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ST Convergence with IASB. SFAS No. 151 – Inventory Costs . Part of the “international convergence” project. Clarifies that abnormal costs of idle facilities should not be capitalized as product costs. Companies should use “normal capacity” for the allocation of overhead.

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sfas no 151 inventory costs
SFAS No. 151 – Inventory Costs
  • Part of the “international convergence” project.
  • Clarifies that abnormal costs of idle facilities should not be capitalized as product costs.
    • Companies should use “normal capacity” for the allocation of overhead.
    • Any unallocated overhead is expensed during the period in which they are incurred.
    • Other abnormal handling costs or abnormal levels of spoilage might also need to be expensed.
coming soon
Coming soon
  • Short-term convergence with IASB
    • EPS (ED expected 1st half 2007)
    • Income taxes (ED expected 1st half 2007)
  • Research and Development- ?
fair value measurements

Fair Value Measurements

SFAS No. 157

Signs of the Future!

fas157 issued sept 2006
FAS157 Issued Sept. 2006
  • With a few exceptions, it does not change WHAT is currently measured using fair value
  • Sets out a framework for measuring fair value
  • Requires additional disclosures about fair value measurements
fas157 definition of fair value
FAS157 – Definition of Fair Value
  • Paragraph 5 - Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
    • This is an exit-price definition of fair value (see paragraph 7)
fas157 related definitions
FAS157 – Related definitions
  • Market Participants (4 criteria)
    • Independent of reporting entity
    • Have knowledge needed for reasonable understanding about transaction
    • Financial and legal ability to enter into the transaction
    • Be willing to enter into transaction without compulsion
fas157 related definitions8
FAS157 – Related definitions
  • Principal Market
    • Has the greatest volume and level of activity.
      • If there is no principal market, use the most advantageous market
  • Most Advantageous Market
    • Most advantageous market has price that maximizes the net amount that would be received or minimizes the net amount paid
      • Transactions costs are included in determining which market to use but do NOT become part of the fair value measurement
fas157 related definitions10
FAS157 – Related definitions
  • Assumptions about the market
    • The asset or liability is exchanged in an orderly transaction between market participants
      • An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities;
      • it is not a forced transaction (for example, a forced liquidation or distress sale).
    • The price is for a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the item
fas157 related definitions11
FAS157 – Related definitions
  • Valuation premise – the assumption about how market participants would use an asset
    • Choose the premise based on “highest and best use”
      • In-use premise
        • Provides maximum value through use in combination with other assets
      • In-exchange premise
        • Provides maximum value principally on a stand-alone basis
valuation techniques
Valuation Techniques
  • Market approach
    • Uses observable prices from market transactions for comparable assets or liabilities
  • Income approach
    • Analysis of future cash flows using present values
  • Cost approach
    • Estimates cost to replace an asset’s service capacity

A change in valuation technique is a change in accounting estimate, not a change in accounting principle

valuing liabilities
Valuing Liabilities
  • The valuation technique must consider the reporting entity’s credit standing
    • A reporting entity could record a GAIN for derivatives at a measurement date because the fair value of the liability decreases in response to a credit downgrade if all other inputs remain unchanged
restrictions on assets
Restrictions on Assets
  • Restrictions are evaluated to determine whether they are an attribute of the asset or an attribute of the reporting entity
    • If sold, would the restriction transfer to another holder?
    • If yes, the impact of the restriction would be taken into consideration (adjust asset fair value downward)
    • If no, the restriction would not reduce the fair value
other provisions of fas157
Other provisions of FAS157
  • It is now possible to recognize a gain on the day recognized (previously prohibited under EITF 02-3)
  • Blockage adjustments are not permitted in pricing
  • Bid-ask spreads
    • Use the price within the bid-ask spread that is most representative of fair value in the circumstances
fas 157 disclosures
FAS 157 Disclosures
  • Will be extensive and reported in three sections (see paragraph A33-A36 for examples)
    • Assets and liabilities measured at fair value on a recurring basis
      • Tabular display reconciles beginning and ending amounts when significant Level 3 inputs are used
    • Assets and liabilities measured at fair value on a nonrecurring basis (impairment of assets, etc.)
    • For all fair value measurements, a table showing the reliance on Level 1, 2 or 3 inputs plus discussion of the valuation techniques used for the measurements
fas 157 effective date
FAS 157 – effective date
  • Implementation is prospective
  • Required for financial statements issued for fiscal years beginning AFTER Nov. 15, 2007
fas 159 the fair value option

FAS 159 – The Fair Value Option

Optional use of fair value for certain assets and liabilities

essentially a one time election
Essentially a one-time election
  • On a contract by contract basis, company can designate specified financial instrument to be accounted for using fair value instead of the usual measurement technique
  • Companies may be able to reduce volatility in reported earnings caused by measuring assets and liabilities differently
other benefits
Other “benefits”
  • Movement toward accounting for all financial instruments at fair value
  • Brings US GAAP into closer agreement with IASB 39 which already contains a fair value election
eligible assets liabilities
Eligible assets & liabilities
  • Most recognized investments including those currently accounted for using the equity method
    • But cannot be used to recognized investments that must be consolidated (VIEs, subsidiaries)
  • Many recognized liabilities
    • Excluding leases, demand deposits of banks, postretirement plans, etc.
eligible assets liabilities23
Eligible assets & liabilities
  • Firm purchase commitments that would otherwise not be recognized at inception (but only for ones involving financial instruments)
  • Rights and obligations under warranties that meet certain requirements
  • Certain host financial instruments that result from separation of embedded nonfinancial hybrid instruments under FAS133
irrevocable election
Irrevocable election
  • Must be applied to contracts as a whole and not to parts of contracts
  • Changes in fair value will be recognized in earnings during each reporting period
election date
Election date
  • Transition – any eligible item as of the date that FAS159 is initially adopted
  • Thereafter:
    • The eligible item is first recognized (including entering into an eligible firm commitment)
    • Occurrence of a short list of other events
  • If fair value option is elected, company must disclose separately assets and liabilities measured at fair value from those not measured at fair value
    • Intended to help readers compare companies that choose the option to those that choose not to elect fair value accounting
disclosures specific 1
Disclosures – specific (1)
  • Why fair value option was selected for each eligible item
  • Difference between fair value and aggregate unpaid principal amounts
  • Relation to other fair value measurements under FAS157
  • Description of partial applications to groups of similar items and why company chose not to be consistent
disclosures specific 2
Disclosures – specific (2)
  • Loans carried at assets at fair value that are past due by 90 days or more
  • APB18 disclosures about investments that would otherwise have been reported using equity method
  • Description of how interest and dividends are measured and reported for items with fair value election
  • Quantitative information (line by line) as to where gains and losses related to fair value option have been reported in the income statement
fin 46r and 48
FIN 46R and 48
  • Lecture notes are in doc file (not ppt) and this was covered as part of the deferred tax lectures
  • Note to self – need to verify
  • FIN46R notes were only in doc file, I think
fsp of interest
FSP of interest
  • Note that FSP158-1 (Feb 21, 2007) contains Update of Illustrations, Application Guidance
    • Don’t hit ‘print’ – 257 pages!
    • Fixes examples in FAS87, FAS88 & FAS106 as related to issuance of FAS158. FAS132R was “fixed” in FAS158 so is not included in this FSP
forthcoming first half 2007
Forthcoming – first half 2007
  • Conceptual Framework – Reporting Entity – preliminary views
  • Business Combinations – for-profit:
    • Applying the Acquisition Method (final)
    • Noncontrolling Interests (final)
  • Derivatives disclosures (final)
forthcoming first half 200733
Forthcoming – first half 2007
  • Implementation Projects
    • Statement 140—Transfers of Financial Assets (ED)
    • Insurance Risk Transfer (ED)
    • Financial Guarantee Insurance (ED and maybe final by mid year)
  • Definition of liability vs. equity (Prelim views expected first half of 2007)
forthcoming second half 2007
Forthcoming – second half 2007
  • Financial Statement Presentation (prelim views maybe by 3rd quarter)
  • Revenue recognition (PV by 3rd or 4th Quarters)
longer term projects
Longer term projects
  • Not-for-profit business combinations and intangible assets
    • In process of reviewing comments (nothing on calendar about when a final version is expected)