Financial Accounting Standards Board National Association of Regulatory Utility Commissioners FASB Update October 8, 2007 Robert C. Wilkins Senior Project

Financial Accounting Standards Board

National Association of Regulatory Utility Commissioners

FASB Update

October 8, 2007

Robert C. WilkinsSenior Project Manager

[email protected] 203-956-5236

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.

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 economy

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

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

Information on Website www.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

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 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


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 occur

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 services

• 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.


Forthcoming

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

(Continued)


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.


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



• Contingent Consideration Arrangements– Include fair value of contingent consideration

in the fair value of the total consideration–Eliminates the practice of deferring

recognition

(Continued)



• 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



• 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



• 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)



• 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)



• 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)



• 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


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)


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


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


Forthcoming

FASB Statement No. 160, Noncontrolling Interests in Consolidated Subsidiaries

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


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.


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

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


• 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


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 benefits

• Clarifies that a tax position could be effectively settled upon examination by a taxing authority


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 46(R)

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, 2007



• 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 required.

• Consequently, the Board’s deliberations on emission allowances is being delayed until that decision is made.



• 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(Continued)

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 Hierarchy• G: Applicability to the Not-for-Profit Sector• H: Entire Framework

Financial Statement Presentation

Statement of Financial Position Statement of Earnings and

Comprehensive Income Statement of Cash Flows

Business Operating assets and liabilities Investing assets and liabilities

Business Operating income Investment income

Business Operating cash flows Investing cash flows

Discontinued operations Discontinued operations Discontinued operations

Financing Financing assets Financing liabilities

Financing Financing income Financing expenses

Financing Financing asset cash flows Financing liability cash

flows

Equity Equity

Income taxes Income taxes Income taxes

Statement of Changesin Equity

Financial Statement Presentation

• Some key changes:–Treasury activities in financing section

–Peripheral business activities in investing section

–Fixed asset acquisitions in business section

– Income taxes in separate section

–Elimination of “Extraordinary” category

–Requirement of direct method for cash flows (likely)

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

Questions?

Statement 140

Fair Value Option

Emission AllowanceStatement 157

Int’l ConvergenceIAS 39