Financial Accounting Standards Board National Association of Regulatory Utility Commissioners FASB Update October 8, 2007 Robert C. Wilkins Senior Project Manager firstname.lastname@example.org 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 Websitewww.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 • Recent & Forthcoming Statements • FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities • FAS 141(R), Business Combinations • FAS 160, Noncontrolling Interests in Consolidated Financial Statements • Other Recent Documents • 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
FVO Project Has Two Phases • Phase 1 resulted in FASB Statement No. 159, which created a fair value option (FVO) 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
FVO Election • The election of the fair value option • Is made for each eligible item (with limited exceptions to item-by-item election) • 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
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 and 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
Effective Date and Transition • Statement 159 is 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)
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 • Could include natural gas storage contracts, transportation contracts, tolling (lease) contracts, etc.
Financial Accounting Standards Board Forthcoming FASB Statement No. 141(R), Business Combinations
Business Combinations • August 1996 – Business combinations project added to the Board’s agenda • First joint project with IASB • Phase 1 ended in June 2001 - Issued two FASB Statements • No. 141, Business Combinations • No. 142, Goodwill and Other Intangible Assets
Business Combinations • Phase 2 addresses applying the acquisition method and noncontrolling interests • Under Phase 2 Issued two Exposure Drafts on June 30, 2005 : • Proposed Statement, Business Combinations • Proposed Statement, Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries • Final Statements are expected in October 2007 and will replace both FAS 141 & IASB’s IFRS 3, carrying forward their other provisions
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 dateand becomes responsible and accountable for all of the acquiree’s assets, liabilities, and activities, regardless of the percentage of its ownership in the acquiree (Continued)
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.
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
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 • Eliminates the practice of deferring recognition (Continued)
Applying the Acquisition Method Measuring Assets Acquired and Liabilities Assumed • Contingent Consideration Arrangements • 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
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
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 (Continued)
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 (Continued)
Applying the Acquisition Method Measuring Assets Acquired and Liabilities Assumed • Contingencies: Subsequent Measures • Recognize in income changes in measurement of those contingencies recognized at the acquisition date • Contingencies not recognized at the acquisition date follow Statement 5 (that is, not at fair value)
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 acquiree’s operating leases • Employee benefits: use existing standards (for example, Statements 87, 106, and 112) • Goodwill: measure as a residual
Applying the Acquisition Method Partial Acquisitions • Identifiable net assets • Recognize at fair value • Eliminate current practice of recognizing mixture of fair value and carry over value for noncontrolling interest portion • Amount reported for noncontrolling interest will be its ownership interest in the fair value of the business acquired (Continued)
Applying the Acquisition Method Partial acquisitions • Goodwill • Recognize 100% of the acquiree’s goodwill (Area of divergence with the IASB) • Eliminates current practice of recognizing goodwill only for the controlling interest • Amount reported for noncontrolling interest will reflect its portion of goodwill
Applying the Acquisition Method Step acquisitions • On the acquisition date • Remeasure to fair value any preacquisition equity investments held by the acquirer • Recognize any unrealized gains or losses on those preacquisition investments in consolidated net income for the period
Financial Accounting Standards Board Forthcoming FASB Statement No. 160, Noncontrolling Interests in Consolidated Subsidiaries
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 parent’s ownership interests in its subsidiary as capital transactions
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.
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
Issuance and Effective Date • Issuance of both final Statements planned for October 2007 • Effective dates will be the same for both Statements: Calendar year companies – January 1, 2009. • Earlier adoption prohibited by FASB
Organization of Topics • Recent & Forthcoming Statements • Other Recent Documents • Various FASB Staff Positions (FSPs) and Statement 133 Implementation Guidance • Disclosures about Derivative Instruments and Hedging Activities • Projects of Particular Interest • Other Project Activities
FASB Staff Positions Finalized FSP FIN 39-1, “Amendment of FASB Interpretation No. 39” (4/30/07) • Amends FIN 39: • To replace the terms conditional contracts and exchange contracts with the term derivative instruments as defined in Statement 133 • To permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with paragraph 10
FASB Staff Positions Finalized FSP FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (5/2/07) • Clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits • Clarifies that a tax position could be effectively settled upon examination by a taxing authority
FASB Staff Positions Finalized FSP FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment Companies” (5/11/07) • Clarifies that investments accounted for at fair value in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, Investment Companies, are not subject to consolidation according to the requirements of FIN 46(R)
Statement 133 Implementation IssuesProposed • Issue No. C21, “Whether Options (Including Embedded Conversion Options) Are Indexed to both an Entity’s Own Stock and Currency Exchange Rates” (Released April 2007) • An option to acquire a fixed number of an issuer’s equity shares with an exercise price denominated in a currency other than the issuer’s functional currency fails the scope exception in paragraph 11(a) of Statement 133
Statement 133 Implementation IssuesFinalized • 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.
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 • Was proposed to be effective for financial statements issued for fiscal years and interim periods ending after December 15, 2007
Organization of Topics • Recent & Forthcoming Statements • Other Recent Documents • Projects of Particular Interest • Emission Allowances • Valuation of Commodity Inventory • Other Project Activities
Emission Allowances • Request from constituent to add project to address trading emission allowances • Constituent noted differing views about emission allowances being either trading inventory or an intangible asset • Constituent 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 (through earnings) for certain nonfinancial assets with readily determinable fair values that are held in trading inventory, including possibly 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)?