SUMMARY OF BOARD DECISIONS
Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue an Accounting Standards Update.
January 30, 2013 Joint FASB/IASB Videoconference Board MeetingRevenue recognition. The IASB and the FASB continued their joint redeliberations on the revised Exposure Draft, Revenue from Contracts with Customers (the 2011 ED). The Boards discussed the following topics:
- Repurchase agreements
- Effect of the revenue recognition model on asset managers
- Transfers of assets that are not an output of an entity’s ordinary activities
- Update on outreach regarding disclosure and transition proposals.
The Boards tentatively decided to confirm the scope of the 2011 ED, including the definition of a customer.
The Boards also tentatively decided to clarify:
- That a collaborative arrangement (as described in paragraph 10 of the 2011 ED) is not limited to the development and commercialization of a product
- That a contract with a collaborator or a partner is within the scope of the revenue standard if the counterparty meets the definition of a customer
- That the application of paragraph 11 of the 2011 ED specifies how an entity would apply the revenue standard when a contract with a customer is partially within the scope of the revenue standard and partially within the scope of other standards.
The Boards discussed the following topics related to the implementation guidance on repurchase agreements in paragraphs IG38–IG48/B38–B48 of the 2011 ED:
- Sale-leaseback transactions that include a put option
- Other amendments
- Application guidance
- Call options—significant economic incentive not to exercise.
The Boards tentatively decided that a sale-leaseback transaction that includes a put option with a repurchase price that is less than the original sales price and for which the customer has a significant economic incentive to exercise would be accounted for as a financing.
The Boards tentatively decided to remove the word unconditional from the implementation guidance for repurchase agreements.
The Boards clarified that in a product financing arrangement (that is, when an entity sells a product to another entity and repurchases that product as part of a larger component for a higher price) an entity would exclude the processing costs from the repurchase price in determining the amount of interest.
The Boards considered the application of the implementation guidance on repurchase agreements in the 2011 ED to the following scenarios and tentatively decided that no amendments to the guidance were necessary:
- Sale of a good to a customer with a guarantee that the customer will receive a minimum amount upon resale—the Boards confirmed that the existence of the guarantee would not preclude the transfer of control of the product to the customer.
- Sale of a good to a customer that is subsequently repurchased for the purposes of leasing to the customer’s customer—the Boards confirmed that the repurchase of the good by the entity subsequent to the customer obtaining control of that good does not constitute a repurchase agreement as described in paragraph IG38/B38. However, in determining whether the customer obtained control of the good, an entity should consider the principal versus agent considerations in paragraphs IG16-IG19/B16-B19.
The Boards tentatively decided not to amend the 2011 ED to require an entity to consider whether it has a significant economic incentive not to exercise a call option when applying the implementation guidance for repurchase agreements.
Effect of the Revenue Recognition Model on Asset Managers
The Boards discussed the application of the 2011 ED to the asset management industry, specifically, the application of the:
- Constraint on revenue recognized
- Contract cost proposals.
The Boards tentatively confirmed their proposal in the 2011 ED that an asset manager’s performance-based incentive fees should be subject to the constraint on revenue recognized (as amended at the November 2012 joint Board meeting).
Contract Costs Proposals
The Boards tentatively decided that no changes should be made to the contract cost proposals in the 2011 ED for upfront commission costs incurred in some asset management arrangements.
The FASB also tentatively decided to retain the cost guidance for financial services—investment companies in paragraph 946-605-25-8.
Transfers of Assets That Are Not an Output of an Entity’s Ordinary Activities
The Boards tentatively decided to confirm the consequential amendments proposed in the 2011 ED for transfers of nonfinancial assets that are not an output of an entity’s ordinary activities. Those amendments would require an entity to apply the control and measurement requirements (including the constraint on revenue recognized) from the revenue model for the purposes of determining when the asset should be derecognized and the amount of consideration to be included in the gain or loss recognized on transfer.
The Boards also tentatively decided that the requirements in paragraphs 13–15 of the 2011 ED for determining whether a contract exists should apply to transfers of nonfinancial assets that are not an output of an entity’s ordinary activities.
Update on Outreach Regarding Disclosure and Transition Proposals
The staff provided the Boards with a summary of the feedback received on the Boards’ proposed disclosure and transition requirements in the 2011 ED. This feedback was received through comment letters, outreach, and workshops held in Japan, the UK, and the United States that included both preparers and users. No decisions were made. The issues will be discussed by the Boards in February 2013.
The Boards will continue redeliberations on the 2011 ED in February 2013.
Leases. The IASB and the FASB discussed questions that have arisen during the drafting of the revised Leases Exposure Draft about the identification of lease components and the classification of leases.
The Boards tentatively decided to include the following guidance in the revised Exposure Draft:
- How to identify separate lease components within a contract. The guidance would be similar to the proposed guidance in paragraphs 28 and 29 of the 2011 Revenue Recognition Exposure Draft about the identification of separate performance obligations. An entity would be required to account for each separate lease component as a separate lease.
- How to determine the nature of the underlying asset for classification purposes when one lease component contains the right to use more than one asset. The Boards tentatively decided that an entity should determine the nature of the underlying asset for classification purposes on the basis of the nature of the primary asset within the lease component.
- Is not required to allocate lease payments between the land and the building; and
- Would assess whether the lease term is for a major part of the remaining economic life of the building.
The Exposure Draft is planned for publication in the first half of 2013.
Insurance contracts. The FASB and the IASB continued their joint discussions of the proposed insurance contracts standard. The Boards discussed (1) the presentation of insurance contract revenue when there are changes in the pattern of expected claims and (2) the transition proposals for insurance contract revenue.
Allocation of Insurance Contract Revenue upon a Change in the Pattern of Coverage or Other Services
The Boards considered the allocation of insurance contract revenue for portfolios of insurance contracts accounted for by applying the building-block approach. The Boards tentatively decided that if there is a change in the expected pattern of coverage (or any other services) to be provided in the future, for a portfolio of insurance contracts, the remaining insurance contracts revenue should be reallocated prospectively to reflect the latest estimates of that pattern. An indicator of a change in the expected pattern of coverage could be a change in the expected pattern of future
Transition for Insurance Contract Revenue
The FASB tentatively decided that for contracts accounted for under the building-block approach that are in force at transition, the amount of the revenue to be recognized after transition should be determined as follows:
- For contracts for which the margin is determined through retrospective application, the insurance contact revenue remaining to be earned as of the date of transition should be determined retrospectively by using the assumptions applied in the retrospective determination of the margin.
- For contracts for which retrospective application is not practicable to determine the margin because it would require significant estimates that are not based solely on objective information, the insurance contract revenue remaining to be earned should be presumed to equal the amount of the liability for remaining coverage (excluding any investment components) recorded at the date of transition (plus accretion of interest).
- The liability for remaining coverage for these contracts at the date of transition should be presumed not to consist of any losses on initial recognition or of changes in estimate of future cash flows recognized in profit or loss after the inception of the contracts.
- The remaining insurance contract revenue to be earned should be limited to the total expected cumulative consideration for in-force policies in the portfolio (plus interest accretion and less investment component receipts).
- The remaining insurance contract revenue should be allocated to periods subsequent to the date of transition in proportion to the value of coverage (and any other services) that the insurer has provided for the period (that is, applying the pattern of expected claims and expenses and release of margin).
In addition, the IASB decided that when retrospective application is not practicable, an insurer should estimate the residual margin by maximizing the use of objective data. In other words, an insurer should not calibrate the residual margin to the insurance liability as it was measured using previous GAAP.
The FASB will continue its discussions on the project at its meeting on February 6, 2013. The IASB will continue its discussions on the project at its meeting on January 31, 2013, when it will consider sweep issues.