Financial Accounting Standards Board Update

Financial Accounting Standards Board

National Association of Regulatory Utility Commissioners

April 23, 2007

FASB Update

Robert C. Wilkins

Senior Project Manager

[email protected] 203-956-5236

Disclaimer

The views expressed in this presentation are my own and do not represent positions of the Financial Accounting Standards Board.

Official positions of the FASB Board are arrived at only after extensive due process and deliberations.

FASB Overview

• Originated in 1973

• Recognized by the SEC under Section 108 of the Sarbanes-Oxley Act of 2002–“Designated Private-Sector Standard Setter”

• Recognized under Section 203 of the AICPA’s Code of Professional Conduct

• Standard-setter, not a regulator

• No enforcement authority

Our Mission

• To establish and improve standards of financial accounting and reporting

• Accounting standards are essential to the efficient functioning of the economy

• Good financial reporting reduces the uncertainty premium charged by investors and lenders.

Our Strategic Objectives

• Improvement in U.S. financial reporting

• Simplification of U.S. accounting standards and the standard-setting process

• Convergence of financial reporting standards internationally

Information on Website www.fasb.org

• FASB Standards, Concepts, and Interpretations, and Staff Positions (FSPs)

• Audio Webcast of Board Meetings

• Semi-Annual Detailed Technical Plan – April/October

• Separate Summary Page for Each Project

• EITF Material

Communication Improvements

• Weekly e-mail for Action Alert for free–under “Action Alert” at left side of home

page

• Major codification of all authoritative GAAP being developed.

–A draft will be issued in late 2007 for an extended verification period

–Ultimately, the codification will become the single authoritative source of U.S. GAAP, superseding all existing standards

Organization of Topics

• Pronouncements Since 9/2007– FAS 159, The Fair Value Option for

Financial Assets and Financial Liabilities (February 2007)

– Various FASB Staff Positions (FSPs) and Statement 133 Implementation Guidance

• Recent Exposure Drafts

• Projects of Particular Interest

• Other Project Activities

Financial Accounting Standards Board

FASB Statement No. 159,

The Fair Value Option

for Financial Assets

and Financial Liabilities

Fair Value Option Project

Focus of Project:

To enable entities to elect irrevocably to report certain selected assets and liabilities at fair value with the changes in fair value included in earnings as they occur

Project Has Two Phases

• Phase 1 resulted in FASB Statement No. 159, which created a fair value option principally for certain financial assets and financial liabilities. It was issued on February 15, 2007.

• Phase 2 will consider permitting the fair value option for other certain assets and liabilities, principally nonfinancial ones

Reasons for an FVO

• Provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions

• Achieves further convergence with international financial reporting standards and should expand the use of fair value measurement

Statement 159 Scope: Eligible Items

• All financial assets and financial liabilities, with limited exceptions (see next slide)

• Firm commitments (only financial items)• Written loan commitments• Nonfinancial warranties & insurance

contracts that can be settled by paying a third party to provide those goods or services

• Financial host contracts resulting from a nonfinancial hybrid instrument

Scope Exceptions for Statement 159

• An investment (or interest in VIE) that would otherwise be consolidated

• Employers’ and plans’ financial obligations for pension benefits, other postretirement benefits, & deferred compensation

• Assets and liabilities recognized under lease contracts.

• Withdrawable deposit liabilities• Items classified as a component of the

entity’s shareholder’s equity

FVO Election

• The election of the fair value option – Is made for each eligible item (see exceptions to

item-by-item election on next slide)

– Is made on a qualifying election date

– Is irrevocable

–Requires that changes in fair value be recognized in earnings (or other performance indicators for entities that do not report earnings) as those changes occur

Exceptions to Item-by-Item Election

• For an equity-method investee, election applies to all the investor’s financial interests in that entity

• If multiple loan advances become part of larger loan balance, election applies to overall loan balance

• Election applies to all claims & obligations under an insurance or reinsurance contract

• Election applies to base insurance contract & any nonintegrated features (SOP 05-1)

FVO Election Dates

• Eligible item first recognized

• Unrecognized firm commitment entered into

• Consolidation no longer required

• Equity method accounting newly required

• Event requires remeasurement at FV without requiring subsequent measurement at FV

• Entity ceases to qualify for specialized accounting (with fair value through earnings)

Presentation & Disclosures

• Statement 159 includes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities

Balance Sheet Presentation

• Must separate the reported fair values from the carrying amounts of similar assets and liabilities measured using another measurement attribute –Present two separate line items to display

the fair value and non-fair-value carrying amounts, or

–Present single aggregate amount and parenthetically disclose the amount of the portion measured at fair value

Cash Flow Presentation

• FVO election does not affect reporting categories (operating, investing, financing) on the Statement of Cash Flows

• Cash flows for trading securities no longer required to be reported as operating (amendments of Statements 115 and 145)

Ongoing Disclosures

• Management’s reasons for electing a fair value option for each eligible item or group of similar eligible items

• If done for some but not all eligible items within a group of similar eligible items, the reasons for only partial election

• Information to relate the group of similar eligible items to balance sheet line items

Ongoing Disclosures

• The difference between the carrying amount and the aggregate principal amount for any long-term receivables or financial liabilities reported at fair value due to FVO

• Information about certain past due assets reported at fair value

• Correlating with Statement 157’s fair value disclosure requirements

Income Statement Disclosures

• For each B/S item reported at fair value due to FVO, the amount of fair value changes included in earnings and in which income statement line items

• A description of how interest and dividends are measured and where reported in the income statement

Income Statement Disclosures

• Selected information about fair value changes attributable to changes in instrument-specific credit risk

• Qualitative information about the reasons for those changes

Effective Date and Transition

• Effective as of the beginning of each reporting entity’s first fiscal year that begins after November 15, 2007

• At initial adoption, entity may elect the fair value option for existing eligible items (including available-for-sale and held-to-maturity securities accounted for under Statement 115)

Effect of Initial Adoption

• Effect reported as a cumulative-effect adjustment of retained earnings as of the effective date

• Items removed from balance sheet:–Unamortized deferred costs, fees, premiums,

and discounts

–Valuation allowances

–Accrued interest, which would be reported as part of the fair value of the eligible item

Disclosures upon Initial Adoption

• A schedule presenting the following by balance sheet line item:–Pre-election carrying amount and the fair

value upon the FVO election

–Pre-tax portion of cumulative-effect adjustment to retained earnings

• Net effect on the entity’s deferred tax assets and liabilities of electing FVO

Continued

Disclosures upon Initial Adoption

• Management’s reasons for electing the fair value option for each existing eligible item or group of similar eligible items

• If for some but not all eligible items within a group of similar eligible items, the reasons for only partial election

• Information to relate the group of similar eligible items to balance sheet line items

Early Adoption of Statement 159

• Earlier adoption permitted as of the beginning of an entity’s earlier fiscal year provided that:–The choice to adopt early shall be made after

February 15, 2007 but within 120 days of the beginning of the fiscal year of adoption

–No financial statements for any interim period of that fiscal year have been issued

–All requirements of Statement 157 (on fair value measurement) adopted early

Fair Value Option Next Steps

• Deliberations on Phase 2 will begin in the third quarter of 2007

• Central issue will be deciding which assets and liabilities should be included in its scope

FASB Staff Positions Finalized

• FSP FAS 123(R)-5, “Amendment of FASB Staff Position FAS 123(R)-1” (10/10/06)

• FSP FAS 123(R)-6, “Technical Corrections of FASB Statement No. 123(R)” (10/10/06)–The former indicates when a modification of an

instrument related to an equity restructuring should not change its recognition & measurement

–The latter involves technical corrections of Statement 123(R).


• FSP FAS 126-1, “Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities” (10/25/06)–Requires that conduit bond obligors for conduit

debt securities that are traded in a public market be considered public entities/enterprises for the purposes of selected accounting pronouncements


• FSP EITF 00-19-2, “Accounting for Registration Payment Arrangements” (12/21/06)–The contingent obligation to make future

payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with FAS 5

–A financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration


• FSP FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides” (2/21/07)–Updates numerous illustrations in the listed

pronouncements

–Does not change the provisions of Statement 158.

–Warning! It’s 257 pages long.

Statement 133 Implementation Issues Finalized

• Statement 133 Implementation Issue No. G26, “Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate” (1/8/07)–To hedge interest rate risk in a cash flow hedge,

the cash flows of the hedged transaction must be explicitly based on a benchmark interest rate (thus, auction rate notes fail that requirement)

Statement 133 Implementation Issues Finalized

• Statement 133 Implementation Issue No. B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets” (1/17/07)–Creates a narrow scope exception from

paragraph 13(b) of Statement 133 for securitized interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets


• Pronouncements Since 9/2007

• Recent Exposure Drafts– Not-for-Profit Organizations: Mergers and

Acquisitions (October 9, 2006)

– Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition (October 9, 2006)

– Disclosures about Derivative Instruments and Hedging Activities



Not-for-Profit Organizations EDs

• Mergers and Acquisitions– Would eliminate the use of the pooling-of-interests

method of accounting by not-for-profit organizations, in which assets acquired and liabilities assumed are reported at “carryover” amounts recorded on the books of acquired organizations

– Would require acquisition method at fair value

• Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition– Post-acquisition accounting guidance

Derivatives Disclosures

• Would require: –That objectives and strategies for using

derivative instruments be discussed in terms of underlying risk and accounting designation

–Tabular disclosure of notional and fair value amounts of derivatives instruments and the gains and losses on derivatives instruments and related hedged items

Derivatives Disclosures

• Would require: – Information about counterparty credit risk and

the existence and nature of contingent features in derivative instruments

• Would be effective for financial statements issued for fiscal years and interim periods ending after December 15, 2007




• Projects of Particular Interest– Emission Allowances

– Valuation of Commodity Inventory


Emission Allowances

• Request from SIFMA (Securities Industry and Financial Markets Association) to add project to address trading emission allowances

• SIFMA noted differing views about emission allowances being either trading inventory or an intangible asset

• SIFMA supported reporting emission allowances at fair value

Emission Allowances

• On February 21, 2007, the Board added a project to its agenda to provide comprehensive guidance for participants in emission trading programs

• Project will provide guidance for emission allowances as well as liability recognition and measurement as a result of an entity emitting pollutants

Valuation of Commodity Inventory

• On March 14, 2007, the Board added a project to its agenda to provide guidance on whether ARB No. 43 should be amended to require fair value accounting for certain nonfinancial assets with readily determinable fair values that are held in trading inventory, including traded emissions allowances

Valuation of Commodity Inventory

• The current debate involves the nature of the characteristic used in determining which items should be required to be reported at fair value with changes in earnings. That is, should the distinction be based on:–The nature of the asset (for example, only those

that have readily determinable fair values), or

–The nature of the activity (for example, only assets used in trading activities)?

Emission Allowances

• The emission allowances project will be affected by the Board’s decision in the commodity inventory project regarding the nature of the characteristic to be used in determining when fair value accounting would be required.

• Consequently, the Board’s deliberations on emission allowances is being delayed until that decision is made (hopefully in mid-May)





• Other Project Activities– Joint IASB-FASB Projects

– Other Major Projects

Joint IASB-FASB Projects

• Conceptual Framework

• Business Combinations–Applying the Acquisition Method

–Noncontrolling Interests

• Liabilities & Equity

• Financial Statement Presentation

• Revenue Recognition

(Continued)

Joint IASB-FASB Projects

• Earnings per Share

• Income Taxes

• Research & Development

• Research Projects:–Accounting for Insurance Contracts

–Financial Instruments

Other Major Projects

• Not-for-Profit Organizations• Postretirement Benefit Obligations

including Pensions• Derivatives Disclosures• Fair Value Option—Phase 2• Financial Guarantee Insurance• GAAP Hierarchy• Subsequent Events

Questions?

Statement 140

Fair Value Option

Emission AllowanceStatement 157

Int’l ConvergenceIAS 39

Financial Accounting Standards Board Update

Documents

Transcript of Financial Accounting Standards Board Update