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.

September 24, 2012 Joint FASB/IASB Videoconference Board Meeting

Insurance contracts. The FASB and the IASB continued their joint discussions on insurance contracts and discussed the accounting for acquisition costs in the pre-coverage period and transition requirements.

Acquisition Costs in the Pre-Coverage Period

The Boards tentatively decided that acquisition costs incurred before a contract’s coverage period begins should be recognized as part of the insurance contracts liability for the portfolio of contracts where the contract will be recognized once the coverage period begins.

Transition Requirements

Measurement

The Boards tentatively decided that when an insurer first applies the new insurance contracts standard, the insurer should:
  1. At the beginning of the earliest period presented:
     
    1. Measure the present value of the fulfilment cash flows using current estimates at the date of transition (that is, as of the earliest period presented).
       
    2. Account for the acquisition costs in accordance with the Board’s existing tentative decisions for acquisition costs and derecognize any existing balances of deferred acquisition costs.
       
  2. Determine the single or residual margin at the beginning of the earliest period presented, as follows:
     
    1. Determine the margin through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.
       
    2. If it is impracticable to determine the cumulative effect of applying that change in accounting principle retrospectively to all prior periods, the insurer should apply the new policy to all contracts issued after the start of the earliest period for which retrospective application is practicable (that is, apply retrospectively as far back as is practicable).
       
    3. For contracts issued in earlier periods for which retrospective application would normally be considered impracticable because it would require significant estimates that are not based solely on objective information, an insurer should estimate what the margin would have been had the insurer been able to apply the new standard retrospectively. In such cases, an insurer need not undertake exhaustive efforts to obtain objective information but should take into account all objective information that is reasonably available.
       
    4. If it is impracticable to apply the new accounting policies retrospectively for other reasons, an insurer should apply the general requirements of FASB Accounting Standards Codification® Subtopic 250-10/ IAS 8 that are relevant to situations in which there are limitations on retrospective application (that is, measure the margin by reference to the carrying value before transition).
The Boards asked the staff to consider developing a constraint or set of constraints on the estimated amount of the single or residual margin. In addition, the FASB Board asked the staff to explore a practical expedient that may allow insurers to determine the margin based on the definition of portfolios during the retrospective period.

Determining the Discount Rate

The Boards tentatively decided that, for those periods for which it would be impracticable to determine the discount rate that would reflect the characteristics of the liability, an insurer should determine the discount rate as follows:
  1. Calculate the discount rate in accordance with the standard for a minimum of three years and, if possible, determine an observable rate that approximates the calculated rates. If there is not an observable rate that approximates the calculated rate, then determine the spread between the calculated rate and an observable rate.
     
  2. Use the same observable reference point to determine the rate (plus or minus the spread determined in (1) if applicable) to be applied at the contract inception for contracts that were issued in the retrospective period.
  3. Apply the yield curve corresponding to that rate to the expected cash flows for contracts recognized in the retrospective period to determine the single or residual margin at contract inception.
     
  4. Use the rate from the reference yield curve reflecting the duration of the liability for recognizing interest expense on the liability.
     
  5. Recognize in other comprehensive income the cumulative effect of the difference between that rate and the discount rate determined at the transition date.
Transition Disclosures

The Boards tentatively decided that an insurer should make the disclosures required by Subtopic 250-10/IAS 8. In addition, an insurer should make the following more specific disclosures:
  1. If full retrospective application is impracticable, the earliest practicable date to which the insurer applied the guidance retrospectively
     
  2. The method used to estimate the expected remaining residual or single margin for insurance contracts issued before that earliest practicable date including the extent to which the insurer has used information that is objective and separately, the extent to which the insurer has used information that is not objective, in determining the margin
     
  3. The method and assumptions used in determining the initial discount rate during the retrospective period.
In addition, the FASB Board asked the FASB staff to consider whether all the disclosures in Subtopic 250-10 should be required.

The Boards also tentatively decided that an insurer need not disclose previously unpublished information about claims development that occurred earlier than five years before the end of the first financial year in which it first applies the new guidance. Furthermore, if it is impracticable when an insurer first applies the guidance to prepare information about the claims development that occurred before the beginning of the earliest period for which the insurer presents full comparable information, it should disclose that fact. (This decision confirms the proposal in the IASB’s ED.)

Next Steps

The IASB will continue its discussions on the Insurance Contracts project at an IASB meeting on September 26, 2012, when it will consider the accretion of interest on the residual margin, disclosures, and whether to publish a review draft or a Re-exposure Draft.

The FASB will continue its discussion on insurance contracts in the week beginning October 1, 2012.

The IASB and the FASB will continue joint discussions at their joint meeting in October 2012.


Revenue recognition. The IASB and the FASB discussed the following topics as they continued their redeliberations on the revised Exposure Draft, Revenue from Contracts with Customers (2011 ED):
  1. Constraining the cumulative amount of revenue recognized
     
  2. Collectibility, including accounting for contracts with customers that contain nonrecourse, seller-based financing.
Constraining the Cumulative Amount of Revenue Recognized

The Boards tentatively decided that, consistent with the proposal in the 2011 ED, an entity should evaluate whether to constrain the cumulative amount of revenue recognized if the amount of consideration to which an entity expects to be entitled is variable. Paragraph 53 of the 2011 ED identified examples of variable consideration. The Boards tentatively decided to clarify the meaning of variable consideration to indicate that the constraint should apply to a fixed price contract in which there is uncertainty about whether the entity would be entitled to that consideration after satisfying the related performance obligation.

Additionally, the Boards discussed the application of the constraint in the revenue proposals and asked the staff to perform further analysis and bring the topic back to a future meeting.

Collectibility

The Boards tentatively decided:
  1. To not reestablish a collectibility recognition threshold for contracts with customers that contain nonrecourse, seller-based financing
     
  2. To provide additional guidance in the standard on determining whether a contract with a customer exists based on the customer’s commitment to perform its obligations under the contract.
The Boards also discussed whether the revenue standard should have a collectibility recognition threshold for all other contracts with customers. IASB members expressed support for not including a collectability recognition threshold. The FASB will decide on that issue together with the issues relating to the presentation of revenue and impairment losses arising from contracts with customers. On those issues relating to the presentation of revenue and impairment losses, the Boards requested the staff to prepare illustrative examples of presentation alternatives for further discussion at the joint Board meeting on Thursday, September 27, 2012.