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.
November 17, 2010 FASB/IASB Joint Board Meeting
Technical plan. The Boards amended the timing of several projects to ensure that their main focus is on the more urgent projects on the MoU.
The Boards expect to publish an update of the workplan within the next week. This meeting was informational and no decisions were reached.
Balance sheet—offsetting. The Boards decided to require an entity to offset a recognized financial asset and financial liability only if the entity has the unconditional right of offset and intends to settle net or intends to settle simultaneously. Simultaneous settlement refers to transactions that settle at the same moment. The Boards also decided that an entity cannot offset a recognized financial asset and financial liability if the entity has a conditional right of offset.
Accounting for financial instruments. The Boards continued their discussion of credit impairment. Representatives from the US Office of the Comptroller of the Currency began the meeting by presenting information on loss data for loan portfolios and other loan performance statistics.
The Boards then discussed seven alternative methods that had been briefly discussed at the November 10-12 joint meetings. The Boards narrowed the seven alternatives down to the following three, which will be discussed in more detail at a future meeting:
- Alternative 2: Immediate recognition of losses expected to occur in an emergence period shorter than the expected life of the loan (for example, the foreseeable future)
- Alternative 4: Recognition of lifetime expected credit losses using a time-proportionate approach combined with a good book and bad book
- Alternative 5: Same as alternative 4 but with expected losses allocated using notional sub-portfolios to accommodate “front loaded” expected loss recognition patterns.
Revenue recognition. The Boards discussed feedback received on the Exposure Draft and the status of the project. This meeting was informational and no decisions were reached.
Statement of comprehensive income. The Boards discussed a number of issues raised by respondents to the FASB and IASB Exposure Drafts. The Boards tentatively decided:
- To proceed with the project as originally planned, as opposed to delaying the project until the Boards can develop a consistent basis for determining which elements should be presented in other comprehensive income and when reclassification to net income is appropriate.
- To require entities to present net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive, statements.
- That the standards would be effective as of the beginning of a fiscal reporting year that begins after December 15, 2011, for U.S. GAAP and for fiscal reporting years that begin on or after January 1, 2012, for IFRS.
- To affirm the tentative decision to require full retrospective application for the final standard.
- To affirm the FASB’s tentative decision to require reclassification adjustments to be presented in both other comprehensive income and net income. The Boards also tentatively decided to affirm both Boards’ decision to allow items of other comprehensive income to be presented either net of tax with details in the notes or gross of tax with each item’s tax effect displayed parenthetically, and to retain the current calculation of earnings per share based on net income/(profit or loss).
The FASB affirmed that it will retain the requirement in FASB Accounting Standards CodificationTM Topic 220, Comprehensive Income, to present the allocation of items of other comprehensive income and net income attributable to noncontrolling interests and the controlling financial interest holders of a company separately. This presentation would be on the face of the continuous statement of comprehensive income or both statements, depending on whether the two-statement approach is presented.
The Boards directed the staffs to begin the balloting process for the final standard.
Conceptual framework: reporting entity. The Boards discussed some of the issues raised in comment letters on the Exposure Draft, Conceptual Framework for Financial Reporting: The Reporting Entity, and concluded that significant time will be required to satisfactorily address those issues. Because of the priority placed on other projects, the Boards concluded that they cannot devote the time necessary to properly address those issues in the near future. The staff will continue to analyze the issues and develop alternative ways to resolve them, and the Boards will discuss them when the necessary time is available. That is not expected to occur during the first half of 2011.
November 18, 2010 FASB/IASB Joint Board Meeting
Emissions trading schemes. The Boards discussed accounting issues in a cap and trade scheme, specifically the recognition of a liability for emissions in excess of the initial allocation and the measurement of liabilities and purchased allowances. The Boards also discussed the presentation of the allowances and liabilities on the balance sheet.
The staff provided the Boards with three views on the recognition of liabilities in a cap and trade scheme. Board members supported two of the views that “cap” the measurement of the liability for the allocation at the quantity of allowances allocated. Those two views differ only on the timing of the recognition of the liability for excess emissions. Some Board members supported the view that recognizes the excess liability throughout the compliance period as an entity emits, while others supported the view that recognizes the excess liability when the entity’s emissions exceed the liability for the allocation. The Boards asked the staff to seek feedback from stakeholders on both views.
The staff also presented two possible models for measuring the quantity of allowances to be returned or submitted. The Boards asked the staff to seek feedback from stakeholders on both the expected return model and the derecognition model.
The staff provided two measurement models for measuring the purchased allowances. The Boards tentatively decided that purchased allowances should be initially and subsequently measured at fair value. This is consistent with the Boards’ tentative decision in October to measure the allocated allowances initially and subsequently at fair value.
The staff provided three views for the presentation of assets and liabilities in a cap and trade scheme on the balance sheet. The IASB preferred gross presentation of the assets and liabilities on the balance sheet; however, it indicated that it would not object to a linked presentation. (A linked presentation would present the assets and liabilities gross, but the amounts would be presented together and total to a net emission asset or net emission liability.) The FASB tentatively decided that the assets and liabilities should be presented on the balance sheet using a form of linked presentation. However, the FASB also indicated that it did not believe that an entity needed to have the intention of offsetting the assets and liabilities to be able to present the items using a linked presentation.
The Boards asked the staff to perform outreach on the Boards’ tentative decisions to date and present them with feedback in the second half of 2011.
Fair value measurement.
Measuring the Fair Value of a Reporting Entity’s Own Equity Instruments
The Boards tentatively decided that an entity may apply the guidance on measuring the fair value of liabilities when measuring the fair value of its own equity instruments. The Boards also tentatively decided to clarify that the objective of measuring the fair value of a liability or an entity’s own equity instrument is to estimate an exit price from the perspective of a market participant who holds the corresponding asset at the measurement date, regardless of whether that asset is traded (for example, on an exchange).
Measuring the Fair Value of a Group of Financial Assets and Financial Liabilities
The Boards tentatively decided the following:
- An entity may measure the fair value of financial instruments that are managed on the basis of the entity’s net exposure to a particular market risk, or to the credit risk of a particular counterparty, on a net basis if there is evidence that the entity manages its financial instruments in this way. Such evidence includes the following:
- Having a documented risk management or investment strategy
- Providing information about the entity’s net risk exposure resulting from the financial instruments to management.
- An entity may measure the fair value of financial instruments in this way only if those instruments are measured at fair value in the statement of financial position. An entity may not measure the fair value of its financial instruments on the basis of the entity’s net risk exposure if the fair value of those instruments is only required to be disclosed.
- When measuring the fair value of financial instruments on the basis of an entity’s net risk exposure, the entity must make an accounting policy decision. That policy must be applied consistently from period to period (that is, an entity cannot choose to measure the fair value of its financial instruments on the basis of the entity’s net risk exposure in one period and not the next, and it must use a consistent technique to assess its net risk exposure from one period to the next). If an entity makes an accounting policy decision to measure its financial instruments in this way, it must disclose that fact.
- When measuring the fair value of an entity’s financial instruments on the basis of the entity’s net risk exposure, the objective is to estimate an exit price from the perspective of a market participant who holds that net risk position at the measurement date. When measuring the fair value of the net risk position, an entity should take into account the availability of Level 1 inputs, the timing and legal enforceability of any credit risk mitigants, and the extent to which the underlying market risks associated with the financial instruments are offset.
Premiums and Discounts in a Fair Value Measurement
The Boards tentatively decided that when measuring the fair value of an asset or liability when a Level 1 input is not available, an entity may apply discounts and premiums only if those discounts or premiums are consistent with the unit of account specified in another standard and if market participants would take into account such discounts or premiums when pricing the asset or liability. If the unit of account is not specified in another standard, an entity should apply discounts and premiums when market participants would do so to maximize the value of the asset or liability on the basis of how they would enter into a transaction for that asset or liability.
Disclosures about Fair Value Measurements
The Boards tentatively decided to require an entity to provide the following information about Level 3 fair value measurements:
- A quantitative disclosure of the unobservable inputs and assumptions used in the measurement
- A description of the valuation control processes in place
- A discussion of the sensitivity of the fair value to changes in unobservable inputs and any inter-relationships between those inputs that magnify or mitigate the effect on the measurement.
The Boards also tentatively decided to perform further analysis about the operationality of a measurement uncertainty analysis disclosure that provides a range of fair values (exit prices) that could have resulted from the use of other reasonable unobservable inputs in the fair value measurement. Because the Boards do not wish to delay the progress and improvements they have made to develop common fair value measurement standards, the Boards will perform this analysis as a separate part of the fair value measurement project to be finalized after completion of their respective standards.