The Board continued its discussions on issues relating to recognition and measurement for its Due Process Document. Four main issues were addressed at the December meeting.

Loan with prepayment options and credit card agreements

First the Board discussed the issue on how a loan with a prepayment option should be characterised by the holder of the instrument.

Board members discussed whether the prepayment option is a non-financial component that the holder should recognise separately from the loan. The Board expressed reservations about this approach. The Board expressed a preliminary view that the entire asset should be recognised at fair value. The Board acknowledged that the prepayment option affects the fair value but that fact does not lead to recognising the non-financial portion of the value as a separate asset.

Secondly the Board discussed the issue on how credit card contracts should be assessed from the perspective of the issuer of the credit cards, and specifically whether the credit card company should separately report the portion of the value of a credit card contract with a cardholder that would not exist if the cardholder made his judgement solely based on interest rate considerations.

The paper presented to the Board identified two alternatives that had support from some Board members. One approach would recognise a single non-financial asset at fair value on the balance sheet. The other approach would split the contract into two portions, recognising a non-financial asset and a financial liability. Board members supporting the second approach said they would separate the two components of if the financial liability is material and separation is justified on a cost/benefit basis.

Bank deposit agreements

The Board discussed whether bank deposit agreements between a bank and the holder of the demand deposit would be within the definition of a financial instrument for the purposes of the Due Process Document. The Board's preliminary view was that since the bank did not have a stand-ready obligation to accept deposits from the depositor, bank deposit agreements should not be regarded as financial instruments. However, the Due Process Document should include a discussion of these agreements and seek views from constituents.

Liabilities with a demand feature

The Board debated how to remeasure liabilities that have a demand feature. The issue was whether the liabilities should be remeasured based on the immediate settlement value of the liabilities or whether it should be measured based on market expectations about the timing and amount of cash flows, the discount rate and incremental service costs on the liabilities.

The Board expressed a tentative view that these liabilities should be remeasured based on the market conditions, taking timing, discount rate and service costs into consideration.

Guaranteed liabilities

The Board discussed how third-party contractual guarantees would affect how a debtor should measure liabilities. Board members' views were divided. One view was that as long as the debtor was not released from its obligation if the guarantor has to settle the obligation, this should not affect measurement of the liability. The other view was that the existence of a guarantee always will affect the value of the liability.

The Board decided that it would need to assess specific examples before it would be able to express a tentative view on how contractual guarantees affect fair value measurement of liabilities for the debtor. The Board directed the staff to develop some examples which will be considered at a later meeting.

Note that the paper presented to the Board also includes a discussion on statutory guarantees, but in light of the conclusion regarding third-party guarantees this discussion was postponed.