Presentations FASB by alicejenny


									 Financial Accounting Standards Board

National Association of Regulatory
       Utility Commissioners
            FASB Update
               October 8, 2007

            Robert C. Wilkins
             Senior Project Manager    203-956-5236

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

• Improvement in U.S. financial
• Simplification of U.S. accounting
  standards and the standard-setting
• Convergence of financial reporting
  standards internationally
        Information on Website
• FASB Standards, Concepts, and
  Interpretations, and Staff Positions
• Audio Webcast of Board Meetings
• Semi-Annual Detailed Technical Plan –
• Separate Summary Page for Each
• EITF Material
     Communication Improvements

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

 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 date and becomes responsible and
  accountable for all of the acquiree’s assets,
  liabilities, and activities, regardless of the
  percentage of its ownership in the acquiree
     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
   – 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

     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
• 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
      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
     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
• 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
     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

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

 – Report noncontrolling interests as a separate
    component of shareholders’ equity rather than
    in liabilities or “mezzanine”
Changes in controlling ownership
  – 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
       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
•   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
      Statement 133 Implementation
            Issues Proposed

• 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
            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.
           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,
        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)?
          Emission Allowances

• The emission allowances project will be
  affected by the Board’s decision in the
  commodity inventory project regarding the
  scope breadth and nature of the
  characteristic to be used in determining
  when fair value accounting would be
• Consequently, the Board’s deliberations on
  emission allowances is being delayed until
  that decision is made.
      Organization of Topics

• Recent & Forthcoming Statements
• Other Recent Documents
• Projects of Particular Interest
• 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
      Joint IASB-FASB Projects

• Earnings per Share
• Income Taxes
• Research & Development
• Research Projects:
  – Accounting for Insurance Contracts
  – Financial Instruments
           Conceptual Framework

Eight phases:
•   A: Objectives and Qualitative Characteristics
•   B: Elements and Recognition
•   C: Measurement
•   D: Reporting Entity
•   E: Presentation and Disclosure, including
       Financial Reporting Boundaries
•   F: Framework Purpose and Status in GAAP
•   G: Applicability to the Not-for-Profit Sector
•   H: Entire Framework
          Financial Statement Presentation

    Statement of Financial           Statement of Earnings and
          Position                    Comprehensive Income         Statement of Cash Flows
Business                             Business                    Business
 Operating assets and liabilities    Operating income           Operating cash flows
 Investing assets and liabilities    Investment income          Investing cash flows

Discontinued operations              Discontinued operations     Discontinued operations
Financing                            Financing                   Financing
 Financing assets                    Financing income           Financing asset cash flows
 Financing liabilities               Financing expenses         Financing liability cash
Equity                                                           Equity

Income taxes                         Income taxes                Income taxes

                                        Statement of Changes
                                              in Equity
     Financial Statement Presentation

• Some key changes:
  – Treasury activities in financing section
  – Peripheral business activities in investing
  – Fixed asset acquisitions in business section
  – Income taxes in separate section
  – Elimination of “Extraordinary” category
  – Requirement of direct method for cash flows
           Other Major Projects

•   Not-for-Profit Organizations
•   Derivatives Disclosures
•   Revisions to Hedge Accounting
•   Financial Guarantee Insurance
•   GAAP Hierarchy
•   Subsequent Events
•   Codification
              Codification Project

• Purpose: to put all authoritative GAAP in one
  central, easily retrievable place
  – Integrate and topically organize all relevant accounting
     guidance issued by US standard setters (FASB, AICPA,
     EITF, SEC)
  –  Relationship to GAAP hierarchy project
• Currently in authoring/ technical review phases
• Anticipated “beta version” release in late 2007 (for
  extended verification by constituents)
• Ultimately will become single authoritative source of
  US GAAP and supersede all existing standards

Statement 157

                IAS 39
                         Int’l Convergence

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