United States: On The Horizon For IFRS - November 20, 2012

IASB / FASB JOINT MEETING OCTOBER 2012

IASB issues October 2012 joint IASB / FASB meeting highlights

Key issues

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

  • Due process papers: The IASB discussed the following forthcoming Exposure Drafts and agreed that they complied with the due process requirements to date:
    • Equity method of accounting: accounting for the share of other net asset changes (proposed amendments to IAS 28)
    • Annual Improvements to IFRSs 2011-2013 cycle
  • The IASB decided that the proposed amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets relating to revenue-based depreciation would be removed from the Annual Improvements project and be published in a separate Exposure Draft with a comment period of 120 days. The remainder of the Annual Improvements will continue to a comment period of 90 days.
  • Financial instruments: Accounting for macro hedging: The IASB continued their discussion on the proposed revaluation model for interest rate portfolio hedging activity as it relates to credit risk, floating leg considerations, loan commitments, and pipeline trades. No decisions were made by the IASB.
  • Financial instruments: Classification and measurement: The IASB staff received feedback about interest rates in a regulated environment and whether financial instruments priced in that environment would still qualify for a measurement category other than FVPL. The IASB staff plans to gather more information on the issue through the exposure draft process. No decisions were made by the IASB.
  • Financial instruments: Impairment (IASB-only session): The IASB staff held discussions with investors, analysts, regulators, auditors, and preparers to better understand whether the three bucket impairment model would be operational and whether that model or the FASB's alternative model would provide more useful information. At this meeting, the IASB staff presented a summary of the feedback received. No decisions were made by the IASB.
  • IAS 8 ‒ effective dates and transition methods: The IASB decided to stop the balloting process for the proposed amendments to IAS 8 and to remove the project to make narrow-scope amendments to IAS 8 from the current work plan. The IASB staff will continue to gather information about how changes in accounting policy are being presented in financial statements.
  • IFRIC Update: The IASB was informed of a request for guidance on the meaning of "expiry" within the context of accounting for the derecognition of financial assets. The IASB noted the request.
  • Insurance contracts (IASB-only session): In an education session the IASB discussed the presentation approach in the statement of comprehensive income for premiums and claims, non-claims fulfillment costs, and acquisition costs. No decisions were made. In addition, the IASB met to discuss financial instruments with discretionary participation features, transition requirements, effective date, comparative information, and early application. The IASB reached certain tentative decisions.
  • Insurance contracts (IASB-FASB joint session): The IASB and the FASB continued their joint discussions on the insurance contracts project where they discussed:

    • The time value of money in the premium allocation approach
    • The presentation of changes in the liability for participating contract
    • How premiums and claims, non-claims fulfillment costs, and acquisition costs should
    • be presented in the statement of comprehensive income

  • The Boards reached certain tentative decisions.
  • Revenue recognition: The IASB and the FASB continued redeliberating the 2011 Exposure Draft, Revenue from Contracts with Customers, and reached tentative decisions on the following topics:
    • Contract modifications
    • Measuring progress toward complete satisfaction of a performance obligation
    • Work plan: The work plan as of October 25, 2012, reflecting decisions made at the October 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 October 15-19, 2012. The IASB met alone for certain sessions.

Highlights of the meeting are discussed below.

Due process papers

The IASB discussed two forthcoming Exposure Drafts.

Equity method of accounting: accounting for the share of other net asset changes (proposed amendments to IAS 28)

All members present agreed that the IASB has complied with the due process requirements to date in preparation for the publication of the Exposure Draft on the equity method of accounting: accounting for the share of other net asset changes (proposed amendments to IAS 28).

Annual Improvements to IFRSs 2011-2013 cycle

All members present agreed that the IASB has complied with the due process requirements to date in preparation for the publication of the Exposure Draft for the Annual Improvements to IFRSs 2011-2013 cycle. Subject to consensus on the final wording of the proposed amendments, no IASB members intend to dissent.

Although the IASB's due process requires only a 90-day comment period for Annual Improvements, the staff recommended a comment period of not less than 120 days since they were concerned about the potential effect of one of the proposed amendments (proposed amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets relating to revenue-based depreciation) on one particular industry.

The IASB noted the concerns and decided that:

  • The proposed amendments to IAS 16 and IAS 38 relating to revenue-based depreciation would be removed from the Annual Improvements project and be published in a separate Exposure Draft with a comment period of 120 days.
  • The remaining issues would be exposed in the form of Annual Improvements with a comment period of 90 days.

Financial instruments: Accounting for macro hedging

The IASB continued their discussion on the proposed revaluation model for interest rate portfolio hedging activity.

Credit risk and floating leg considerations (Steps 8 and 9)

The IASB discussed the treatment of changes in fair value of hedging derivatives with respect to credit risk and floating legs within the proposed revaluation model.

Under the revaluation model hedging derivatives would continue to be measured at Fair Value through Profit or Loss (FVPL), in accordance with IFRS 9, Financial Instruments. Measuring the fair value of derivatives is governed by IFRS 13, Fair Value Measurement, which would include fair value fluctuations resulting from changes in the derivatives' floating legs and credit risk.

Treatment of unrecognised items: loan commitments and pipeline trades

The IASB discussed whether items that are not recognized in the statement of financial position, such as loan commitments or items that have not yet been executed (e.g. pipeline trades, which are anticipated trades of financial instruments offered for a period of time at fixed rates) could be integrated into the accounting model for macro hedging on the basis of a net portfolio revaluation approach for interest rate risk.

The IASB considered the following aspects:

  • Whether including pipeline trades in the hedged risk position would be consistent with the existing Conceptual Framework for Financial Reporting and whether any Discussion Paper on accounting for macro hedging would overlap with the discussion of the project on the Framework;
  • The economic and legal boundary between existing and non-existing items
  • Accounting implications and alternatives when pipeline trades are prohibited from being included in the hedged risk position

No decisions were made by the IASB.

Next steps

The IASB staff will start to consider the application of the proposed revaluation model to risks other than interest rate risk. The staff will also begin drafting an overview of the revaluation model after consideration of the IASB discussions to date, which may be included in a Discussion Paper on Accounting for Macro Hedging.

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

Financial instruments: Classification and measurement

The IASB staff received feedback about interest rates in a regulated environment and whether financial instruments priced in that environment would still qualify for a measurement category other than FVPL. The IASB staff plans to gather more information on the issue through the exposure draft process. The Exposure Draft will include the proposed clarification about a modified relationship between principal and the consideration for the time value of money and credit risk, but will not suggest any further proposed amendments to the contractual cash flow characteristics assessment.

This session was for information purposes only. No decisions were made.

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

Financial instruments: Impairment (IASB-only session)

Background

In July 2012, the IASB and the FASB finished deliberating all joint matters in developing the general framework of a three bucket impairment model. The proposed impairment model would distinguish between assets with a 12-month allowance balance and those with a life time expected loss balance. Thus, the impairment model is now essentially a "two-bucket model". However the IASB continues to refer to this as the three bucket impairment model as there is also a third stage of deterioration (i.e. incurred losses) which would trigger a change in the way interest revenue is presented.

In response to feedback received from U.S. constituents about that model, in August 2012 the FASB directed their staff to explore an alternative expected loss model that:

  • Does not use a dual-measurement approach
  • Reflects all credit risk in the portfolio at each reporting date

The IASB staff held discussions with investors, analysts, regulators, auditors, and preparers to better understand whether the three bucket impairment model would be operational and whether that model or the FASB's alternative model would provide more useful information.

Current discussions

The staff reported that a majority of outreach participants, including users of financial statements, support an impairment model that distinguishes between assets that have deteriorated in credit quality and those that have not. Additional clarification regarding the criteria to be used to determine when a lifetime loss is measured and how to apply the criteria to retail loans was requested and some participants noted that their support for the approach was dependent on whether the benefits of the information provided outweighed the costs of determining which assets have deteriorated. For example, if assets move too readily to a lifetime loss measurement (such as on the basis of minor credit deterioration) the costs of the model might not be justified. The IASB asked the staff to explore ways to address those concerns and to suggest clarifications to the criteria.

Some questioned the conceptual merits of the model in the absence of convergence. They would prefer the IASB to reconsider the proposals in the 2011 Supplementary Document, Financial Instruments: Impairment (but using the Time Proportional Allocation approach without the floor for the good book), or the expected cash flow model in the original IASB Exposure Draft, Financial Instruments: Amortised Cost and Impairment. The IASB prefers the three-bucket impairment model but asked the IASB staff to prepare a paper summarizing the feedback on the Supplementary Document and why the IASB rejected that approach in favor of the three-bucket impairment model.

Next steps

At its November 2012 meeting, the IASB will discuss possible clarifications to the criteria for recognition of lifetime expected losses.

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

IAS 8 ‒ effective dates and transition methods

Background

One of the requirements in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors is for an entity to disclose, to the extent practicable, the amount of the adjustment on the initial application of an IFRS for the current period and each prior period for each financial statement line affected (IAS 8.28(f)). At the May 2012 meeting, the IASB reached a tentative decision to remove the requirement in paragraph 28(f) of IAS 8 related to a change in accounting policy that results from a change in an IFRS. Instead, the IASB would decide on a case-by-case basis whether additional disclosures are needed.

However, during the balloting process, the IASB staff identified new matters that they decided should be brought back to the IASB for consideration in a public meeting. During the interim, the IASB has agreed to special transition requirements for IFRS 9, Financial Instruments, thus making the need for amendments to IAS 8 less urgent.

Current discussions

At the October 2012 meeting, the IASB decided to stop the balloting process for the proposed amendments to IAS 8 and to remove the project to make narrow-scope amendments to IAS 8 from the current work plan.

The IASB staff will continue to gather information about how changes in accounting policy are being presented in financial statements. Comparability, which is the main purpose of the IAS 8 requirements, will be considered more generally in the development of the presentation and disclosure chapters in the Conceptual Framework project.

The IASB staff will be responsible to assess and present to the IASB on a case-by-case basis whether to create more specific transition requirements for a particular IFRS or amendment.

IFRIC Update

The IASB received an update from the September 2012 meeting of the IFRS Interpretations Committee. The IASB was informed of a request for guidance on the meaning of "expiry" within the context of accounting for the derecognition of financial assets. This request was included in the feedback on the IFRS Interpretations Committee's discussion of derecognition of financial instruments upon modification, and on which it finalized an agenda decision at its September 2012 meeting. The IASB noted the request.

Insurance contracts (IASB-only session)

The IASB held an education session to continue to discuss the proposed Standard on insurance contracts (proposed Standard), including the presentation approach in the statement of comprehensive income for premiums and claims, non-claims fulfillment costs, and acquisition costs. No decisions were made.

In addition, the IASB met to discuss financial instruments with discretionary participation features, transition requirements, effective date, comparative information, and early application.

Financial instruments with discretionary participation features

For a financial instrument with a discretionary participation feature, the IASB tentatively decided to adapt the following contract boundary criteria and recognition criteria:

  • The contract boundary for a financial instrument with a discretionary participation feature is the point at which the contract no longer confers substantive rights on the contract holder and certain conditions are met.
  • An entity would recognize a financial instrument with a discretionary participation feature only when the entity becomes a party to the contractual provisions of the instrument.

Transition requirements

The IASB made the following tentative decisions related to transition requirements:

  • An insurer would follow the reclassification guidance in IFRS 9, Financial Instruments except that an insurer would be:

    • Permitted to designate eligible financial assets under the fair value option where new accounting mismatches are created
    • Required to revoke previous designations under the fair value option where the accounting mismatch no longer exists
    • Permitted to newly elect to use other comprehensive income for the presentation of changes in the fair value of some or all equity instruments that are not held for trading, or revoke a previous election if applicable (following earlier application of IFRS 9)
  • An insurer would determine the residual margin on transition, assuming that all changes in estimates of cash flows between initial recognition and the beginning of the earliest period presented were already known at initial recognition.

In addition, the IASB tentatively decided that:

  • The proposed transition requirements for insurers that already apply IFRS would also apply to first-time adopters of IFRS.
  • The proposed transition requirements would not include explicit guidance on redesignation of property, plant and equipment and investment property on transition.

Effective date, comparative financial statements and early application

The IASB stated its intention to allow approximately three years between the date of publication of the final insurance contracts Standard (final Standard) and the mandatory effective date. In addition: the IASB tentatively decided:

  • To permit entities to apply the final Standard before the mandatory effective date
  • To require entities to restate comparative financial statements on first application of the final Standard

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

Insurance contracts (IASB-FASB joint session)

The IASB and the FASB continued their joint discussions on the insurance contracts project and discussed:

  • The time value of money in the premium allocation approach
  • The presentation of changes in the liability for participating contract
  • How premiums and claims, non-claims fulfillment costs, and acquisition costs should be presented in the statement of comprehensive income

Time value of money in the premium allocation approach

The Boards tentatively decided that the discount rate at inception of the contract would be used to measure the liability for remaining coverage, when it is accreted or discounted.

The Boards discussed how the decision to present in Other Comprehensive Income (OCI) changes in the insurance liability arising from changes in discount rates would apply to the presentation of the liability for incurred claims for contracts to which the premium allocation approach is applied. The Boards tentatively decided that when the liability for incurred claims is discounted, an insurer would use the rate at the inception of the contract to determine the amount of the claims and interest expense in profit or loss. Going forward that rate is locked in.

Participating contracts

For contracts with participating features for which the mirroring approach would apply, the Boards noted that the mirroring decision would take precedence over the tentative decision that insurers should present in OCI changes in the insurance contract liability arising from the effect of changes in the discount rate. As a result, insurers would present changes in the insurance contract liability in the statement of comprehensive income that are consistent with the presentation of changes in the directly linked underlying items. No decisions were made.

The FASB tentatively decided that, for contracts where the mirroring decisions do not apply and where the contractual obligation to the policyholder is directly linked to the fair value of the underlying items, changes in the insurance liability would be presented in profit or loss.

Presentation in the statement of comprehensive income

Premiums and claims

The Boards tentatively decided that premiums and claims presented in an insurer's statement of comprehensive income would be determined by applying an earned premium presentation.

The FASB also asked the FASB staff when drafting to consider the inclusion of application guidance about other approaches that may meet the earned premium principle, noting that the description of the approach within the Agenda Papers was too prescriptive.

Non-claims fulfillment costs

The Boards tentatively decided that in an earned premium presentation:

  • The portion of premium allocated to cover non-claims fulfillment costs would be equal to the originally expected non-claims fulfillment costs included in the measure of the building block liability.
  • The premium allocated to cover non-claims fulfillment costs would be included in earned premium in the periods in which the costs are expected to be released from the liability for remaining coverage.
  • The amounts presented as expenses would be the actual costs incurred or be added to the liability for incurred claims in the period.

Acquisition costs

Consistent with a decision previously made by the FASB, the IASB tentatively decided that the cash flows relating to acquisition costs would be recognized in the statement of comprehensive income over the coverage period.

The FASB tentatively decided that an insurer would disaggregate in the statement of financial position the insurance contracts liability into the expected cash flows to fulfill the insurance obligation and the margin. Acquisition costs would be reported as part of the margin.

The Boards tentatively decided that acquisition costs would be recognized in the statement of comprehensive income in a way that is consistent with the proposed allocation of the residual / single margin. In other words:

  • The IASB would have the insurer recognize the acquisition costs in a way that is consistent with the pattern of transfer of services provided under the contract.
  • The FASB would have the insurer recognize the acquisition costs as it satisfies its performance obligations to stand ready to compensate the policyholder if a specified uncertain future event adversely affects the policyholder, which is when the insurer is released from exposure to risk as evidenced by a reduction in the variability of cash outflows. Consequently, the margin recognized would be grossed up for the amount of acquisition costs recognized.

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

Revenue recognition

The IASB and the FASB continued redeliberating the 2011 Exposure Draft, Revenue from Contracts with Customers, with a discussion of the following topics:

  • Contract modifications
  • Measuring progress toward complete satisfaction of a performance obligation

Contract modifications

The Boards discussed applying the proposed guidance on contract modifications that current IFRS and U.S. GAAP guidance describe as contract claims in which changes in scope and price are either unapproved or in dispute. 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 2011 Exposure Draft. 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.

Measuring progress toward complete satisfaction of a performance obligation

The Boards discussed a "units produced" method and a "units delivered" method for measuring progress toward complete satisfaction of a performance obligation that is satisfied over time. The Boards tentatively decided that a 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 also tentatively decided to clarify that the adjustment to the input method for uninstalled materials, which is proposed in paragraph 46 of the 2011 Exposure Draft, is to ensure that the input method meets the objective of measuring progress in paragraph 38 of the 2011 Exposure Draft—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.

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

Work plan

The work plan as of October 25, 2012, reflecting decisions made at this meeting, is available on the IASB website.

See the IASB work plan for additional information.

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.

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