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.

October 3, 2012 FASB Board Meeting

Accounting for financial instruments: impairment. The Board discussed disclosures and related presentation issues related to the Current Expected Credit Loss (CECL) model.

Disclosures

The Board tentatively decided to require the following disclosures:
  1.  Expected credit loss calculations (disaggregated at the portfolio segment level):
     
    1. A discussion of the inputs and specific assumptions an entity factors into its estimate of expected credit loss, including a description of the reasonable and supportable forecasts about the future that affected their estimate.
       
    2. How the information above is developed and utilized in measuring expected credit losses.
       
  2. Allowance narrative disclosures (disaggregated at the portfolio segment level):
     
    1. A discussion of the changes in credit loss expectations and the reasons for those changes.
       
    2. A discussion of the changes in estimation techniques used and the reasons for the change.
       
    3. Reasons for a significant amount of write-offs.
       
  3. Financial asset roll forward (disaggregated at the portfolio segment level):
     
    1. A roll forward of the amortized cost balances of financial assets within the scope of the impairment model that are classified at amortized cost, from the beginning of the period to the end of the period.
       
    2. A roll forward of the amortized cost balances of financial assets within the scope of the impairment model that are classified at FV-OCI, from the beginning of the period to the end of the period.
       
  4. Use of the practical expedient for financial assets measured at FV-OCI (disaggregated at the portfolio segment level):
     
    1. The amortized cost balance of assets measured at FV-OCI that apply the practical expedient to not measure expected credit losses.
       
  5. Nonaccrual assets:
     
    1. The average recorded investment in nonaccrual debt instruments.
       
    2. The amount of interest income recognized during the period on nonaccrual debt instruments.
       
    3. The amortized cost of debt instruments on nonaccrual status as of the reporting date.
       
    4. The amortized cost of debt instruments on nonaccrual status for which there are no related expected credit losses as of the reporting date because the debt instrument is fully collateralized.
       
  6. Purchased credit-impaired assets:
     
    1. A reconciliation of PCI assets purchased in the current period, including the purchase price of those assets, the discount attributable to expected credit losses, the discount attributable to non-credit factors, and the par value of the assets.
       
  7. Collateral disclosures (disaggregated at the class level):
     
    1. A discussion of the quality of collateral securing an entity’s financial assets.
       
    2. An explanation of any changes in the quality of collateral, whether because of a general deterioration, a change in appraisal policies by the reporting entity, or some other reason.
The Board also tentatively decided to amend implementation guidance in paragraph 310-10-55-8 that provides information on the credit quality of financial assets.

Presentation

The Board tentatively decided that balance sheet and income statement amounts for purchased credit-impaired assets need not be presented separately from non-PCI assets.


[Revised 10/08/12] Accounting for financial instruments: classification and measurement.

Assessment of the Need for a Valuation Allowance against Deferred Tax Assets Related to Debt Instruments Classified and Measured at Fair Value though Other Comprehensive Income (FVOCI)

The Board decided that an entity should evaluate the need for a valuation allowance on deferred tax assets related to debt instruments classified and measured at FVOCI separately from its evaluation of other deferred tax assets.

Scope Considerations Related to Entities within Specialized Industries

The Board decided to retain the following specialized guidance in the relevant industry Topics in FASB Accounting Standards Codification:

Broker Dealers:
  1. Initial measurement guidance on (a) fail-to-deliver assets, (b) fail-to-deliver liabilities, (c) financial-restructuring transactions, and (d) proprietary trading securities
     
  2. Subsequent measurement guidance on (a) securities underlying suspense accounts, (b) shares that a broker-dealer is firmly committed to purchase but that have not yet been subscribed to by customers, (c) investments in the form of equity or financing provided to another entity in connection with financial-restructuring transactions, and (d) proprietary trading securities 
Investment Companies:
  1. Subsequent measurement guidance on investments in debt and equity securities
     
  2. Measurement guidance on (a) dividends and interest, (b) investment securities sold, (c) capital stock sold, and (d) other accounts receivable, such as receivables from related parties, including expense reimbursement receivables from affiliates and variation margin on open futures contracts
The Board decided to supersede the following specialized guidance in the relevant industry Topics in FASB Accounting Standards Codification. Therefore, such entities would apply the tentative model for classification and measurement to such instruments:

Depository and Lending Institutions
  1. Initial measurement guidance on debt-equity swaps
     
  2. Subsequent measurement guidance on (a) debt-equity swaps and (b) short sales of securities
Mortgage Banks
  1. Initial measurement guidance on (a) affiliated transactions and (b) loans held as long-term investments
     
  2. Subsequent measurement guidance on (a) loans held for sale and (b) securitizations of mortgage loans held for sale
The Board also decided that investment companies and brokers and dealers in securities would not be allowed to use the proposed practicability exception to fair value measurement for investments in nonmarketable equity securities.

The Board also affirmed its previous decision to exempt nonpublic investment companies and nonpublic brokers and dealers in securities from the requirement to provide the fair value of financial instruments classified and measured at amortized cost, either parenthetically on the face of the financial statements or in the notes to the financial statements.

Presentation and Disclosure

The Board decided that equity method investments held for sale would be presented in a separate line item on the face of the statement of financial position.

The Board agreed to require the following disclosures in notes to financial statements:

Financial Instruments Measured at Amortized Cost:
  1. An entity with financial instruments that are measured at amortized cost for which fair value information is presented parenthetically on the statement of financial position would disclose the following about the fair value information:
     
    1. The level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3).
       
    2. For fair value measurements categorized within Level 3 of the fair value hierarchy, quantitative information about the significant unobservable inputs used in the fair value measurement.
       
    3. For fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement.
       
    4. A description of the changes in the method(s) and significant assumptions used to estimate the fair value of financial instruments, including the reason(s) for making the change, if any, during the period.
       
    5. For fair value measurements categorized within Level 3 of the fair value hierarchy, a description of the valuation processes used by the reporting entity (including, for example, how an entity decides its valuation policies and procedures and analyzes changes in fair value measurements from period to period).
       
  2. An entity that has sold financial assets that were carried at amortized cost would disclose the following:
     
    1. The net carrying amount of the asset(s) sold
       
    2. The net gain or loss in accumulated other comprehensive income for any derivative that hedged the forecasted acquisition of the amortized cost security
       
    3. The related realized gain or loss on asset(s) sold
       
    4. The circumstances leading to the decision to sell the asset(s)
       
    5. The amortized cost basis, fair value, and the unrealized gain or loss on asset(s) subsequently identified for sale
Financial Assets classified at FVOCI
  1. An entity with financial assets classified at FVOCI would disclose the following:
     
    1. The amortized cost basis of the assets
       
    2. Fair value
       
    3. Total gains for financial assets with net gains in accumulated other comprehensive income
       
    4. Total losses for financial assets with net losses in accumulated other comprehensive income
       
  2. An entity that has sold financial assets classified at FVOCI would disclose:
     
    1. The proceeds from sales and the gross realized gains and gross realized losses that have been recognized in earnings as a result of those sales
       
    2. The amount of the net unrealized holding gain or loss on assets for the period that has been included in accumulated other comprehensive income and the amount of gains and losses reclassified out of accumulated other comprehensive income into earnings for the period 
Reclassification of Financial Assets Due to a Change in Business Model
  1. For financial assets that have been reclassified because of a change in an entity’s business model:
     
    1. The date of reclassification.
       
    2. A detailed explanation of the reason for the change in business model and a qualitative description of its effect on the entity’s financial statements.
       
    3. The amount reclassified into and out of each category
Other Disclosures
  1. Entities that apply the practicability exception to fair value measurement for investments in nonmarketable equity securities would disclose the following
     
    1. The carrying amount of equity securities that the entity concludes are nonmarketable
       
    2. The amount of any impairments and upward and downward adjustments, both annual and cumulative
       
    3. As of the date of the most recent statement of financial position, additional information (in narrative form) that provides sufficient information to allow financial statement users to understand the quantitative disclosures and the information that the entity considered (both positive and negative) in reaching the carrying amounts and upward or downward adjustments.
       
  2. An entity with nonrecourse financial liabilities would disclose:
     
    1. Qualitative information about the relationship between financial assets and the nonrecourse financial liabilities that will be used to settle them, and the line items where they are reported.
       
    2. The carrying amounts of the financial liabilities and the related financial assets that will be used to settle the nonrecourse financial liabilities
       
  3. Own credit risk (applicable to financial liabilities for which an entity has elected the fair value option):
     
    1. The amount of change, during the period and cumulatively, in the fair value of the financial liability that is attributable to changes in the instrument specific credit risk
       
    2. How the gains and losses attributable to changes in instrument specific credit risk were determined
       
    3. If a liability is settled during the period, the amount (if any) presented in other comprehensive income that was realized in net income at settlement.

Transfers and servicing: repurchase agreements and similar transactions. At previous Board meetings, the Board decided that repurchase agreements and similar transactions meeting all of the following characteristics would be accounted for as a secured borrowing:
  1. The agreement involves a transfer of existing financial assets at its inception.
     
  2. The agreement involves both a right and an obligation to repurchase the financial assets.
     
  3. The initial transfer and forward repurchase agreement involve the same counterparty.
     
  4. The agreement to repurchase the financial assets is entered into contemporaneously with, or in contemplation of, the initial transfer.
     
  5. The repurchase price is fixed or readily determinable.
     
  6. The financial assets specified under the forward repurchase agreement are identical to or substantially the same as the financial assets transferred at inception.
Under these decisions, secured borrowing accounting would be required for repurchase agreements and similar transactions that would be settled through repurchase of financial assets that are the same or substantially the same as those initially transferred or, for agreements in which the settlement date of the forward purchase agreement coincides with the maturity date of the transferred financial assets, an amount of cash equal to the redemption or settlement value of the initially transferred financial assets (or the difference between that value and the fixed repurchase price).

At today’s meeting, the Board considered but decided not to expand the six characteristics above and the requirement to apply secured borrowing accounting to include other types of transactions.

The Board also decided to eliminate the current accounting requirements for repurchase financings in Topic 860, Transfers and Servicing (formerly FASB Staff Position FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions). That is, the Board decided that a repurchase agreement or similar transaction with the six characteristics above would always be accounted for as a secured borrowing.


Insurance contracts. The FASB continued its discussions on insurance contracts by considering the measurement of the aggregate premium for the insurance component of an insurance contract.

The Board tentatively decided that an insurer should allocate an amount of consideration to the insurance component for each period, resulting in premium recognized in the statement of comprehensive income, equal to the (implicit or explicit) cost of insurance and other fees charged that period to the policyholder account balances. That amount may be calculated by deducting from total consideration the amount, if any, allocated that period to an investment component (and thus excluded from the premium presented in the statement of comprehensive income). The amount of consideration allocated to the investment component for each period may be determinable as follows:

+/- increase (decrease) in the amount of the cash surrender value (or other account balance the policyholder is entitled to through lapse, etc.) for the period

+ the amount of surrenders

+ the cash surrender value included in any death benefits paid

- interest credited

= consideration allocated to the investment component.

The Board may reconsider this decision at a later date in connection with the decision yet to be made about the premium recognition pattern.

Next Steps

The FASB and the IASB will continue joint discussions in the week beginning October 15, 2012.