Financial Accounting Standards Board

1
Financial Accounting Standards Board

• US GAAP Update
• June 2008
• Michael Crooch

2
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.

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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 AICPAs Code
  of Professional Conduct
• Standard-setter, not a regulator
• No enforcement authority

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Changes to FASB Oversight, Structure and
Operations

• Reduce the size of the Board from seven members
  to five members, effective 7/1/2008
• Composition to be one at-large member and four
  others having experience as a preparer of
  financial statements, an auditor, an academic,
  and a financial analyst/investor, respectively
• Retain the simple majority voting retirement
• Adopted a leadership agenda process
• The Boards technical agenda is established
  solely by the FASB Chairman, following
  consultation with the other Board members

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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.

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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

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Communication Improvements

• Weekly e-mail for Action Alert
• under Action Alert at left side of home page
• Major codification of all authoritative GAAP has
  been developed.
• A verification draft was issued in January 2008
  for feedback during a one-year period
• Ultimately, the codification will become the
  single authoritative source of U.S. GAAP,
  superseding all existing standards

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Financial Accounting Standards Board

• FASB Statement No. 141(R), Business Combinations

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Business Combinations

• Phase 1 ended in June 2001 - Issued two FASB
  Statements
• No. 141, Business Combinations
• No. 142, Goodwill and Other Intangible Assets
• Phase 2 addresses applying the acquisition method
  and noncontrolling interests

10
Applying the Acquisition Method

• Overall Principles
• Business combinations are exchange transactions
  in which knowledgeable, unrelated willing parties
  exchange equal values
• The acquirer obtains control of the acquiree at
  the acquisition date and becomes responsible and
  accountable for all of the acquirees assets,
  liabilities, and activities, regardless of the
  percentage of its ownership in the acquiree

11
Applying the Acquisition Method

• Overall Principles (continued)
• The total amount to be recognized is the fair
  value of the acquiree as a whole and, therefore,
  the assets acquired and liabilities assumed
  should be recognized at their fair values on the
  date control is obtained.

12
Applying the Acquisition Method

• Measuring Assets Acquired and Liabilities
  Assumed
• Equity securities issued as consideration
• Measured at their fair value as of the
  acquisition date (not the agreement date)
• Acquisition-related costs paid to third parties
• Not part of consideration transferred
• Expensed as incurred

13
Applying the Acquisition Method

• Measuring Assets Acquired and Liabilities
  Assumed
• Contingent Consideration Arrangements
• Include fair value of contingent consideration in
  the fair value of the total consideration
• Determine whether the obligation is a liability
  or equity.
• Liability - changes in fair value would be
  recognized in income (unless it is a hedging
  instrument for which changes are recognized in
  other comprehensive income)
• Equity - no subsequent remeasurement

14
Applying the Acquisition Method

• Measuring Assets Acquired and Liabilities
  Assumed
• Restructuring reserves
• Only items that meet the definition of a
  liability at the acquisition date will be
  recognized as part of the business combination
  (EITF 95-3 will be nullified)
• Others are post-combination expense - thus
  practice of recognizing liabilities prematurely
  eliminated
• Valuation allowances
• No separate allowance for receivables or other
  assets measured at fair value

15
Applying the Acquisition Method

• Measuring Assets Acquired and Liabilities
  Assumed
• Contingencies
• Applies equally to assets and liabilities
• Recognize contractual contingencies at fair value
  as of the acquisition date, and for
  non-contractual contingencies, only if it is then
  more-likely-than-not that they meet the
  definition of an asset or liability

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Applying the Acquisition Method

• Measuring Assets Acquired and Liabilities
  Assumed
• Contingencies Subsequent Measures
• A liability is to be measured at the higher of
• Its acquisition-date fair value
• The amount recognized if Statement 5 applied
• An asset is to be measured at the lower of
• Its acquisition-date fair value
• The best estimate of its future settlement amount

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Applying the Acquisition Method

• Measuring Assets Acquired and Liabilities
  Assumed
• Exceptions to fair value measurement
• Taxes use Statement 109
• Operating leases no separate recognition of the
  asset and the liability embodied in the
  acquirees operating leases
• Employee benefits use existing standards (for
  example, Statements 87, 106, and 112)
• Goodwill measure as a residual

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Financial Accounting Standards Board

• FASB Statement No. 160, Noncontrolling Interests
  in Consolidated Subsidiaries

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Noncontrolling Interests

• Classification
• Report noncontrolling interests as a separate
  component of shareholders equity rather than in
  liabilities or mezzanine
• Changes in controlling ownership interests
• If there is no change in control, recognize
  subsequent increases or decreases in the parents
  ownership interests in its subsidiary as capital
  transactions

20
Noncontrolling Interests

• Loss of control
• A transaction that causes the subsidiary to cease
  being consolidated results in recognition of a
  gain or loss in the income statement.
• Any investment in the previously consolidated
  subsidiary that is retained by the reporting
  entity initially is measured at its fair value.

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Noncontrolling Interests

• Allocation of net income and losses
• Net income or loss and each component of other
  comprehensive income is attributed to the
  controlling interests and the noncontrolling
  interests

22
Issuance and Effective Date

• Both final Statements issued in December 2007
• Effective dates will be the same for both
  Statements Calendar year companies January 1,
  2009.
• Earlier adoption prohibited by FASB

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Financial Accounting Standards Board

• FASB Statement No. 161,
• Disclosures about Derivative Instruments and
  Hedging Activities

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Derivatives Disclosures

• Objective to provide an enhanced understanding
  of
• How and why an entity uses derivatives
• How derivatives and related hedged items are
  accounted for under Statement 133 and its related
  interpretations, and
• How derivatives affect an entitys financial
  position, results of operations, and cash flows.

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Derivatives Disclosures

• Tabular Disclosures
• Final Statement requires 2 tables
• Those 2 tables focus on (1) where in balance
  sheet derivatives are located and what is the
  fair value (balance sheet table) and (2) where in
  income statement change in fair value is located
  and what is the change in fair value (income
  statement table)
• Information on hedged items is required but does
  not have to be part of the tabular format

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Derivatives Disclosures

• Other Required Disclosures
• Final Statement requires disclosure of the
  existence and nature of credit-risk-related
  contingent features embedded in derivative
  instruments. Disclosure must include
• The aggregate fair value of derivative
  instruments that contain those features
• The aggregate fair value of assets posted as
  collateral, the aggregate fair value of
  additional assets that would be required to be
  posted as collateral and/or needed to settle the
  instrument if the contingent features were
  triggered

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Derivatives Disclosures

• Other Required Disclosures
• Final Statement requires entities to
  qualitatively discuss, by underlying risk, its
  objectives for holding or issuing derivative
  instruments
• Final Statement requires entities to provide
  information that would enable users to understand
  its volume of derivative activity

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Derivatives Disclosures

• Effective Date
• The effective date for the final Statement is for
  financial statements issued for fiscal years and
  interim periods beginning after November 15, 2008
  
• Statement 161 was issued in March 2008

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Statement 133 Implementation Issues Finalized

• Issue No. E23, Issues Involving the Application
  of the Shortcut Method under Paragraph 68
  (Released July 2007)
• Addresses various practice issues about the
  applicability of the shortcut method of
  accounting for hedging relationships.

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FSP FAS 157-1 on the Interaction of FAS 157 and
Lease Accounting

• Issued 2/14/2008
• Potential practice issues
• Leases that presently qualify as direct financing
  or leveraged leases
• Estimated residual values for pools of leased
  assets
• Effective upon initial adoption of Statement 157

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FSP FAS 157-2, Effective Date of FASB Statement
No. 157

• Issued 1/12/2008
• Partial deferral of the effective date of
  Statement 157
• Nonfinancial assets and liabilities, except for
  those recognized or disclosed at fair value on a
  recurring basis
• Now effective for fiscal years beginning after
  November 15, 2008

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FSP FAS 157-2 Examples of ItemsSubject to FAS
157 Deferral

• Impairment tests
• Goodwill (FAS 142)
• Indefinite-lived intangible assets (FAS 142)
• Long-lived assets (FAS 144)
• Initial measurement
• Nonfinancial items in a business combination (FAS
  141(R))
• Asset retirement obligations (FAS 143)
• Liabilities for exit costs (FAS 146)

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FSP FAS 157-2 Examples of ItemsNot Subject to
FAS 157 Deferral

• Financial assets and liabilities (FAS 107,
  141(R), and 159)
• Derivatives (FAS 133)
• Servicing assets and liabilities (FAS 156)
• Impaired loans measured at fair value of
  collateral even if the collateral is
  nonfinancial (FAS 114)

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Proposed FSP FAS 157-c, Measuring Liabilities
under FASB Statement No. 157

• Would clarify the application of Statement 157 to
  measuring the fair value of liabilities
• Best evidence quoted market price for the
  identical liability
• Example a bond traded as an asset
• If quoted market price unavailable, the amount
  the reporting entity would receive as proceeds if
  it were to issue the liability on the measurement
  date

35
FSP APB 14-1 on the Accounting for Certain
Convertible Debt Instruments

• Issued 5/9/2008
• Will require separation of all convertible debt
  instruments that may be settled partially or
  entirely in cash upon conversion
• Will require initial measurement of the liability
  component at the fair value of a similar
  instrument that does not have an equity component
• Guidance to be applied retroactively with
  restatement of prior years statements
• Effective for financial statements issued for
  fiscal years beginning after December 15, 2008.
  Early adoption is not permitted.

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Proposed FSP 132(R)-a

• Objective To improve disclosures about plan
  assets and to require nonpublic entities to
  disclose net periodic cost
• Requires separate disclosure of the fair value of
  each major category of plan assets based on the
  types of assets held in the plan

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Proposed FSP 132(R)-a

• Disclosures about the following major categories,
  if significant, are also required
• Cash and cash equivalents Equity securities
• Governmental debt securities Structured debt
• Corporate debt securities Asset-backed
  securities
• Private equity funds Hedge funds
• Venture capital funds Real estate
• Derivatives, segregated by type (interest rate,
  FX, etc.)

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Proposed FSP 132(R)-a

• The following disclosures are also required
• Disclosures about the nature and amount of
  concentrations of risk arising within or across
  categories of plan assets
• Disclosures about fair value measurements,
  similar to those required by FASB Statement No.
  157, Fair Value Measurements.

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FSP FAS 142-3 on Intangible Assets

• Amends the factors that should be considered in
  developing renewal or extension assumptions used
  to determine the useful life of a recognized
  intangible asset under FASB Statement No. 142,
  Goodwill and Other Intangible Assets.
• It allows an entity to consider its own
  assumptions about renewal or extension of the
  arrangement.
• No guidance on the measurement or amortization of
  a recognized intangible asset
• Provides Enhanced Disclosures
• Effective for fiscal years beginning after
  December 15, 2008. Early adoption is prohibited.
• Guidance for determining the useful life of a
  recognized intangible asset shall be applied
  prospectively to intangible assets acquired after
  the effective date.
• Disclosure requirements shall be applied
  prospectively to all intangible assets recognized
  as of, and subsequent to, the effective date.

40
Exposure Draft, Disclosure of Certain Loss
Contingencies

• The proposal to significantly improve the
  disclosures about certain loss contingencies was
  released for comment on June 5, 2008. Comments
  are requested by August 8, 2008.
• It is proposed to be applied prospectively for
  financial statements issued for fiscal years
  ending after December 15, 2008, and for both
  interim and annual periods in subsequent fiscal
  years.

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Exposure Draft, Disclosure of Certain Loss
Contingencies

• The proposal would significantly expand and
  improve the qualitative and quantitative
  disclosures about loss contingencies
• QualitativeAn entity shall provide disclosures
  to enable users of financial statements to assess
  the likelihood, timing, and amount of future cash
  flows associated with loss contingencies.  Such
  disclosure shall include discussion of the risks
  loss contingencies pose to the entity and their
  potential effects on the entitys financial
  position, cash flows, and results of operations .

42
Exposure Draft, Disclosure of Certain Loss
Contingencies

• Other disclosures about loss contingencies
• QualitativeAt a minimum, disclose a description
  of the contingency (for example, how it arose,
  its legal or contractual basis, its current
  status, and the anticipated timing of its
  resolution), a description of the factors that
  are likely to affect the ultimate outcome of the
  contingency along with their potential impact on
  the outcome, managements qualitative assessment
  of the most likely outcome of the contingency,
  and significant assumptions made by management.

43
Exposure Draft, Disclosure of Certain Loss
Contingencies

• Other disclosures about loss contingencies
• QuantitativeDisclose the following information
  about the entitys gross exposure to loss from
  the contingency
• The amount of the claim or assessment against the
  entity (including any estimated treble or
  punitive damages, if known), if applicable, or
• If there is no claim or assessment amount, an
  estimate of the entitys maximum exposure to loss

44
Exposure Draft, Disclosure of Certain Loss
Contingencies

• Other disclosures about loss contingencies
• QuantitativeIn addition, an entity may
  supplementally disclose managements best
  estimate of the possible loss or range of loss,
  if management believes that the amount of the
  claim or assessment or the maximum exposure to
  loss is not representative of the entitys actual
  exposure

45
Exposure Draft, Disclosure of Certain Loss
Contingencies

• Other disclosures about loss contingencies
• QuantitativeIn addition, a reconciliation is
  required, in a tabular format, of the total
  amount recognized in the aggregate for loss
  contingencies in its statement of financial
  position at the beginning and end of the period.
  Detailed components in the reconciliation are
  specified.

46
Exposure Draft, Disclosure of Certain Loss
Contingencies

• Other disclosures about loss contingencies
• QuantitativeEven if an entity has made an
  assessment and determined that the likelihood of
  loss is remote, it shall disclose a loss
  contingency, or a combination of loss
  contingencies, if events that are expected to
  occur in the near-term (within one year) could
  have a severe impact on the entitys financial
  position, cash flows, or results of operations.

47
Hedging Project

• Project Objectives
• Simplify accounting for hedging activities
• Improve the financial reporting of hedging
  activities to make the accounting model and the
  associated disclosures easier to understand for
  financial statement users
• Resolve hedge accounting practice issues that
  have arisen under Statement No. 133
• Address differences in the accounting for
  derivative instruments and hedged items or
  transactions

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Hedging Project

• The hedge accounting approach would establish a
  fair value methodology to hedge accounting. The
  approach would eliminate many elements that exist
  under the current hedge accounting model,
  including bifurcation-by-risk, the shortcut
  method, critical terms match, and the requirement
  to quantitatively assess effectiveness in order
  to qualify for hedge accounting
• The items and transactions currently eligible for
  hedge accounting would continue to be eligible
  under this approach.

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Hedging Project-Major Changes

• Hedge Effectiveness
• Qualitative instead of Quantitative
• Reasonably effective
• No ongoing effectiveness testing unless
  circumstances suggest no longer reasonably
  effective
• No effectiveness testing at all was considered

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Hedging Project - Major Changes

• Dedesignation
• Discontinuation of hedge accounting only if
  hedging relationship is terminated
• Discontinuation of hedging relationship by merely
  dedesignating is not permitted

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Hedging Project - Major Changes

• Hedged Risk
• General model is that the designated hedged risk
  must be all changes in fair value or variability
  in cash flows (bifurcation-by-risk not permitted)
• Two exceptions
• Foreign exchange rate risk can be designated as
  the hedged risk
• Interest rate risk can be designated as the
  hedged risk in a hedge of an entitys own debt at
  inception of the debt

52
Hedging Project - Major Changes

• Measurement of Hedged Item in Fair Value Hedges
• Hedged item and derivative hedging instrument
  must be independently measured for changes in
  fair value
• Not permitted to take the change in fair value of
  the derivative, change the sign and apply it to
  the hedged item
• All of contractual cash flows of the entire
  hedged item must be included in calculating the
  fair value
• Adjust the carrying value of hedged item for
  changes in fair value during the hedge period

53
Hedging Project - Major Changes

• Measuring and Reporting Ineffectiveness in Cash
  Flow Hedges
• Compare change in fair value of the actual
  derivative and the present value of the
  cumulative change in expected future cash flows
  on the hedged transaction
• For example, an entity could compare the change
  in fair value of the actual derivative with the
  change in fair value of a derivative that would
  mature on the date of the forecasted transaction,
  be priced at market, and provide cash flows that
  would exactly offset the hedged cash flows
• The difference would be reported in earnings as
  ineffectiveness
• Nonperformance risk must be considered when
  calculating the fair value of the derivative
  hedging instrument
• Permitted to use the same credit adjustment in
  the derivative that would exactly offset the
  hedged cash flows as used in the actual derivative

54
Hedging Project - Major Changes

• Measuring and Reporting Ineffectiveness in Cash
  Flow Hedges
• Hedging with purchased options
• When a purchased option contract is used as the
  hedging instrument to provide only one-sided
  protection, a purchased option derivative that
  would mature on the date of the forecasted
  transaction and provide cash flows that would
  exactly offset the one-sided change in the hedged
  cash flows could be used for calculating
  ineffectiveness.
• Ineffectiveness can be measured using all changes
  in the options cash flows

55
Hedging Project - Major Changes

• Measuring and Reporting Ineffectiveness in Cash
  Flow Hedges
• Hedging groups of transactions first 100M in
  sales for January
• Compare actual derivative to derivative that
  settles within a reasonable period of time of
  cash flows on forecasted transactions
• Reasonable if the difference in forward rates
  between that derivative and derivative(s) that
  would exactly offset cash flows is minimal

56
Hedging Project - Major Changes

• Disclosures
• For hedged items in fair value hedges - table
  showing amount reported in balance sheet,
  Statement 133 adjustment, Other fair value
  adjustments, amount excluding those adjustments
• Hedging interest rate risk in issued debt how
  hedging derivative(s) changes maturity and
  interest rate on debt

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Disclosures about Credit DerivativesBackground

• There is a current focus on credit default swaps
  given turmoil in credit markets
• Estimated notional amount of outstanding CDS was
  43 trillion in June 2007
• On actively traded names CDS volume is
  substantially greater than outstanding debt
  making it difficult to settle contracts
• When Delphi defaulted - 28 billion outstanding
  CDS against 5.2 billion of bonds

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Disclosures about Credit Derivatives

• Objectives
• Improve disclosures about credit derivatives and
  guarantees to help users better understand their
  impact on an entitys financial position,
  financial performance, and cash flows
• Close the gap in GAAP
• Align recognition/measurement and disclosures in
  same standards

59
Disclosures about Credit Derivatives

• Gap in GAAP
• FIN 45 requires disclosures by guarantors for
  guarantees within its scope, which includes some,
  but not all, credit derivatives
• S133 CDS for which the party purchasing the
  protection owns the referenced obligation are
  within the scope of FIN 45s disclosure
  requirements
• S133 CDS for which the party purchasing the
  protection does not own the referenced obligation
  are not within the scope of FIN 45s disclosure
  requirements
• Project would amend S133 and FIN 45 to result in
  the disclosure requirements for all S133 credit
  derivatives being included in S133

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Disclosures about Credit Derivatives

• Proposed Disclosures
• Disclosures for Sellers of Credit Derivatives
• The nature of the credit derivative, including
  the approximate term of the credit derivative,
  the events or circumstances that would require
  the seller to perform under the credit
  derivative, and the current status of the credit
  derivative (for example, the current credit risk
  of the referenced obligation).
• The maximum potential amount of future payments
  (undiscounted) the seller could be required to
  make under the credit derivative. That maximum
  potential amount of future payments shall not be
  reduced by the effect of any amounts that may
  possibly be recovered under recourse or
  collateralization provisions in the credit
  derivative (which are addressed below). If the
  terms of the credit derivative provide for no
  limitation to the maximum potential future
  payments under the credit derivative, that fact
  shall be disclosed. If the seller is unable to
  develop an estimate of the maximum potential
  amount of future payments under the credit
  derivative, the seller shall disclose the reasons
  why it cannot estimate the maximum potential
  amount.

61
Disclosures about Credit Derivatives

• Proposed Disclosures
• Disclosures for Sellers of Credit Derivatives
  Cont
• The fair value of the credit derivative.
• The nature of (1) any recourse provisions that
  would enable the seller to recover from third
  parties any of the amounts paid under the credit
  derivative and (2) any assets held either as
  collateral or by third parties that, upon the
  occurrence of any specified pre-agreed event or
  condition under the credit derivative, the seller
  can obtain and liquidate to recover all or a
  portion of the amounts paid under the credit
  derivative. The seller shall indicate, if
  estimable, the approximate extent to which the
  proceeds from liquidation of those assets would
  be expected to cover the maximum potential amount
  of future payments under the credit derivative.
  In its estimate of potential recoveries, the
  seller of credit protection should consider the
  effect of any purchased credit protection with an
  identical underlying(s).

62
Disclosures about Credit Derivatives

• Next Steps
• Exposure Draft of an FSP expected to be issued in
  Q2 2008.
• Final FSP expected to be issued in Q3 2008
• Effective for fiscal years and interim periods
  beginning after November 15, 2008 (same as S161)

63
Transfers of Financial Assets

• Objectives
• Simplify the guidance on accounting for transfers
  of financial assets in Statement 140, Accounting
  for Transfers and Servicing of Financial Assets
  and Extinguishments of Liabilities
• Improve consistency and transparency in financial
  reporting
• Next steps
• Issue Exposure Draft in third quarter 2008

64
Transfers of Financial Assets

• Recent Board Decisions
• Remove the concept of the qualifying SPE (QSPE)
• Derecognition Statement 140
• Consolidation Interpretation 46(R),
  Consolidation of Variable Interest Entities
• Amend the derecognition model
• Maintain the existing Statement 140 derecognition
  model with modifications to paragraphs 9(a) and
  9(c) and the full removal of paragraph 9(b)
• Transfers of portions of financial assets are
  eligible for derecognition only when it is a
  participating interest

65
Transfers of Financial Assets

• Recent Board Decisions, continued
• Interests in the transferred financial assets
  that continue to be held by the transferor
  represent proceeds of the transfer when sale
  accounting is achieved
• All proceeds of the transfer must be recognized
  at fair value
• Enhanced Disclosures

66
Transfers of Financial Assets / Interpretation
46(R)

• Interaction between Statement 140 and
  Interpretation 46(R)
• Elimination of the QSPE concept in Statement 140
  will remove the scope exception in Interpretation
  46(R)
• Removal of the scope exception for QSPEs will
  result in a significant increase in the
  population of entities subject to Interpretation
  46(R)

67
Interpretation 46(R)

• Recent Board Decisions
• Continuous Reconsideration Events
• Enhanced Disclosures
• Current Deliberations
• Assessment of the design of the VIE
• Determination of the Primary Beneficiary
• Begin with a qualitative assessment to determine
  the variable interest that has (1) power to
  direct matters that significantly impact the
  activities of the VIE, and (2) the right to
  receive benefits from the VIE along with the
  obligation to potentially absorb the related
  risks
• If the qualitative assessment is inconclusive,
  perform an expected loss calculation using the
  current expected loss model

68
Proposed FSP EITF 03-6-1, EPS Guidance for Share
Based Payments with Dividends

• Rights to dividends or dividend equivalents
  (whether paid or unpaid) on unvested share-based
  payment awards that would provide a
  non-contingent transfer of value to the holder of
  the share-based payment award constitute
  participation rights
• Therefore, should be included in the computation
  of basic EPS pursuant to the two-class method
• Effective date fiscal years beginning after
  December 15, 2008
• Transition method - retrospective

69
FSP ARB 43-a, Amendment of the Inventory
Provisions of Chapter 4 of ARB No. 43

• Objective
• Amends ARB No. 43 to require that inventories
  included in an entitys trading activities be
  initially and subsequently measured at fair value
  with changes in fair value recognized in
  earnings.
• Scope
• This FSP applies to inventory (as defined in ARB
  43) which
• (1) are held for sale in the ordinary course of
  business,
• (2) are in process of production for such sale,
  or
• (3) are to be currently consumed in the
  production of goods or services to be available
  for sale.
• New disclosures required
• Proposed effective date is FY beginning after
  November 15, 2008
• Proposed transition method is a cumulative
  adjustment to opening R/E

70
Proposed EITF Issue 07-5, Whether an Instrument
is Indexed to an Entitys Own Stock

• Issue addresses the first part of the scope
  exception in paragraph 11(a) of Statement 133
• 11(a) scope exception specifies that a contract
  that is both (1) indexed to its own stock and (2)
  classified in stockholders equity is not a
  derivative under that statement
• Objective
• The objective of this Issue is to provide
  guidance for determining whether an equity-linked
  financial instrument (or embedded feature) is
  indexed to an entity's own stock.

71
Proposed EITF Issue 07-5

• Evaluate whether an equity-linked instrument (or
  embedded feature) is indexed to the entitys own
  stock using the following two-step approach
• Step 1 Evaluate the instruments contingent
  exercise provisions, if any
• Carries forward existing guidance on
  contingencies in EITF 01-6
• Step 2 Evaluate the instruments settlement
  provisions
• Fixed shares for fixed strike price would be
  considered indexed to entitys own stock
• If not fixed-for-fixed, still considered
  indexed to own stock if only variables that
  affect settlement amount are inputs to fair value
  of a fixed-for-fixed forward or option on
  equity shares

72
Proposed EITF Issue 07-5
73
Proposed EITF Issue 07-5
74
Proposed EITF Issue 07-5

• Application to equity-linked instruments (or
  embedded features) with foreign currency elements
• Not indexed to own stock if strike price is not
  in issuers functional currency
• Currency in which underlying shares are traded
  does not affect whether the instrument is indexed
  to entitys own stock
• Consistent with proposed DIG Issue C21
• Market-based employee stock option valuation
  instruments would be subject to the guidance in
  this Issue
• Proposed effective date FY beginning after
  12/15/08
• Proposed transition method - cumulative-effect
  adjustment to the opening balance of R/E

75
Other Proposed EITF Issues

• Consensuses-for-exposure reached
• Issue 08-3, Accounting by Lessees for
  Nonrefundable Maintenance Deposits
• Issue 08-4, Transition Guidance for Conforming
  Changes to EITF Issue No. 98-5, 'Accounting for
  Convertible Securities with Beneficial Conversion
  Features or Contingently Adjustable Conversion
  Ratios
• Other current EITF agenda items
• Issue 08-1, Revenue Recognition for a Single Unit
  of Accounting
• Issue 08-2, Lessor Revenue Recognition for
  Maintenance Services

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Proposed FSP 144-a, Discontinued Operations

• Definition of Discontinued Operations
• FASB and IASB agreed to a converged definition of
  discontinued operations
• A component that has been (or will be) disposed
  of and meets the definition of an operating
  segment would be reported as a discontinued
  operation
• Additional financial information to be presented
  in the notes for all components that have been
  (or will be) disposed of
• Exposure draft expected in second quarter 2008

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Questions?
Fair Value Option
Statement 157
Emission Allowance
IAS 39
Intl Convergence
Statement 140