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Financial Accounting Standards Board. National Association of Regulatory Utility Commissioners FASB Update March 31, 2008 Robert C. Wilkins Senior Project Manager [email protected] 203-956-5236. Disclaimer.

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Financial accounting standards board l.jpg
Financial Accounting Standards Board

National Association of Regulatory Utility Commissioners

FASB Update

March 31, 2008

Robert C. Wilkins

Senior Project Manager

[email protected] 203-956-5236


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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 AICPA’s Code of Professional Conduct

  • Standard-setter, not a regulator

  • No enforcement authority


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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


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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 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


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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 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


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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


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Financial Accounting Standards Board

FASB Statement No. 141(R), Business Combinations


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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


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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


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    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)


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    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.


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    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


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    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)


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    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


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    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


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    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)


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    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)


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    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)


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    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


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    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)


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    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


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    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


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    Financial Accounting Standards Board

    Forthcoming

    FASB Statement No. 160, Noncontrolling Interests in Consolidated Subsidiaries


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    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


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    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.


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    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


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    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


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    Financial Accounting Standards Board

    FASB Statement No. 161,

    Disclosures about Derivative Instruments and Hedging Activities


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    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


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    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


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    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


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    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


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    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


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    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


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    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


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    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


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    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


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    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


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    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


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    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.


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    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


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    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


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    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


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    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)


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    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)


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    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


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    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


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    Proposed FSP APB 14-a on the Accounting for Certain Convertible Debt Instruments

    Proposed FSP APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)

    • Issued for comment on 8/31/2007

    • Board redeliberations concluded on March 26, 2008

    • Guidance to be applied retroactively with restatement of prior years’ statements


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    Convertible Debt Instruments That May Be Settled in Cash upon Conversion

    Proposed FSP APB 14-a (Continued)

    • Will require separation of all convertible debt instruments that may be settled partially or entirely in cash upon conversion

    • Will require initial measurement of the liability component at the fair value of a similar instrument that does not have an equity component


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    Convertible Debt Instruments That May Be Settled in Cash upon Conversion

    Proposed FSP APB 14-a (Continued)

    • The liability component should be amortized using the interest method, in the same manner as a debt instrument without an equity component issued at a discount.

    • The equity component is not remeasured, as long as it meets the criteria for equity classification in EITF Issue 00-19.


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    Convertible Debt Instruments That May Be Settled in Cash upon Conversion

    Proposed FSP APB 14-a (Continued)

    • Regardless of the form of consideration transferred at settlement (cash, shares, or a combination), an issuer should account for a settlement as an extinguishment of the debt component and a reacquisition of the equity component.

    • The portion of the consideration equal to the fair value of the debt component on the date of settlement is allocated to the extinguishment of the debt component. The remainder of the fair value of the total consideration transferred is allocated to the reacquisition of the equity component.


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    Proposed FSP 132(R)-a upon Conversion

    Proposed FSP FAS 132(R)-a, Employers’ Disclosures about Postretirement Benefit Plan Assets (Issued 03/18/08)

    • Objective: To improve disclosures about plan assets and to require nonpublic entities to disclose net periodic cost

      • Requires separate disclosure of the fair value of each major category of plan assets based on the types of assets held in the plan


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    Proposed FSP 132(R)-a upon Conversion

    Proposed FSP FAS 132(R)-a (Continued)

    • Disclosures about the following major categories, if significant, are also required:

      Cash and cash equivalents Equity securities

      Governmental debt securities Structured debt

      Corporate debt securities Asset-backed securities

      Private equity funds Hedge funds

      Venture capital funds Real estate

      Derivatives, segregated by type (interest rate, FX, etc.)


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    Proposed FSP 132(R)-a upon Conversion

    Proposed FSP FAS 132(R)-a (Continued)

    • The following disclosures are also required:

      • Disclosures about the nature and amount of concentrations of risk arising within or across categories of plan assets

      • Disclosures about fair value measurements, similar to those required by FASB Statement No. 157, Fair Value Measurements.


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    Proposed FSP FAS 142-f on Intangible Assets upon Conversion

    Proposed FSP FAS 142-f, Determination of the Useful Life of Intangible Assets (Issued 11/26/2007)

    • Proposal would amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.

      • It would allow an entity to consider its own assumptions about renewal or extension of the arrangement.

      • No guidance on the measurement or amortization of a recognized intangible asset


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    Forthcoming Exposure Draft, upon ConversionDisclosure of Loss Contingencies

    The proposal would significantly expand and improve thequalitative and quantitative disclosures about loss contingencies

    • Qualitative––An entity shall provide disclosures to enable users of financial statements to assess the likelihood, timing, and amount of future cash flows associated with loss contingencies.  Such disclosure shall include discussion of the risks loss contingencies pose to the entity and their potential effects on the entity’s financial position, cash flows, and results of operations .


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    Forthcoming Exposure Draft, upon ConversionDisclosure of Loss Contingencies

    Other disclosures about loss contingencies

    • Qualitative––At a minimum,disclose a description of the contingency (for example, how it arose, its legal or contractual basis, its current status, and the anticipated timing of its resolution), a description of the factors that are likely to affect the ultimate outcome of the contingency along with their potential impact on the outcome, management’s qualitative assessment of the most likely outcome of the contingency, and significant assumptions made by management.


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    Forthcoming Exposure Draft, upon ConversionDisclosure of Loss Contingencies

    Other disclosures about loss contingencies

    • Quantitative––Disclose the following information about the entity’s gross exposure to loss from the contingency:

      • The amount of the claim or assessment against the entity (including any estimated treble or punitive damages, if known), if applicable, or

      • If there is no claim or assessment amount, an estimate of the entity’s maximum exposure to loss


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    Forthcoming Exposure Draft, upon ConversionDisclosure of Loss Contingencies

    Other disclosures about loss contingencies

    • Quantitative––In addition, an entity may supplementally disclose management’s best estimate of the possible loss or range of loss, if management believes that the amount of the claim or assessment or the maximum exposure to loss is not representative of the entity’s actual exposure


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    Forthcoming Exposure Draft, upon ConversionDisclosure of Loss Contingencies

    Other disclosures about loss contingencies

    • Quantitative––In addition, a reconciliation is required, in a tabular format, of the total amount recognized in the aggregate for loss contingencies in its statement of financial position at the beginning and end of the period. Detailed components in the reconciliation are specified.


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    Forthcoming Exposure Draft, upon ConversionDisclosure of Loss Contingencies

    Other disclosures about loss contingencies

    • Quantitative––Even if an entity has made an assessment and determined that the likelihood of loss is remote, it shall disclose a loss contingency, or a combination of loss contingencies, if events that are expected to occur in the near-term (within one year) could have a severe impacton the entity’s financial position, cash flows, or results of operations.


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    Forthcoming Exposure Draft, upon ConversionDisclosure of Loss Contingencies

    • The proposal to significantly improve thedisclosures about loss contingencies is expected to be released for comment in late April or May 2008.

    • It is proposed to be applied prospectively for financial statements issued for fiscal years ending after December 15, 2008, and for both interim and annual periods in subsequent fiscal years.


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    Exposure Draft on Financial Guarantee Contracts upon Conversion

    A final Statement, Accounting for Financial Guarantee Insurance Contracts, should be issued soon (most likely numbered #162)

    • The scope is limited to financial guarantee insurance and reinsurance contracts issued by enterprises included within the scope of FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises.

    • Its objective is to eliminate diversity in the recognition and measurement of claim liabilities.


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    Statement 133 Implementation upon ConversionIssuesFinalized

    • 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.


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    Organization of Topics upon Conversion

    • Recent FASB Statements

    • Other Recent Documents

    • Projects of Particular Interest

      • Fair Value Option

      • Emission Allowances

      • Valuation of Commodity Inventory

      • Accounting for Hedging Activities


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    Financial Accounting Standards Board upon Conversion

    FASB Statement No. 159,

    The Fair Value Option

    for Financial Assets

    and Financial Liabilities


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    FVO Project Has Two Phases upon Conversion

    • 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


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    Fair Value Option: Next Steps upon Conversion

    • Deliberations on Phase 2 will likely begin in the last half of 2008

    • Central issue will be deciding which assets and liabilities should be included in its scope

      • Likely include investment property

      • Could include natural gas storage contracts, transportation contracts, tolling (lease) contracts, etc.


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    SEC Advisory Committee on Improvements to Financial Reporting

    • Established in July 2007 to examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors

    • Published a “Progress Report” on February 14, 2008 that included numerous “Developed Proposals”


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    SEC Advisory Committee on Improvements to Financial Reporting

    • Selected “Developed Proposals”:

      • GAAP should be based on a presumption that formally promulgated alternative accounting policies should not exist. The SEC should recommend that any new projects undertaken jointly or separately by the FASB not provide additional optionality, unless, in rare circumstances, it can be justified.

      • FASB goal should be to minimize avoidable complexity.


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    Emission Allowances Reporting

    • 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


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    Emission Allowances Reporting

    • 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


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    Valuation of Commodity Inventory Reporting

    • 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


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    Valuation of Commodity Inventory Reporting

    • A proposed FSP is being developed that would specify the accounting for inventories (under the scope of ARB 43) included in an entity’s trading activities.

      • Entities should determine trading inventories based on their specific facts and circumstances and guidance in current GAAP about trading activities. “Trading” is not further defined.

      • Inventories included in an entity’s trading activities shall be initially and subsequently measured at fair value through earnings .


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    Valuation of Commodity Inventory Reporting

    • The proposed FSP would not change the accounting for nontrading inventories, such as those that are held for production, retail, wholesale, distribution, or any other nontrading activities.

    • It would required disclosures that enable financial statement users to understand the measurement basis for its trading inventories and the effect of inventory transfers from nontrading to trading and vice versa, if any, on the entity’s financial performance.


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    Valuation of Commodity Inventory Reporting

    • The Notice for Recipients for the proposed FSP also solicits input from constituents regarding other possible scopes:

      • Commodity inventories that are not used in production, wholesale, retail, or distribution activities.

      • Trading inventories that have readily determinable fair values (that is, those whose fair value estimates use only Level 1 and Level 2 inputs under Statement 157)


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    Valuation of Commodity Inventory Reporting

    • Other possible scopes:

      • All trading items even though those not physical inventories (that is, inventories included in an entity’s trading activities, including trading items other than inventories within the scope of ARB 43).

        • That would also potentially include storage and transportation contracts and land included in trading activities.


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    Emission Allowances Reporting

    • The emission allowances project is proceeding separately from the commodity inventory project.

    • Both the IASB and the FASB are pursuing this issue concurrently, though not officially as a joint project.

    • Scope issues will be addressed before recognition and measurement issues.


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    Accounting for Hedging Activities Reporting

    • Project added in May 2007 to achieve the following:

      • Resolve practical issues that have arisen under Statement 133

      • Simplify accounting for hedging activities

      • Make the hedge accounting model and the associated disclosures easier to understand for financial statement users

      • Address differences in the accounting for derivative instruments and hedged items or transactions

        (Continued)


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    Accounting for Hedging Activities Reporting

    • Tentative Conclusions

      • Establish a fair value methodology to hedge accounting

      • Eliminate bifurcation-by-risk, the shortcut method, critical terms match, and the requirement to quantitatively assess effectiveness in order to qualify for hedge accounting

      • Thus, the hedged risk must be the risk of all changes in fair value of the hedged item or all changes in the hedged cash flows

        (Continued)


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    Accounting for Hedging Activities Reporting

    • Tentative Conclusions

      • However, bifurcation-by-risk permitted for hedges of foreign currency risk and for hedges of an entity’s own debt

      • Entities would be permitted to designate just foreign currency risk if it so desired.

      • Entities also would be permitted to designate just interest rate risk for hedges of its own fixed- or variable-rate debt. Interest rate risk hedges of an entity’s own debt would be permitted only at initial recognition of the debt.

        (Continued)


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    Accounting for Hedging Activities Reporting

    • Tentative Conclusions

      • Eliminate the “highly effective” criterion

      • A qualitative evaluation must demonstrate that (a) an economic relationship exists between the hedging instrument and hedged item or forecasted transaction, and (b) the derivative should be expected to reasonably offset changes in fair value or the variability in the hedged cash flows attributable to all risks.

        (Continued)


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    Accounting for Hedging Activities Reporting

    • Further deliberations expected in April

    • Exposure Draft likely issued in June or July 2008.


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    Questions? Reporting

    Fair Value Option

    Statement 157

    Emission Allowance

    IAS 39

    Int’l Convergence

    Statement 140


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