IASB: Summary of ASAF September meeting

14 October 2013

The ASAF discussed the IASB's Disclosure Initiative, including proposed amendments to IAS 1. It considered an approach to rethinking a disclosure and presentation framework developed by the AASB, and discussed insurance contracts, leases and financial instruments.

Insurance contracts

The ASAF discussed the proposals in the IASB's Exposure Draft Insurance Contracts. There was support from many ASAF members for the general direction the IASB has taken in unlocking, insurance contract revenue and transition. However, there remain significant concerns about the accounting mismatches that would arise as a result of applying the proposals relating to contracts with cash flows that vary with underlying items, and those relating to the use of other comprehensive income. For some these concerns would be substantially addressed if the IASB were to permit an option to present changes in the insurance contract liability in profit or loss. For others the IASB should look into extending measuring assets at fair value through OCI when assets are managed in order to match insurance liabilities.

Leases

The ASAF discussed the IASB’s Exposure Draft Leases (ED), the comment period for which ended on 13 September 2013. In particular ASAF members were asked to comment on the following topics:

• The lessee and lessor accounting models
• The measurement of the lease assets and liabilities (including the determination of the lease term)
• The definition of a lease
• Disclosure and transition.

ASAF members broadly supported the direction of the proposals in the ED, in particular the proposal that lessees should recognise assets and liabilities arising from leases on the balance sheet. However, ASAF members had mixed views about the proposed dual approach to recognising lease expenses. Some members were concerned about the complexity that results from having a dual approach. Some members noted that, although they have conceptual concerns about the proposed dual approach, they understand the IASB’s and FASB’s reasoning for developing it and, accordingly, could accept it in order to achieve the recognition of assets and liabilities arising from leases on a lessee’s balance sheet. Nonetheless, some members encouraged the boards to develop a single lessee accounting model, with amortisation and interest recognised separately for all leases. They thought there could be more support for such a model if the boards narrowed the scope, such as by broadening the application of the proposed short-term lease exemption. One member, however, cautioned the boards about any such broadening of the short-term lease exemption Many ASAF members recommended the IASB to reduce complexity and cost further to ensure a much better cost/benefit trade-off. With respect to lessor accounting, ASAF members also had mixed views. Some members suggested not changing the existing lessor model, some supported a single model and others thought the extent of the risks associated with the residual should be considered in determining the appropriate lessor model.

Financial Instruments: Impairment

The IASB staff presented to the ASAF the following clarifications and enhancements to the proposed model:

• The responsiveness of the general model: In its September meeting the IASB tentatively decided to clarify that the objective ofthe model is to recognise lifetime expected credit losses on all financial instrumentsfor which there has been a significant increase in credit risk—whether on anindividual or portfolio basis—and that all reasonable and supportable information,including forward-looking information that is available without undue cost or effort,needs to be considered. In addition, the IASB tentatively decided to includeIllustrative Examples to reflect the intention of the proposals.
• The measurement objective for Stage 1 of the model: In its September meeting the IASB tentatively decided to confirm 12-month expected credit losses as the measurement objective for instruments in Stage 1.
• The definition of ‘default’: In its September meeting the IASB tentatively decided to require a definition of default to be applied that is consistent with credit risk management practices and to emphasise that qualitative indicators of default should be considered when appropriate (such as for financial instruments that contain covenants). The IASB also tentatively decided to include a rebuttable presumption that default does not occur later than 90 days past due unless an entity has reasonable and supportable information to support a more lagging default criterion.

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