IASB / FASB joint meeting December 2012

IASB issues December 2012 joint IASB / FASB meeting highlights

Key issues

At the December 2012 joint IASB / FASB meeting the following issues were discussed:

  • Accounting for macro hedging: The IASB continued their discussions on the proposed revaluation approach for macro hedging activity and its application to risks other than interest rate risk. No decisions were made.

  • Bearer biological assets: The IASB tentatively decided that the scope of the amendment to IAS 41, Agriculture would be restricted to bearer biological assets that are plants and that plants would be defined as bearer biological assets if they have no consumable attributes. In addition, the IASB decided to develop a cost-based model for bearer biological assets within the scope of this project.

  • Conceptual Framework: The IASB held education sessions on the difference between a liability and equity and measurement concepts. No decisions were made. The Board also considered a staff plan for the project.

  • Financial instruments: impairment: The IASB discussed a sweep issue related to transition and due process considerations necessary before deciding to move to balloting the proposed three bucket impairment model. The IASB also agreed to publish an Exposure Draft on the proposed three bucket impairment model with a 120-day comment period.

  • Insurance contracts: The IASB continued its discussions of the proposed Standard on insurance contracts and specifically discussed unlocking the residual margin, the residual margin for participating contracts, and impairment of reinsurance contracts. The IASB reached certain tentative decisions.

  • Rate-regulated activities: The IASB considered a project plan proposal for the Discussion Paper and whether that plan should include the development of an interim Standard. The IASB tentatively decided that a formal consultative group would be formed for the project. The IASB also tentatively decided to develop an Exposure Draft for an interim Standard.

  • Recognition of deferred tax assets for unrealized losses: The IASB tentatively decided that the accounting for deferred tax assets for unrealized losses on debt instruments should be clarified by a separate narrow-scope amendment to IAS 12, Income Taxes.

  • Recoverable amount disclosures for non-financial assets: The IASB tentatively decided on a proposed narrow-scope amendment to IAS 36, Impairment of Assets, to require disclosure of information about the recoverable amount of impaired assets, particularly if the recoverable amount is based on fair value less costs of disposal.

  • Revenue recognition: The Boards continued redeliberating the revised Exposure Draft, Revenue from Contracts with Customers, and tentatively decided to retain, clarify, or amend some of the proposals for the following topics:

  • Allocating the transaction price

  • Contract costs

  • Effect of the revenue recognition model on some bundled arrangements

  • Constraining the cumulative amount of revenue recognized ‒ licenses

  • Work plan: The work plan as of December 19, 2012, reflecting decisions made at the December 2012 meeting is available on the IASB website.

All decisions reached at IASB meetings are tentative and may be changed or modified at future meetings. Board decisions become final only after completion of a formal ballot to issue a Standard or Interpretation or to publish an Exposure Draft.

The International Accounting Standards Board has issued an IASB Update, which summarizes the joint IASB / FASB meeting that was held on December 13-17, 2012. The IASB met alone for certain sessions.

Highlights of the meeting are discussed below.

Accounting for macro hedging

The IASB continued their discussions on the proposed revaluation approach for macro hedging activity. Previously the IASB has considered the revaluation approach within the context of financial institutions' dynamic management of interest rate risk. At this meeting the IASB discussed the application of the proposed revaluation approach to risks other than interest rate risk, including commodity risk and foreign exchange risk.

The IASB staff presented their initial findings on the outreach they have undertaken to identify instances in which macro hedging activity for open portfolios is undertaken for risks other than interest rate risk, and to consider the relevance of a revaluation approach to that activity.

The proposed revaluation approach may be appropriate in accounting for some macro hedging activity undertaken for foreign exchange and commodity price risk. However, additional outreach is necessary to fully understand the issues involved, in particular within the context of the application of the new hedging requirements of IFRS 9, Financial Instruments.

The IASB staff noted that they would use the comment period of the upcoming Discussion Paper to obtain a better understanding of the potential application of the model for other risks. It was noted that once the model is described in full, it would be easier to obtain such input.

No decisions were made.

Next steps

The staff will continue drafting the Discussion Paper, for which the initial focus will be on documenting an overview of the revaluation model after consideration of the IASB discussions to date.

See the IASB project summary for more information on this project.

Bearer biological assets

The IASB discussed the definition of bearer biological assets, how bearer biological assets should be measured before they reach maturity, and how the produce growing on the bearer biological assets should be accounted for (e.g. fruit growing on a fruit tree).

Scope

The IASB tentatively decided that

  • The scope of the amendment to IAS 41, Agriculture, would be restricted to bearer biological assets that are plants.

  • Plants would be defined as bearer biological assets if they have no consumable attributes, which means they can only be used in the production or supply of agricultural produce (so there is no alternative use).

Application of a cost-based model

The IASB decided to develop a cost-based model for bearer biological assets within the scope of this project and also tentatively decided:

  • Before being placed into production, such assets would be measured at accumulated cost, similar to the accounting treatment for a self-constructed item of machinery before it is placed into production

  • The produce growing on bearer biological assets would be measured at fair value less costs to sell with changes recognized in profit and loss as the produce grows. This method would ensure that produce growing in the ground (e.g. carrots) and produce growing on a bearer biological asset (e.g. apples) would be accounted for consistently.

Next steps

The IASB will discuss the remaining issues including whether there is any need for measurement exemptions, unit of account, additional disclosure requirements if a cost model is used, and transitional provisions.

See the IASB project summary for more information on this project.

Conceptual Framework

The IASB held education sessions on the difference between a liability and equity and measurement concepts. No decisions were made.

The IASB also considered a plan for the Conceptual Framework project that was developed by the staff and will continue its discussions at the January 2013 meeting.

See the IASB project summary for more information on this project.

Financial instruments: impairment

The IASB discussed a sweep issue and due process considerations necessary before beginning the balloting process on the proposed three bucket impairment model. In addition the IASB staff asked for permission to begin the balloting process for the Re-exposure Draft.

The IASB tentatively decided to update the wording of one of the transition requirements to ensure consistency with the updated lifetime loss criterion. That is, if at transition an entity does not use the initial credit quality information for a financial asset, the entity would evaluate the financial asset only on the basis of whether the credit quality is below investment grade at the date of initial application. The IASB noted that the modification did not affect the substance of the proposed transition requirements. The IASB also observed that entities using delinquencies as an indicator of deterioration would use that information, rather than the investment grade criteria, as a basis for assessing lifetime losses at transition.

As it relates to the due process requirements, the IASB agreed that the appropriate requirements to begin the balloting process had been met. The IASB intends to conduct fieldwork during the comment period by working with a small number of institutions in different jurisdictions to assess and illustrate the benefits of the proposed expected loss impairment model and to solicit views on the cost and operability of the proposals.

The IASB also agreed to publish an Exposure Draft on the proposed three bucket impairment model with a 120-day comment period.

Next steps

The IASB will proceed with the balloting process and plans to publish the Exposure Draft for comment in first quarter of 2013.

See the IASB project summary for more information on this project.

Insurance contracts

The IASB continued its discussions of the proposed Standard on insurance contracts and specifically discussed unlocking the residual margin, the residual margin for participating contracts, and impairment of reinsurance contracts. The IASB also received an update on the FASB-only meetings that were held in November 2012.

Unlocking the residual margin

The IASB tentatively decided that the residual margin would be unlocked for differences between current and previous estimates of cash flows relating to future coverage or other future services.

The residual margin for participating contracts

The IASB tentatively decided that

  • The residual margin for participating contracts would not be adjusted for changes in the value of the underlying items as measured using IFRS.

  • The constraint on recognizing revenue that is proposed in the revenue recognition project would not be applied to the allocation of the residual margin for insurance contracts, for both participating and non-participating contracts.

Impairment of reinsurance contracts

The IASB tentatively decided that a cedant would account for the risk of non-performance that is associated with changes in expected credit losses as follows

  • At inception of the contract: the residual margin would be determined by the cedant by reflecting in the expected fulfillment cash flows all the expected effects of non-performance, including those associated with expected credit losses

  • After inception of the contract: the cedant would recognize in profit or loss changes in cash flows that result from changes in expected credit losses. Accordingly, a cedant would not apply the proposals of the impairment project that are being developed by the IASB to reinsurance contracts.

Next steps

The IASB will continue its joint discussions with the FASB at their meeting in January 2013.

See the IASB project summary for more information on this project.

Rate-regulated activities

The IASB continued its discussions on the rate-regulated activities project. The IASB considered a project plan proposal for the Discussion Paper and whether that plan should include the development of an interim Standard for rate-regulated activities.

The IASB discussed the issues to be addressed in the Discussion Paper. The Discussion Paper is expected to be issued in the second half of 2013. The IASB tentatively decided to form a consultative group for the project due to the specialized nature of the subject and the need for industry expertise.

As it related to the development of an interim Standard, the IASB tentatively decided to develop an Exposure Draft for an interim Standard that will:

  • Permit “grandfathering” of existing recognition and measurement policies for those entities that currently recognize regulatory assets or regulatory liabilities in accordance with their local accounting requirements

  • Require that such regulatory amounts be identified as separate regulatory accounts and be presented as separate line items in the financial statements with additional disclosure requirements

  • Contain similar impairment test requirements to those required by IFRS 6, Exploration for and Evaluation of Mineral Resources

The IASB emphasized that the interim Standard would not delay the completion of the main project nor influence the outcome of that project. The interim Standard is expected to be issued during the first half of 2013.

Next steps

The staff will prepare an initial draft of an interim IFRS for the IASB to consider at their meeting in January 2013.

See the IASB project summary for more information on this project.

Recognition of deferred tax assets for unrealized losses

At the request of the IFRS Interpretations Committee, the IASB discussed options to clarify the accounting for deferred tax assets for unrealized losses on debt instruments measured at fair value.

The May 2012 Exposure Draft, Annual Improvements to IFRSs 2010-2012 Cycle, included a proposed amendment to IAS 12, Income Taxes, to address the accounting for deferred tax assets for unrealized losses on debt instruments. Respondents to that Exposure Draft raised questions about the proposed amendment. In November 2012, the IFRS Interpretations Committee discussed the respondents’ questions and concluded that several issues needed to be resolved to clarify the accounting for deferred tax assets for unrealized losses on debt instruments. However the Committee could not decide on an appropriate path forward. Therefore, the Committee decided to consult with the IASB on how to proceed.

In December 2012, the IASB tentatively decided that the accounting for deferred tax assets for unrealized losses on debt instruments would be clarified by a separate narrow-scope amendment to IAS 12. The IASB noted that the issue of whether an entity can assume that it will recover an asset for more than its carrying amount when estimating probable future taxable profits is beyond clarifications and corrections (that is, a project with a broader scope than Annual Improvements). The IASB also noted that a narrow-scope amendment to IAS 12 would allow the Board to consider whether it should achieve an outcome for deferred tax accounting that would be consistent with the one that was recently discussed by the FASB for the same type of debt instruments.

The IASB also agreed with the IFRS Interpretations Committee that clarifying this issue will require addressing the question of whether an unrealized loss on a debt instrument measured at fair value gives rise to a deductible temporary difference when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all the contractual cash flows.

Next steps

The staff will prepare an analysis of the different approaches to account for this issue for discussion at a future IFRS Interpretations Committee meeting.

See the IASB project summary for more information on this project.

Recoverable amount disclosures for non-financial assets

The IASB discussed a proposed narrow-scope amendment to IAS 36, Impairment of Assets, to require disclosure of information about the recoverable amount of impaired assets, particularly if the recoverable amount is based on fair value less costs of disposal.

The IASB made the following tentative decisions to clarify that the requirement to disclose the recoverable amount would be intended only for impaired assets and not for each cash-generating unit for which the carrying amount of goodwill is significant:

  • To remove the requirement in paragraph 134 of IAS 36 to disclose the recoverable amount of each cash-generating unit for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit is significant in comparison with the entity's total carrying amount of goodwill or intangible assets with indefinite useful lives

  • To amend paragraph 130 of IAS 36 to require an entity to disclose the recoverable amount of an individual asset (including goodwill) or cash-generating unit for which the entity has recognized or reversed a material impairment loss during the period

  • To include in paragraph 130 of IAS 36 the requirement to disclose information about the measurement of fair value less costs of disposal of an individual asset (including goodwill) or cash-generating unit for which the entity has recognized or reversed a material impairment loss during the period

The IASB also noted that one of the proposed amendments to paragraph 130(f) of IAS 36 overlaps with a proposed amendment to IAS 36 that was included in the May 2012 Exposure Draft, Annual Improvements to IFRSs 2010–2012 Cycle. That proposed amendment would require an entity to disclose the discount rate used in a present value technique when measuring fair value less costs of disposal. Such information is currently required if an impaired asset's recoverable amount is based on value in use. The IASB tentatively decided to include that proposal into the proposed amendments to paragraph 130 of IAS 36 for this project, rather than address it in the Annual Improvements project.

In addition, the IASB tentatively decided that the proposed amendments would be applied retrospectively for annual periods beginning on or after January 1, 2014 with earlier application permitted. Comparative information would not be required if an entity decides to apply these amendments early. The IASB also tentatively decided on a 60-day comment period to ensure that the amendments would be finalized before entities publish their half-year results.

Next steps

The IASB expects to publish an Exposure Draft in January 2013.

See the IASB project summary for more information on this project.

Revenue recognition

The IASB and the FASB continued redeliberating the revised Exposure Draft, Revenue from Contracts with Customers (the 2011 ED), at the December 2012 meeting. The following topics were discussed:

  • Allocating the transaction price

  • Contract costs

  • Effect of the revenue recognition model on some bundled arrangements

  • Constraining the cumulative amount of revenue recognized ‒ licenses

Allocating the transaction price

The Boards reached a tentative decision to retain the residual approach as a technique in allocating the transaction price to separate performance obligations (Step 4 of the proposed revenue model) to estimate the stand-alone selling price of a good or service when that stand-alone price is highly variable or uncertain.

The Boards also tentatively clarified that the residual approach may be used for two or more goods or services with highly variable or uncertain stand-alone selling prices if one or more other goods or services in the contract do not have highly variable or uncertain stand-alone selling prices. In addition, a combination of techniques could be used when estimating stand-alone selling prices of two or more goods or services with highly variable or uncertain stand-alone selling prices, as follows:

  • First, an entity would apply the residual approach to estimate the aggregate stand-alone selling prices of all goods and services with highly variable or uncertain selling prices.

  • Then, it would utilize another technique to allocate that aggregate stand-alone selling price to those individual goods and services.

The Boards tentatively clarified that an entity would apply the criteria in paragraph 75 of the 2011 ED for allocating a discount to one or some performance obligations in the contract before using a residual approach to estimate a stand-alone selling price for a good or service with a highly variable or uncertain stand-alone selling price. Also, contingent consideration could be allocated to more than one distinct good or service.

Contract costs

The Boards tentatively decided to retain the proposed guidance that an entity would be required to recognize the incremental costs of obtaining a contract as an asset if an entity expects those costs to be recoverable. However, the Boards also tentatively agreed to retain the practical expedient that would allow an entity to expense, rather than capitalize, those costs when incurred if the asset’s amortization period would have been one year or less.

Effect of the revenue recognition model on some bundled arrangements

The Boards discussed possible amendments to the proposed model for bundled arrangements that include the transfer to customers of both services and a distinct good related to those services, as is commonly encountered in telecommunications and satellite television contracts. The Boards tentatively decided not to make any amendments to the proposed model for bundled arrangements, in particular the proposals for (a) allocating the transaction price and (b) accounting for the costs of obtaining a contract.

The Boards also tentatively decided to clarify that the portfolio approach described in paragraph 6 of the 2011 ED could be utilized for bundled arrangements (that is, for a portfolio of contracts with similar characteristics, if the entity reasonably expects that the results would not materially differ from applying the proposed guidance to each of the contracts or performance obligations).

Constraining the cumulative amount of revenue recognized ‒ licenses

The Boards tentatively decided to delete paragraph 85 of the 2011 ED, which would have precluded revenue recognition for intellectual property licensed to a customer if consideration paid to the licensor varies based on the customer’s subsequent sales (for example, a sales-based royalty). Instead, the Boards tentatively agreed that these licenses would be subject to the same proposed general principles for constraining revenue (as revised by the Boards' tentative decisions in November 2012).

One proposed indicator in those general principles describes factors outside an entity’s influence that may constrain revenue from being recognized. The Boards tentatively decided to refine this indicator to include the actions of third parties (for example, the customer’s subsequent sales) as a factor that might constrain revenue. Accordingly, when a license arrangement begins and the licensor estimates the minimum amount of revenue to which it expects to be entitled, in some cases the entity may conclude its best estimate is zero.

Next steps

The Boards have completed their substantive redeliberations of the recognition and measurement principles in the 2011 ED. At a future meeting, the Boards will redeliberate the remaining topics, including scope, disclosure, and transition.

See the IASB project summary for more information on this project.

Work plan

The work plan as of December 19, 2012, reflecting decisions made at this meeting, is available on the IASB website.

See the IASB work plan for additional information.

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