FASB Update Baruch College Financial Reporting Conference May 3, 2007 Leslie F. Seidman The views...

FASB Update

Baruch College Financial Reporting Conference

May 3, 2007Leslie F. Seidman

The views expressed in this presentation are my own and do not represent positions of the Financial Accounting Standards Board.Positions of the FASB Board are arrived at only after extensive due process and deliberations.

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Agenda

• Agenda Snapshot

• Guidance Expected to Be Issued in 2007

• Longer-term Projects

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Converging Projects

Joint Projects:• Conceptual Framework• Acquisition Method and Noncontrolling

Interests• Leasing• Presentation of Financial Statements • Revenue RecognitionModified Joint Projects:• Liabilities and Equity (FASB leading)• Fair Value Measurement (FASB led)

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Converging Projects (cont’d)

“Short-term” Convergence Projects:

• Earnings per Share

• Income Taxes

Convergence Pipeline

• Insurance (FASB ITC?)

• Consolidations (FASB ITC?)

• Internally generated intangible assets

• Pensions: Phase 2 (Joint?)

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FASB-Only Projects

• Combinations of Not-for-Profit Organizations

• Statement 140 Revisions

• Derivative Disclosures

• Financial Guarantees

• Insurance Risk Transfer

• Research and Development

• Loan Disclosures

• Emission Allowances

• Numerous FASB Staff Positions, EITF Issues

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Guidance Expected to Be Issued in 2007

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Business Combinations and Noncontrolling Interests

• The Boards confirmed much of the guidance that was proposed in the June 2005 Exposure Drafts

• Overall principles reaffirmed in redeliberations:• Record 100% of the assets acquired and liabilities assumed

at FV on acquisition (control) date, not just the % purchased. – New guidance on noncontractual contingencies

• Transactions involving noncontrolling (minority) interests are equity transactions; no gains/losses as long as still in control

• In a step acquisition/disposition, remeasure previous holdings (in earnings) upon gaining or losing control.

• Final Statements expected to be issued in 3Q 2007. Effective date: Fiscal years beginning after 12/15/08 (1/1/09 for calendar year co’s)

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Derivatives Disclosure

• Investors dissatisfied with disclosures about derivatives, primarily in nonfinancial sectors

• Will require (for all entities):– More narrative disclosure– Detailed quantitative information by risk (including

notionals)– Info about where amounts are reported in balance

sheet and income statement

• Comments in on Exposure Draft; will begin redeliberations in 2Q ‘07

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FAS 133, Critical Terms Match ¶65

• Board is aware of practice issues, esp. FX

• FASB staff is researching

• Board meeting on scope alternatives in May

• Possibilities:– Clarify paragraph 65

– Reconsider paragraphs 65 and 68 together

– Fundamentally reconsider hedging by risk (in light of FVO). 

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FAS 133, Short-Cut Issues ¶68

–Proposed clarifications of shortcut issues:–Trade date/settlement date differences: OK–Market conventions (rounding coupons) that

result in slight premiums and discounts: OK–Hedges of other debt instruments whose

carrying amount ≠ par (a.k.a. “late hedging”): NOT OK

–Zero-coupon instruments: NOT eligible

• Expect to issue Draft DIG Issue in 2Q; 60 day comment period

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Longer-term Projects

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Accounting for Leases

• Current GAAP: “All or nothing” evaluation of whether leased asset has been sold.

• Investors routinely add operating leases to lessee balance sheets using incomplete disclosures

• Possible new approach: What are the assets and liabilities relating to the lease contract? Present value of expected lease payments?

• Implications for lessors (revenue recognition)– Is there a point where enough of the benefits/risks been

transferred that the original asset should no longer be recognized?

• Goal is Preliminary Views document in 2008 (not an Exposure Draft)

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Financial Statement Presentation• Establish a common standard for presentation of

information in the financial statements to facilitate financial analysis and investment decisions.

• Criticism of existing practices:– Categories in financial statements do not “track” with each

other (e.g., Cash Flow Statement categories do not relate to presentation on Balance Sheet or Income Statement)

– “Core” and “Noncore” items are intermingled, making it harder to forecast

– Not enough information about the nature of income statement items, most currently organize by functional categories, which group unlike items (SG&A)

– Different accounting methods are grouped, such as accruals and value changes

• Expect to issue Preliminary Views document in 3Q 2007

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Revenue Recognition

• Current guidance is voluminous, industry-specific and inconsistent

• Developing 2 competing models:1) Revenue = Customer consideration; allocate to

deliverables and recognize as obligations are satisfied2) Revenue = Sum of Fair Value of obligations (using exit

price, not actual price); recognize any difference from contract price up front. Then, recognize revenue as value of obligations change

• Goal is to issue a Discussion Paper with both approaches in 3Q 2007

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Liabilities and Equity

• Key problem: Equity hybrids and derivatives have vastly different reporting based on minor differences in terms

• Developed 3 approaches:– Ownership/Settlement (poss. cash settlement trumps)– Narrow View of Equity (only common stock)– Reassessed Expected Outcomes (at every reporting date,

allocate between debt and equity based on likelihood of settlement in stock)

– Underlying concepts differ – Which improves information to investors?

• Goal is to issue either Preliminary Views or Discussion Memo in 3Q 2007 (IASB likely ITC)

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Sources of Information

• The FASB website www.fasb.org

– Project updates – Effective dates

– FSPs – Exposure drafts

– EITF material – Original Statements

– Live webcasts – Minutes of Board mtgs

• Sign up for a weekly e-mail from the FASB (under Action Alert on left side of home page).