United States: On The Horizon For IFRS - February 19, 2013

IASB / FASB JOINT MEETING JANUARY 2013

IASB issues January 2013 joint IASB / FASB meeting highlights

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 January 20-31, 2013. The IASB met alone for certain sessions.

Highlights of the meeting are discussed below.

Conceptual Framework ‒ education session

The IASB held an education session on the Conceptual Framework project and discussed the definition of an asset and a liability, and presentation. No decisions were made.

The IASB will continue its discussions on the Conceptual Framework project at the February 2013 meeting.

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

Financial instruments: hedge accounting

In September 2012 a draft of the forthcoming hedge accounting requirements was released. At this meeting the IASB discussed the following issues raised in comments on the draft requirements.

Using "hypothetical derivatives" to measure the change in the value of the hedged item

The IASB discussed the effect of the application guidance in the draft on the use of hypothetical derivatives to calculate the change in the value of the hedged item when foreign currency risk is hedged using cross-currency swaps. A hypothetical derivative, as noted in the draft guidance, is the use of a derivative with terms that match the critical terms of the hedged item and is at the money at the time of designation of the hedging relationship.

The discussion focused on the nature of FX basis spreads and whether they can be considered to represent costs of hedging. The IASB noted that the appropriate use of a hypothetical derivative is to represent the hedged item rather than representing the perfect hedge. The IASB retained the notion of a hypothetical derivative, but tentatively decided to expand the notion of costs of hedging so as to accommodate FX basis spreads by:

• Expanding the existing draft requirement regarding the forward elements of forward contracts so that it also covers FX basis spreads
• Aligning the structure with that used for the accounting for the time value of options

The transition requirement for designation of "own use" contracts as at fair value through profit or loss

The IASB discussed the draft requirements at transition to the new hedge accounting guidance on the designation of own use contracts. The election of accounting as at fair value through profit or loss can only be made at the inception of a contract, and thus the transition to the new scope of IAS 39, Financial Instruments: Recognition and Measurement for own use contracts would in effect be prospective. This is because the election would not be available for contracts that already exist on the date on which an entity applies the new guidance for the first time. This would result in a prolonged phasing-in of the new accounting treatment, which would make comparative financial information less useful. The IASB tentatively decided to allow an entity to make the election for all of its own use contracts that are in existence on the date when the entity applies the new guidance for the first time on an all-or-none basis for all similar contracts. The IASB also tentatively decided to make a similar amendment to IFRS 1, First-time Adoption of International Financial Reporting Standards to allow for the same approach on transition to IFRS.

The scope of the draft requirements and the interaction with macro hedging activities

The IASB discussed the scope of the new hedge accounting model and its interaction with macro hedging activities. Entities are permitted to apply IAS 39 instead of the new hedge accounting model for a fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities, and only for such a hedge. Cash flow hedging relationships are to be accounted for under the new hedge accounting model even if they relate to macro hedging activities. The IASB considered whether IAS 39 should continue to be applied for some cash flow hedges and whether to clarify how the new hedge accounting model relates to hedging relationships that result from macro hedging activities.

The IASB tentatively decided:

• Not to include any additional guidance from IAS 39 or the accompanying implementation guidance in the new hedge accounting guidance
• To clarify that designations for hedge accounting purposes do not have to be the same as the actual risk management view but must be directionally consistent with it. This relates to designations of hedging relationships that do not exactly represent the actual risk management (proxy hedging)
• To expand the example of when to discontinue hedge accounting to clarify that discontinuation of a hedging relationship applies when the risk management objective changes
• To explain in the guidance that not carrying forward implementation guidance of IAS 39 does not mean that the IASB rejected it

The IASB also asked the staff to provide at a future meeting an analysis of how an election to apply IAS 39 instead of the new hedge accounting model might be designed and the consequences, however no decisions have yet been made.

Next steps

The IASB will discuss the staff analysis regarding the scope of the new hedge accounting model at a future meeting.

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

Financial instruments: hedge accounting (IFRS Interpretations Committee matters)

The IASB discussed an issue that was raised to the IFRS Interpretations Committee regarding hedge accounting. The issue is whether hedge accounting should be discontinued in a circumstance in which an over-the-counter (OTC) derivative, which has been designated as a hedging instrument, is novated from one counterparty to a central counterparty (CCP) following the introduction of new regulations.

Matters arising from the IFRS Interpretations Committee

The IASB discussed whether the current IAS 39 and IFRS 9, Financial Instruments should be amended to allow the novation of a hedging instrument to a central counterparty (CCP), as a result of legislation, to be considered a continuation of the existing hedging relationship and, if so, how to determine the scope of the amendment. The IASB tentatively decided:

• To issue an exposure draft for a limited-scope amendment to IAS 39 and IFRS 9 that would require a continuation of the existing hedging relationship in the circumstances raised in this issue
• To limit the scope of proposed amendments to circumstances in which:
• • A novation is required as a result of legislation, regulation, or similar statutory requirements
  • All parties to the original OTC derivative contract are affected in the same way by the novation
  • There are no changes to the terms of the original OTC derivative contract other than the change of counterparty to a CCP

The IASB also tentatively decided that the comment period for the exposure draft should be 30 days because of the urgency of this issue.

Next steps

The IASB directed the staff to prepare an exposure draft for publication in February 2013.

Insurance contracts (IASB-only meeting)

During an education session on the proposed Standard on insurance contracts, the IASB discussed the presentation of insurance contract revenue when there are changes in the pattern of expected claims, the transition proposals for insurance contract revenue, and how to measure insurance contracts that had been previously acquired in a business combination on transition. No decisions were made.

In addition, the IASB considered and reached certain tentative decisions on the following sweep issues for the proposed Standard on insurance contracts:

• Definition and scope
• Recognition
• Measurement
• Reinsurance
• Premium allocation approach
• Business combinations and portfolio transfers
• Implementation guidance

Next steps

The Board is near completion of its technical discussions needed to finalize the revised Exposure Draft on insurance contracts so at its February 2013 meeting, it will discuss transition for business combinations. In addition, the Board will be asked to decide on the timing for the comment period and for permission to ballot.

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

Insurance contracts

The IASB and the FASB continued their joint discussions of the proposed Standard on insurance contracts, specifically discussing the presentation of insurance contract revenue when there are changes in the pattern of expected claims and the transition proposals for insurance contract revenue.

Allocation of insurance contract revenue upon a change in the pattern of expected claims

If there is a change in the expected pattern of future claims, the Boards reached a tentative decision that the remaining insurance contract revenue would be reallocated prospectively to reflect the latest estimates of that pattern.

Transition for insurance contract revenue

The IASB tentatively decided that an insurer would estimate the amount of revenue to be recognized in future periods by estimating on transition the residual margin or initial loss included in the liability for the remaining coverage. An insurer would assume that in estimating that residual margin or loss, the risk adjustment at inception would be equal to the risk adjustment on transition.

In addition, the IASB decided that when retrospective application is impracticable, an insurer would estimate the residual margin by maximizing the use of objective data. That is, an insurer would not calibrate the residual margin to the insurance liability as it was measured using previous GAAP.

The FASB discussed contracts accounted for under the building block approach that are in force at transition and tentatively decided that the amount of the revenue to be recognized after transition would be determined as follows:

• For contracts for which the margin is determined through retrospective application: determine retrospectively the insurance contract revenue remaining to be earned as of the date of transition by using the assumptions applied in the retrospective determination of the margin
• For contracts for which retrospective application is impracticable for determining the margin because it would require significant estimates that are not based solely on objective information: presume that the remaining insurance contract revenue to be earned would equal the amount of the liability for the remaining coverage (excluding any investment components) recorded at the date of transition (plus accretion of interest)

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

Integrated reporting ‒ education session

The staff conducted an education session that provided the IASB with an overview of the Board's involvement with integrated reporting, in their capacities as members of the International Integrated Reporting Council (IIRC) and its working group. No decisions were made.

Subsequent to the Board meeting, on February 7, 2013, the IASB and the IIRC issued a Memorandum of Understanding that will allow the two organizations to deepen their cooperation on the IIRC's work to develop an integrated corporate reporting framework. The IIRC is a global coalition of market participants and other relevant stakeholders who are working towards the publication of the International Integrated Reporting Framework. The Consultation Draft of the Framework will be released on April 16, 2013. The Framework itself will be published in December 2013.

Leases

The Boards discussed several questions that arose during the drafting of the revised Exposure Draft on leases about the identification of lease components and the classification of leases and tentatively decided that:

• Identification of separate lease components within a contract: The proposed guidance for identifying separate lease components in a contract would be based on the proposed guidance about the identification of separate performance obligations in the revised revenue recognition Exposure Draft. Under that guidance, entity would account for a promised good or service as a separate performance obligation only if the promised good or service is both capable of being distinct because the customer can benefit from the good or service either on its own or with other resources readily available to the customer and distinct within the context of the contract because the good or service is not highly dependent on, or highly interrelated with, other promised goods or services in the contract.
  
  An entity would account for each separate lease component as a separate lease.
• Determining the nature of the underlying asset for classification purposes when a lease component contains the right to use more than one asset: An entity would determine the nature of the underlying asset for classification purposes based on the nature of the primary asset in the lease component.
• Applying the classification criteria to a property lease component that contains both land and a building: An entity would not be required to allocate the lease payments between the land and building, but, for classification purposes, it would assess whether the lease term is a major part of the remaining economic life of the building.

Next steps

The Boards plan to publish a revised Exposure Draft in the second quarter of 2013.

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

Post-implementation review: IFRS 8, Operating Segments

The IASB discussed the staff's papers on the following information received in response to the IASB's Request for Information, Post-implementation Review: IFRS 8, Operating Segments:

• Preliminary staff analysis of the 62 comment letters
• Outreach activities undertaken by IASB members and staff
• Findings of a review of academic literature to December 2012 on the effect of applying IFRS 8

The staff did not include any recommendations in the papers presented to the IASB and the IASB was not asked to make any technical decisions. However, the IASB reaffirmed the staff view that they had now received sufficient information for the IASB to report on its post-implementation review of IFRS 8 and requested that the staff prepare a feedback statement for presentation at a future IASB meeting.

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

Rate regulated activities (IASB-only meeting)

The IASB held an education session on a proposal for an interim IFRS for rate-regulated activities that would allow entities adopting IFRS to continue to use their local GAAP requirements for rate-regulated activities until the main project is completed. No decisions were made.

The IASB continued discussions on the proposed interim standard for rate-regulated activities, specifically discussing the following:

Scope

The IASB tentatively decided that:

• The scope of the proposed interim standard would be restricted to only those regulatory items that are not already dealt with in other IFRS.
• The type of rate regulation within the scope would be defined.
• The proposed interim standard would only be available for use by those entities that are within the scope of IFRS 1 when the proposed interim standard is first applied.

Recognition and measurement

The IASB tentatively decided to grant an exemption from the requirements of paragraph 11 of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors which requires an entity when establishing accounting policies for transactions not addressed in other IFRS to consider the guidance in The Conceptual Framework for Financial Reporting. This would allow entities to continue to use their existing accounting policies for recognition, measurement, and impairment under the proposed interim standard and that no changes to those existing policies would be permitted.

Presentation and disclosure

The IASB tentatively decided that regulatory balances would be shown as separate line items in each of the financial statements presented. The regulatory items would be segregated from non-regulatory items by subtotals and analysis of the amounts reported would be included in the notes.

Transition and consequential amendments

The IASB tentatively decided that the requirements of the proposed interim standard would be applied retrospectively, subject to the deemed cost exemption already included in IFRS 1.

Next steps

The staff will prepare an Exposure Draft based on the IASB's tentative decisions.

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

Revenue recognition

The FASB and the IASB continued redeliberating the 2011 Exposure Draft (ED), Revenue from Contracts with Customers, focusing on scope, repurchase agreements, impact of revenue recognition guidance on asset managers, transfers of assets that are not an output of an entity's ordinary activities, and update on outreach regarding disclosure and transition proposals.

Scope

The Boards tentatively affirmed the scope of the proposed revenue guidance in the 2011 ED, including the definition of a customer. The Boards also tentatively decided to clarify that (1) a collaborative arrangement as described in the 2011 ED would not be limited to the development and commercialization of a product, and (2) that a transaction with a collaborator or a partner would fall within the scope of the revenue guidance if the counterparty to the arrangement meets the definition of a customer. Finally, the Boards tentatively decided to clarify the application of the guidance on how to apply the proposed revenue standard when a contract with a customer is partially within the scope of the proposed revenue standard and partially within the scope of other standards.

Repurchase agreements

The Boards discussed the implementation guidance on repurchase agreements in the 2011 ED and tentatively decided that:

• A sale and leaseback transaction with a put option that has an exercise price less than the original sales price and for which the customer has a significant economic incentive to exercise the option would be accounted for as a financing transaction.
• The word unconditional would be removed from the implementation guidance for repurchase agreements in the final revenue standard.
• Processing costs would not be included in the repurchase price in determining the amount of interest in a product financing arrangement (that is, when an entity sells a product to another entity and later repurchases the product as part of a larger component for a higher price).

The Boards also tentatively decided to confirm the following implementation guidance on repurchase agreements in the 2011 ED:

• In a sale of goods to a customer with a guaranteed minimum resale value, the existence of the guarantee would not preclude the transfer of control of the product to the customer.
• In the sale of a good to a customer that is subsequently repurchased and leased to the customer's customer, the repurchase of the good after the customer obtains control of that good would not be considered a repurchase agreement. However, an entity would consider the principal versus agent considerations in determining whether the customer had obtained control.
• In a sales agreement that includes a call option, an entity would not be required to consider whether a significant economic incentive not to exercise a call option exists when determining if control has been transferred to the customer.

Impact of proposed revenue guidance on asset managers

The Boards tentatively decided that the performance-based incentive fees of asset managers would be subject to the constraint on the amount of revenue recognized and that certain fees would therefore not be recognized until they are no longer subject to significant reversal. The Boards also tentatively confirmed that the proposed contract costs guidance in the ED would apply to upfront commission costs in asset management arrangements.

The FASB also tentatively decided to retain the cost guidance in ASC 946-605-25-8, Financial Services – Investment Companies: Revenue Recognition.

Transfers of assets that are not an output of an entity's ordinary activities

The Boards tentatively affirmed the revised guidance on transfers of nonfinancial assets that are not part of an entity's ordinary activities. Those amendments would require an entity to apply the control and measurement requirements in the proposed ED, including the requirements on constraining revenue, in determining when to derecognize the asset and the amount of the consideration to be included in the gain or loss on the transfer.

The Boards also tentatively decided that the requirements in the proposed ED to determine when a contract exists would also be applied to transfers of nonfinancial assets that are not part of an entity's ordinary activities.

Update on outreach regarding disclosure and transition proposals

The Boards received a summary of the feedback received on the proposed disclosure and transition requirements in the 2011 ED from comment letters, outreach, and workshops that included both preparers and users of financial statements. The Boards did not make any decisions at this meeting. Further discussion is expected in February 2013.

Next steps

The Boards plan to continue redeliberations on the 2011 ED in February 2013.

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

Work plan

The work plan as of February 4, 2013 reflecting decisions made at this meeting is available on the IASB website.

See the IASB work plan for additional information.

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