FASB

Board meetings held between October 15 and 18

All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

At joint meetings held on October 15, 17, and 18, the FASB and the IASB discussed their projects on insurance contracts and revenue recognition, while on October 15 and October 17, the FASB alone discussed issues related to insurance contracts and financial instruments. Highlights of these meetings are summarized below.

The FASB also met on October 19 to discuss classification and measurement issues related to the financial instruments project. Highlights from this meeting will be included in a future edition of On the Horizon.

Revenue recognition

The Boards tentatively reached the following decisions after discussing issues related to modifying contracts and measuring progress toward the complete satisfaction of a performance obligation.

Contract modifications

The Boards discussed applying the proposed guidance on modifying contracts to contract claims where changes in scope and price are either unapproved or in dispute, as described in FASB Accounting Standards Codification® (Codification or ASC) 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The Boards tentatively decided that contract modifications, including contract claims, would be considered approved when the modification creates or changes the enforceable rights and obligations of the parties to the contract. Approval could be made orally or in writing or could be implied by customary business practice.

The Boards also tentatively decided the following:

  • Modifications that result in only a change in transaction price would be accounted for similarly to contract modifications that result in a change in scope. If approved, this change in guidance would require eliminating paragraph 20 in the proposed 2011 Accounting Standards Update (ASU), Revenue from Contracts with Customers. Paragraph 20 requires a modification that results in only a change to the transaction price to be treated consistently with other changes in transaction price.
  • If the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification, then the transaction price available for allocation to the remaining separate performance obligations would equal the amount of consideration received from the customer but not yet recognized as revenue, plus the amount of any remaining consideration that the customer has promised to pay that has not been recognized as revenue.
  • If the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification and there is a subsequent change in the estimated transaction price, an entity would account for the modification prospectively, unless the change in transaction price relates to satisfied performance obligations. Amounts allocated to a satisfied performance obligation would be recognized either as revenue or as a reduction of revenue in the period the transaction price changes.

Measurement of progress toward complete satisfaction of a performance obligation

The Boards tentatively agreed that the units produced method of measuring progress toward satisfying a performance obligation could provide a reasonable proxy for the entity's performance if the value of any work-in-progress at the end of the reporting period is immaterial. In addition, a units delivered method could provide a reasonable proxy for the entity's performance in satisfying a performance obligation if both of the following conditions exist:

  • The value of any work-in-progress at the end of the reporting period is immaterial.
  • The value of any units produced but not yet delivered to the customer at the end of the reporting period is immaterial.

The Boards tentatively decided to clarify in the final standard that the adjustment to the input method for uninstalled materials, which is proposed in paragraph 46 of the 2011 ASU, is to ensure that the input method meets the objective of measuring progress in paragraph 38 of the ASU—that is, to depict an entity's performance. Paragraph 46 indicates that the best depiction of an entity's performance may be for the entity to recognize revenue for the transferred goods in an amount equal to the costs of those goods if the following two conditions are met at contract inception:

  • The cost of the transferred goods is significant relative to the total expected costs.
  • The entity procures the transferred goods from another entity and is not significantly involved in designing and manufacturing the goods.

Additionally, the Boards tentatively decided that if an entity selects an input method such as costs incurred to measure its progress, it would be required to make adjustments to that measure of progress if including some of those costs (for example, wasted materials) would distort the entity's performance under the contract.

Financial instruments: classification and measurement

In a FASB-only meeting, the Board made the tentative decisions noted below related to classifying and measuring financial instruments.

Measurement of certain investments held for doing business

The Board tentatively decided to retain certain specialized guidance that currently exists in the Codification in the following areas:

  • Investments in agricultural cooperatives of farmers
  • Certain exchange memberships of brokers and dealers in securities
  • Federal Home Loan Bank and Federal Reserve Bank stock of banks
  • National Credit Union Share Insurance Fund deposits of credit unions

The FASB also tentatively decided that the proposed impairment model for nonmarketable equity securities would apply to the following financial assets:

  • Investments in exchange memberships recognized as ownership interests that are held by brokers and dealers within the scope of ASC 940, Financial Services – Brokers and Dealers
  • Investments in Federal Home Loan Bank and Federal Reserve Bank stock that are held by depository and lending institutions within the scope of ASC 942, Financial Services – Depository and Lending

Disclosures for core deposit liabilities

The Board tentatively decided that public entities would not be required to disclose a present value amount for demand deposit liabilities in the notes to the financial statements, but that they would be required to provide on an annual basis the following disclosures, based on an appropriate level of disaggregation by significant types of core deposit liabilities:

  • The core deposit liability balance
  • The implied weighted-average maturity period
  • The estimated all-in-cost-to-service rate

However, nonpublic entities would be exempted from core deposit liability disclosure requirements.

Applying the contractual cash flow characteristics assessment to beneficial interests in securitized financial assets

The Board tentatively decided that if all of the following conditions are met, a beneficial interest in a securitized financial asset has contractual cash flow characteristics that are payments of principal and interest on the principal amount outstanding:

  • The contractual terms of the beneficial interest being assessed for classification (without looking through to the underlying pool of financial instruments) give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (for example, the interest rate is not linked to a commodity index).
  • The underlying pool of financial instruments has the following characteristics:
  • Contains one or more instruments with contractual cash flows that are solely payments of principal and interest on the principal amount outstanding.
  • Includes financial instruments that either
    • Reduce the cash flow variability in instruments with contractual cash flows that are solely payments of principal and interest on the principal amount outstanding and, when combined with those instruments, result in cash flows that are solely payments of principal and interest on the principal amount outstanding (for example, an interest rate cap or floor)
    • Align the cash flows of the tranches of beneficial interests with the cash flows of the pool of underlying instruments that have

contractual cash flows that are solely payments of principal and interest on the principal amount outstanding to address differences in any of the following:

(1) Whether the interest rate is fixed or floating

(2) The currency in which the cash flows are denominated, including inflation in that currency

(3) The timing of the cash flows

  • The exposure to credit risk in the underlying pool of financial instruments inherent in the tranche of beneficial interest is equal to or lower than the exposure to credit risk of the underlying pool of financial instruments (for example, this condition would be met if the underlying pool of instruments would lose 50 percent as a result of credit losses and under all circumstances the tranche would lose 50 percent or less).

The Board also tentatively decided that if the above criteria cannot be assessed upon initial recognition, the beneficial interest must be measured at fair value, with all changes in fair value recognized in net income. Additionally, if the underlying pool of financial instruments can change after initial recognition in such a way that the pool does not meet the conditions in the three bullets noted above, then the beneficial interest must be measured at fair value, with all changes in fair value recognized in net income.

Insurance contracts

Regarding insurance contracts, the Boards discussed issues related to the time value of money in the premium allocation approach, participating contracts, and presentation in the statement of comprehensive income. In its separate meeting, the FASB discussed certain transition matters.

Time value of money in the premium allocation approach

The Boards tentatively decided that the discount rate at contract inception would be used to measure the liability for the remaining coverage when the liability is accreted or discounted. Additionally, an entity would use the rate at the inception of the contract to determine the amount of the claims and interest expense in profit or loss if the liability for incurred claims is discounted.

Participating contracts

While no joint decisions were made on participating contracts, the FASB tentatively decided that changes in the insurance liability would be presented in profit or loss for contracts if both (1) the "mirroring" decisions do not apply and (2) the contractual obligation to the policyholder is directly linked to the fair value of the underlying items.

Under the "mirroring" approach, an entity measures and presents the part of the obligation that relates to the underlying items on the same basis that it used to measure and present those underlying items.

Presentation in the statement of comprehensive income

The Boards made tentative decisions related to the presentation of the following items in the statement of comprehensive income:

  • Premiums and claims
  • Non-claims fulfillment costs
  • Acquisition costs

In its separate meeting, the FASB tentatively decided that on adopting the final insurance contracts standard, an insurer would be permitted to designate and classify financial assets related to its insurance business either by legal entity or by internal designation.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandates numerous studies and regulatory rule changes. Initiatives that impact financial reporting are described in On the Horizon as information becomes available.

Proposed Rule issued on the capital, margin, and segregation requirements

The Dodd-Frank Act authorized the SEC to regulate "security-based" swaps and directed it to issue rules to shape a regulatory framework for such products. To implement certain portions of the Dodd-Frank Act, the SEC recently issued a proposed Rule, Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, which calls for the following measures:

  • Capital and margin requirements for security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs)
  • Segregation requirements for SBSDs
  • Notification requirements with respect to segregation for SBSDs and MSBSPs
  • Increased minimum net capital requirements for broker-dealers permitted to use the alternative internal model–based method for computing net capital

The comment period on this proposed Rule ends 60 days after publication in the Federal Register.

SEC staff issues Legal Bulletin on shareholder proposals

Staff Legal Bulletins are neither rules nor interpretations of the SEC. They represent interpretations and practices followed by the staffs of the Divisions of Corporation Finance, Market Regulation, or Investment Management on a given matter. The Commission has neither approved nor disapproved the content of these bulletins.

The SEC's Division of Corporation Finance recently issued Staff Legal Bulletin 14G (CF), Shareholder Proposals, which provides guidance on the application of Rule 14a-8 under the Securities Exchange Act of 1934.

The bulletin describes which parties qualify to submit a shareholder proposal under Rule 14a-8, explains how companies should notify parties that fail to provide proof of those qualifications, and provides guidance on the use of website addresses in proposals and supporting statements.

Comment letter issued

On October 15, the firm issued a comment letter in response to the proposed FASB Accounting Standards Update, Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income.

The comment letter is available on the firm's public website at grantthornton.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.