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Financial Accounting Standards Board

Financial Accounting Standards Board

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Financial Accounting Standards Board

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  1. Financial Accounting Standards Board National Association of Regulatory Utility Commissioners FASB Update March 31, 2008 Robert C. Wilkins Senior Project Manager rcwilkins@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.

  3. 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

  4. 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 Board’s technical agenda is established solely by the FASB Chairman, following consultation with the other Board members

  5. 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.

  6. 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

  7. 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

  8. 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 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

  9. Organization of Topics • Recent FASB Statements • FAS 141(R), Business Combinations • FAS 160, Noncontrolling Interests in Consolidated Financial Statements • FAS 161, Disclosures about Derivative Instruments and Hedging Activities • Other Recent Documents • Projects of Particular Interest

  10. Financial Accounting Standards Board FASB Statement No. 141(R), Business Combinations

  11. 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

  12. 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 issued in December 2007 and replaced both FAS 141 & IASB’s IFRS 3, carrying forward their other provisions

  13. 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)

  14. 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.

  15. 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

  16. 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)

  17. 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

  18. 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

  19. 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)

  20. 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)

  21. 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)

  22. 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

  23. 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)

  24. 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

  25. 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

  26. Financial Accounting Standards Board Forthcoming FASB Statement No. 160, Noncontrolling Interests in Consolidated Subsidiaries

  27. 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

  28. 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.

  29. 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

  30. 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

  31. Financial Accounting Standards Board FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities

  32. Derivatives Disclosures • Background • Statement 133 has been criticized by constituents for lacking transparent disclosures, including criticism in: • November 2004 Fitch Ratings Report • Berkshire Hathaway’s 2002 Annual Report • Numerous published articles • The Board agreed to add a project to its agenda at the March 9, 2005 Board meeting • Exposure Draft was issued on December 8, 2006 32

  33. 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 entity’s financial position, results of operations, and cash flows. 33

  34. Derivatives Disclosures Scope • The scope of the final Statement is limited to all derivatives and all related hedged items accounted for under Statement 133. • The Board decided not to add a fourth objective to require information about an entity’s risk exposures and strategy for mitigating those risks • The Board decided not to expand the scope to include all financial instruments. 34

  35. 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 35

  36. 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 36

  37. 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 37

  38. 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 38

  39. Organization of Topics • Recent FASB Statements • Other Recent Documents • Various Finalized FASB Staff Positions (FSPs) and Statement 133 Implementation Guidance • Various Proposed or Forthcoming FSPs and Exposure Drafts • Projects of Particular Interest

  40. FASB Staff Positions Finalized FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (5/2/2007) • 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

  41. FASB Staff Positions Finalized FSP FIN 48-2, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises (2/1/2008) • Defers the effective date of Interpretation 48 for one year for certain nonpublic enterprises. The deferral has no applicability to nonpublic companies that have already the Interpretation’s provisions in a full set of annual financial statements. • No deferral for nonpublic subsidiaries of public enterprises that apply GAAP

  42. FASB Staff Positions Finalized FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (2/20/2008) • A repurchase financing is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties that is entered into contemporaneously with, or in contemplation of, the initial transfer. • A repurchase financing transaction is not addressed in Statement 140

  43. FASB Staff Positions Finalized FSP FAS 140-3 (Continued) • A transferor and transferee shall not separately account for a transfer of a financial asset and a related repurchase financing unless (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset.

  44. FASB Staff Positions Finalized FSP FAS 157-1 on the Interaction of FAS 157 and Lease Accounting (2/14/2008) • Potential practice issues: • Leases that presently qualify as direct financing or leveraged leases • Estimated residual values for pools of leased assets

  45. FASB Staff Positions Finalized FSP FAS 157-1 (Continued) • Effective upon initial adoption of Statement 157 • Leasing literature scoped out of Statement 157’s fair value definition and framework • Fair value measurements related to leases under FAS 141, 141(R), 144, and 146 not scoped out

  46. FASB Staff Positions Finalized FSP FAS 157-2, Effective Date of FASB Statement No. 157 (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

  47. 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)

  48. 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)

  49. 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 • Would be applied on a prospective basis effective the latter of • Beginning of period in which FSP issued • Beginning of period in which FAS 157 adopted

  50. Proposed FSP FAS 157-c Proposed FSP FAS 157-c (Continued) • 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 • Comment deadline: 2/18/08