarity as to whether RVGs should be included in lessee's liability to make lease payments and a lessor's lease receivable, the staff believed it important to clarify that RVGs (that are not from an unrelated party) should be included in the measurement of a lessee's liability to make lease payments and the lessor's lease receivable, similar to current guidance. The full amount of the RVGs would be included in this measurement.
The Boards confirmed such a recommendation, as considered against the variable lease payment definition outlined above, as a RVGs is viewed equivalent to a contingent payment at the end of the lease term, whereby they are linked to the value of the underlying asset and could be misleading to recognise such guarantees separately.
The Boards also tentatively decided that RVGs provided by the lessee (not unrelated third parties) should be included in the measurement of a lessee's liability to make lease payments at the amount that represents the difference between the residual value of the asset and the level of the guarantee. The amount of the residual value guarantee included in the liability to make lease payments will be reassessed. The staff will reach out to constituents to gather feedback on these tentative decisions.
Third party RVGs
The Exposure Draft proposes that the present value of lease payments should not include an estimate of amounts payable under RVGs that are provided by an unrelated third party, which has been objected by a minority as part of comment letter responses received and outreach activities performed. The conclusion expressed in the Exposure Draft Leases is reached because RVGs that are provided by an unrelated third party are not lease payments and are outside of the lease contract. Further, the staff believes that since such third party RVGs solely affect the value of the underlying lease asset and are not arrangements between the lessee and lessor, these should be accounted for as other guarantees.
Given the above, the staff recommended that the Boards confirm the tentative decision reflected in the Exposure Draft Leases that the lessee's liability to make lease payments and the lessor's lease receivable should not include an estimate of amounts payable under RVGs provided by an unrelated third party.
The Boards confirmed such a recommendation.
Term option penalties
Consistent with the proposals for variable lease payments, the Exposure Draft Leases proposes that the present value of lease payments should include an estimate of expected payments to the lessor under term option penalties.
While very few respondents providing feedback on the Exposure Draft Leases commented specifically on term option penalties, of those who responded to this particular proposal, many requested clarification of the term, while others disagreed with use of term option penalties in the measurement of the lessee's liability to make lease payments and a lessor's lease receivable.
Given the above, the staff recommended that if there are term option penalties for non-renewal and the renewal period is not included in the lease term, then those term option penalties should be included in the measurement of the lessee's liability to make lease payments and the lessor's lease receivable (e.g., term option penalties should be included to the extent that it is reasonably certain that the lessee will not extend the lease).
The Boards confirmed such a recommendation on the basis that such a conclusion is consistent with the accounting for options to extend or terminate a lease.
The IASB and FASB considered (1) the current assumptions under which the insurance contracts project is being developed (2) the discount rate to be used in discounting non-participating contracts.
The staff presented the current assumptions under which the insurance contracts project is being developed for the consideration and approval of the Board members.
Key assumptions include:
that the development of a standard for insurance contracts is appropriate
the standard focuses on insurance contracts only, not the entities or underlying assets
insurance contracts will be considered as a bundle of rights and obligations generating a package of cash flows
insurance contracts will be measured at the portfolio level
the use of observable market consistent inputs in a current estimates model
contracts will be measured from the perspective of the insurer fulfilling them
insurer's own credit shall not be considered.
The staff asked the members of the Boards to ratify these assumptions.
In general, the members of the Boards had no significant disagreements with the assumptions, although a small number of additions and considerations were suggested, particularly to include explicit references to consideration of the interaction between the IFRS on insurance contracts and IFRS 9 for the measurement of assets held by insurers to fund the insurance contracts cash flows.
Discount rate for non-participating contracts
The staff presented a paper on the discount rate to be used in discounting non-participating contracts, and recommended that the Boards confirm that:
the objective to adjust the future cash flows for the time-value of money and reflect the characteristics of the insurance contract liability
the method for determining the discount rate shall not be prescribed
guidance shall be provided on determining the discount rate which shall be adjusted for risks that are not included elsewhere in the measurement model.
The Board members held a significant debate on the calculation of the discount rate for non-participating contracts and addressed numerous issues, including:
the calculation of an illiquidity adjustment
the use of top-down and/or bottom-up approaches, and the differences that may arise as a result
whether the substance of the transaction could permit the use of a standard borrowing rate as a proxy after removal of the insurer's own credit risk
the impact of discount rates on pricing decisions and products
comparison to the discount rate discussed in the leases project currently underway.
Overall, the Boards concluded that there were no significant objections to the proposed objective for discounting, but that additional clarification of the wording was required, and that they would not prescribe a model for the calculation of the discount rate. Insurers would be permitted to use any methodology provided the resulting discount rate meets the IASB's objective.
Although the Boards concluded that guidance should be provided on the calculation of the discount rate, a number of concerns about staff recommendations were raised, and the Boards decided that the staff should consider these concerns during the drafting phase and the Boards would rule on the wording at that point. The Boards also decided to include a requirement that yield curves for each major relevant currency should be disclosed.
The IASB and FASB (1) continued their discussion of discount rates for non-participating contracts (2) considered a paper addressing the estimation of future cash flows (3) considered a paper on the results of consultations on the use of an explicit risk adjustment (4) considered whether an insurer should recognise day one gains and losses (5) had an education session focusing on the implications of unlocking and remeasuring residual or composite margins (6) had a refresher on the presentation models.
Discount rate for non-participating contracts
The Boards continued their discussion of discount rates for non-participating contracts by discussing the staff query whether to allow the substitution of a specified rate (e.g. one based on the interest rate of a high quality corporate bond) as a practical expedient to allow insurers to determine their discount rate in certain circumstances.
The Boards expressed mixed views, raising points for and against the development of an approach that uses a proxy rate. Ultimately, no conclusion could be reached. As such, the Boards cautiously agreed that a proxy rate might be used, but instructed the staff to explore that possibility and provide the Boards at future meetings with information regarding the selection of such a rate and the circumstances in which it could be used.
The staff presented a paper to the Boards addressing the estimation of future cash flows, the treatment of specific cash flow items such as general overheads, and the level of detailed guidance proposed in the Exposure Draft / Discussion Paper.
The staff requested that the Boards:
clarify the measurement objective of expected value to refer to the mathematical mean;
clarify that implementation would require enough scenarios to be considered to satisfy the measurement objective rather than requiring all possible scenarios to be considered;
confirm which costs could be included within the cash flow;
confirm that indirect costs should be expensed; and
eliminate "incremental" from the definitions.
The Boards agreed with the staff that the measurement objective should be based on the mathematical mean of the expected future cash flows although there was some concern about the application of this to general insurance business due to the variability of future cash flows. In addition, the Boards generally agreed that sufficient, rather than all, scenarios should be considered by the insurers. The Boards also agreed that only costs directly related to contract activity should be included within the liability cash flows rather than the wider concept of attributable costs proposed by the paper. This redefinition replaces "incremental" and would also drive the designation of which costs could be included. The Boards instructed the staff to draft appropriate wording in line with this decision when preparing the final standard.
Explicit risk adjustment
The staff presented a paper to the Boards on the results of consultations on the use of an explicit risk adjustment but the Boards were not asked to decide between an explicit risk adjustment or a composite margin at this stage. Instead, the staff asked the Boards to consider whether an explicit risk adjustment would, in principle, provide useful information to users of financial statements. The staff noted that there were two distinct streams of comments. Some users felt that information on the risk adjustment was useful and necessary, while others felt that the costs, difficulty and market inconsistency that were possible with risk adjustments rendered the information provided by an explicit risk margin not reliable for financial reporting.
The Boards discussed the issues presented, providing points for and against explicit risk margins, many of which had been considered in previous debates. Many members commented that it was difficult to dissent with the staff's view on risk margin as the question was not touching the issue that had divided them in previous discussions on this subject. A significant issue was identified in that the effective use of a risk margin in dependant on the estimate of the liability cash flows being prepared on an unbiased basis and some Board members were not convinced that this was always possible. The Boards decided that the staff should arrange an educational session on how risk margins are calculated in the market and the Boards will reconsider the issue at that point.
Day one gains and losses
The staff asked the Boards to consider whether an insurer should recognise day one gains, should be required to recognise day one losses, and whether the residual or composite margin could become negative on subsequent measurement.
There was no significant support for the recognition of day one gains amongst the Board members, and there was general agreement that day one losses should be recognised on day one. A small number of concerns were raised, and the Boards expressed a general feeling that margins should not become negative. A few Board members supported the possibility of recognising a negative residual margin, but only where the sum of the risk adjustment liability and the negative residual margins remained a net liability.
The staff presented an educational session to the Boards focusing on the implications of unlocking and remeasuring residual or composite margins. The staff also presented a number of examples of how various scenarios could play out under different unlocking and measurement assumptions. Although the Boards discussed this and raised a number of questions and comments, no decisions were made.
The Boards instructed the staff to prepare a paper for discussion based on the following guidance:
use of floating margins (i.e. remeasuring the residual/composite margin for both favourable and unfavourable changes in non-financial assumptions);
an onerous contract tests should be included; and
only non-financial assumptions could be considered in the adjustment of the residual margin.
The Boards requested that the staff discuss these proposals with users prior to presentation to the Boards for decision.
Refresher on presentation models
The staff presented a short session to the Boards as a reminder of the issues arising from the presentation proposals set out in the ED / DP and which would need to be considered when making other decisions within the insurance project. The Boards noted the feedback from the comment letters requesting volume of business information being included in the statement of comprehensive income. No decisions were made, but the debate appeared to suggest that the Boards or their constituents cannot yet identify a clearly superior presentation format.
The Boards requested that the staff consider the work being performed by EFRAG on presentation which is expected to be presented to the IASB next week.
Discounting non-life contract liabilities and locking the discount rate
The Boards did not consider these papers and have deferred them to the next meeting.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.
IAS Plus Full SiteView page in Full SiteThe page you are trying to view is currently not supported by our mobile site. Please click below to view this page in our Full Site.