Financial Accounting Standards Board

1
Financial Accounting Standards Board

• National Association of Regulatory Utility
  Commissioners
• April 23, 2007
• FASB Update
• Robert C. Wilkins
• Senior Project Manager
• rcwilkins_at_fasb.org 203-956-5236

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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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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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

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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 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

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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

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Financial Accounting Standards Board

• FASB Statement No. 159,
• The Fair Value Option
• for Financial Assets
• and Financial Liabilities

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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

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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

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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

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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

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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 entitys
  shareholders equity

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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

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Exceptions to Item-by-Item Election

• For an equity-method investee, election applies
  to all the investors 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)

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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)

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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

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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

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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)

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Ongoing Disclosures

• Managements 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

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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 157s fair value
  disclosure requirements

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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

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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

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Effective Date and Transition

• Effective as of the beginning of each reporting
  entitys 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)

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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

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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 entitys deferred tax assets
  and liabilities of electing FVO
• Continued

28
Disclosures upon Initial Adoption

• Managements 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

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Early Adoption of Statement 159

• Earlier adoption permitted as of the beginning of
  an entitys 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

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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

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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).

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FASB Staff Positions Finalized

• 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

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FASB Staff Positions Finalized

• 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

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FASB Staff Positions Finalized

• 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! Its 257 pages long.

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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)

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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

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Organization of Topics

• 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
• Projects of Particular Interest
• Other Project Activities

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Not-for-Profit Organizations EDs

• Mergers and Acquisitions
• Would eliminate the use of the pooling-of-interest
  s 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

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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

40
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

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Organization of Topics

• Pronouncements Since 9/2007
• Recent Exposure Drafts
• Projects of Particular Interest
• Emission Allowances
• Valuation of Commodity Inventory
• Other Project Activities

42
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

43
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

44
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

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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)?

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Emission Allowances

• The emission allowances project will be affected
  by the Boards 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 Boards deliberations on
  emission allowances is being delayed until that
  decision is made (hopefully in mid-May)

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Organization of Topics

• Pronouncements Since 9/2007
• Recent Exposure Drafts
• Projects of Particular Interest
• Other Project Activities
• Joint IASB-FASB Projects
• Other Major Projects

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Joint IASB-FASB Projects

• Conceptual Framework
• Business Combinations
• Applying the Acquisition Method
• Noncontrolling Interests
• Liabilities Equity
• Financial Statement Presentation
• Revenue Recognition
• (Continued)

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Joint IASB-FASB Projects

• Earnings per Share
• Income Taxes
• Research Development
• Research Projects
• Accounting for Insurance Contracts
• Financial Instruments

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Other Major Projects

• Not-for-Profit Organizations
• Postretirement Benefit Obligations including
  Pensions
• Derivatives Disclosures
• Fair Value OptionPhase 2
• Financial Guarantee Insurance
• GAAP Hierarchy
• Subsequent Events

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