Financial Accounting Standards Board
ACLI: Financial and Investment
Roundtable
FASB Update
March 19, 2007
John L. Sarno
Practice Fellow, FASB
The views expressed in this presentation are the speakers 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.
Topics to be Covered
• Agenda:
– SFAS 157, Fair Value Measurements
– SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities
– FSPs
– EITFs
– DIGs
Statement 157
• Objectives
– Define fair value
– Establish a framework for measuring fair value
– Enhance disclosures about fair value
– Codify and simplify fair value measurement
guidance within GAAP
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Statement 157 – Scope
• Applies under other pronouncements that require
or permit fair value measurements except as
follows:
– Does not apply to share-based payment transactions
– Does not eliminate practicability exceptions to fair
value in other pronouncements
– Does not apply under pronouncements that require
measurements that are like fair value but that are not
intended to measure fair value
Statement 157 – Fair Value Definition
• Definition of fair value
– 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
• Exit price objective considered from perspective of market participants in the
principal (or most advantageous) market for the asset or liability
• Price in the principal (or most advantageous) market is not adjusted for
transaction costs
• Assets and Liabilities
– For an asset, fair value measurement assumes the highest and best use
from perspective of market participants, regardless of how reporting entity
intends to use the asset
– For a liability, fair value measurement assumes that the liability is
transferred to a market participant of comparable nonperformance risk
(including credit risk)
Statement 157 – Valuation Techniques
• Valuation techniques used to measure fair value
should be consistent with the market approach,
income approach, and/or cost approach
• Valuation techniques that are appropriate in the
circumstances and for which sufficient data are
available shall be used to measure fair value
• In some cases, multiple valuation techniques will
be appropriate
– Results are evaluated and weighted, as appropriate
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Statement 157 – Fair Value Hierarchy
• Level 1—observable inputs that reflect quoted prices in active
markets for identical assets or liabilities
– For large positions of an instrument traded in an active market measure fair
value as P x Q; do not adjust by blockage factor
• Level 2—observable inputs, other than quoted prices included
within Level 1, for the asset or liability, including marketcorroborated inputs
• Level 3—unobservable inputs that reflect the reporting entity’s
assumptions about the assumptions market participants would
use in pricing the asset or liability (including assumptions about
risk)
– EITF 02-3 and recognition of day-one gains and losses
Statement 157 – Bid and Ask Prices
• If an input is based on bid and ask prices, the
•
price within the bid-ask spread that is most
representative of fair value in the
circumstances must be used, regardless of
where that input falls in the hierarchy
Statement does not preclude use of midmarket or other pricing convention as
practical expedient
Statement 157 – Disclosures
• For assets/liabilities measured at fair value on a recurring
basis in subsequent periods:
– Fair value measurements at reporting date
– Level within hierarchy in which the measurements in their entirety
fall (segregating Level 1, Level 2, and Level 3)
– For Level 3 measurements, a reconciliation of beginning and
ending balances, presenting separately:
• Total gains and losses for the period, segregating those recognized in
earnings and a description of where reported in the income statement
–
–
• Purchases, sales, issuance, and settlements (net)
• Transfers in/out of Level 3
Amount of gains/losses included in earnings that are unrealized
Description of valuation techniques (annual periods only)
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Statement 157 – Disclosures
• For assets/liabilities measured at fair value on a
nonrecurring basis in subsequent periods
– Fair value measurements during period and reasons for the
measurements
– Level within hierarchy in which the measurements in their
entirety fall (segregating Level 1, Level 2, and Level 3)
– For Level 3 measurements, description of the inputs and
information used to develop those inputs
– Description of valuation techniques (annual periods only)
Statement 157 – Effective Date
• Effective for financial statements issued for fiscal years
beginning after November 15, 2007
• Early application encouraged, provided the reporting entity has
not yet issued interim or annual financial statements for that
fiscal year
• Transition is prospective, except for the following items, which
have a limited retrospective transition:
– Elimination of blockage factors by broker-dealers and investment
companies
– Difference between carrying amount and fair value of a derivative
(or other instrument) measured using transaction price at initial
recognition under Issue 02-3 or Statement 133 (added by
Statement 155)
Statement 159 – Fair Value Option
• Objective – To consider whether entities should be permitted a
one-time election, at the initial recognition of a contract, to report
financial instruments, and perhaps certain nonfinancial
instruments with characteristics similar to financial instruments,
at fair value with the changes in fair value included in earnings
• Phase 1 addresses the fair value option for most financial
assets and financial liabilities
• Phase 2 will consider permitting the fair value option for certain
nonfinancial assets and nonfinancial liabilities and some of the
financial assets and financial liabilities excluded from the scope
of Phase 1
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Statement 159 – Reasons for FVO
• Entities will be able to avoid reporting volatility in
•
•
•
earnings that results from using different
measurement attributes in reporting various assets
and liabilities
Entities will be able to avoid some of the problems
and effort required to apply FAS 133
International convergence—the IASB has
incorporated a fair value option for financial
instruments in IAS 39, Financial Instruments:
Recognition and Measurement
Expand use of fair value measurement attribute
Statement 159 – FVO Election
• The election of the fair value option:
– Is made on an contract-by-contract basis
– 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
Must be made at initial recognition or on date of (a) a new-basis
event, (b) a requirement to apply the equity method, (c) no longer
being required to consolidate, or (d) no longer qualifying for fair
value of financial assets under specialized accounting principles
• No eligibility criteria imposed on the election of the fair
value option
Statement 159 – Scope Issues
• Phase 1 scope: All financial assets and financial liabilities,
with the following exceptions:
– Interests that would otherwise be consolidated
– Financial assets and financial liabilities recognized under lease
contracts
– Employers’ and plans’ financial obligations for pension benefits,
–
–
other postretirement benefits, postemployment benefits, employee
stock option / stock purchase plans, & deferred compensation
Deposit liabilities of financial institutions
• Contain nonfinancial components will be considered in phase two
Financial instruments that are, in whole or in part, classified as
equity (including “temporary equity”)
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Statement 159 – Scope Issues
• Phase 1 scope: Recent decisions during redeliberations
– For equity method investments, election must be applied to all
financial investments in the investee (equity and debt)
– Insurance and reinsurance contracts and warranty rights and
–
–
obligations that (a) meet the definition of a financial instrument, or
(b) do not prohibit settlement by payment to third-party provider of
goods or services (rather than to insured party or claimant), will be
eligible
Written loan commitments not accounted for as derivatives will be
eligible
A financial instrument “host contract” accounted for separately due
to a bifurcated embedded derivative will be eligible
Statement 159 – Scope Issues
• Phase 1 scope also includes firm commitments
(as defined in FAS 133) that would otherwise not
be recognized at inception under existing GAAP
and that involve only financial instruments
– FVO election must be made at inception of the firm
commitment
• Current and deferred income tax assets and
liabilities are not contractual, thus excluded from
the scope
Statement 159 – Changes in Fair Value
• Companies would not be permitted to elect to recognize in
earnings the change in an instrument’s fair value attributable to
only certain selected risks, rather than the total change in fair
value
– The Board decided not to permit a by-selected-risk model for the Fair Value
Option project because it would undermine the objectives of the project
• Costs and fees related to assets and liabilities for which FVO is
elected must be recognized in earnings as incurred (not
deferred)
• The Board decided not to curtail a debtor’s recognizing in
earnings the effect of changes in its creditworthiness in reporting
liabilities at fair value when the fair value option has been
elected
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Statement 159 – Selected Disclosures
• Basis for electing FVO for each eligible item (or
group of similar eligible items)
– Information to enable users to relate groups of similar
items to lines in balance sheet
• For each line in balance sheet that includes an
item for which FVO is elected
– Information to enable users to relate each line to FAS
157’s fair value disclosures
– Carrying amounts of items included in each line that
are not eligible for FVO
Statement 159 – Selected Disclosures
• By line in balance sheet, difference between aggregate fair value and
unpaid principal balance of:
– Loans and long-term receivables (other than FAS 115 securities) that have contractual
principal amounts and for which FVO is applied
– Long-term debt with contractual principal amounts and for which FVO is applied
• For all loan assets for which FVO is applied:
– Aggregate fair value of loans 90 days or more past due
– If entity’s policy is to recognize interest income separately from other fair value
changes, the fair value of loans on nonaccrual status
– For loans 90 days or more past due, in nonaccrual status, or both, the difference
between fair value and the unpaid principal balance
• For investments that would have been accounted for under the equity
method if FVO had not been elected, the information required by
paragraph 20 of Opinion 18
Statement 159 – Selected Disclosures
• For each period in which an income statement is presented, disclose
the following about items for which FVO is applied:
– Gains and losses from fair value changes included in earnings and the income
statement line where reported
– Description of how interest and dividends measured and where reported
– For all loans and other receivables held as assets, the estimated gains or losses
included in earnings due to changes in instrument-specific credit risk
– For liabilities, the estimated gains or losses included in earnings due to significant
changes in instrument-specific credit risk and qualitative information about reasons for
those changes
• FVO election does not affect reporting categories (operating, investing,
financing) on the Statement of Cash Flows
• Cash flows for trading securities no longer required to be reported as
operating (amendment of FAS 115 and FAS 145)
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Statement 159 – Effective Date &
Transition
• Effective as of the beginning of the reporting entity’s
first fiscal year that begins after November 15, 2007
• Earlier adoption permitted as of the beginning of an
•
entity’s earlier fiscal year, provided that all of the
requirements of FAS 157 are adopted
Early adoption of FVO would be permitted within 120
days of the beginning of the reporting entity’s fiscal
year, provided that interim financial statements have
not been issued for that fiscal year
Statement 159 – Effective Date &
Transition
• At initial adoption, entity may elect the fair value
option for existing financial assets and financial
liabilities that are within the Statement’s scope
(including available-for-sale and held-to-maturity
securities accounted for under FAS 115)
• Effect reported as a cumulative-effect adjustment
of retained earnings as of the effective date
• Transition disclosures
FSPs Issued in 2006/2007
• FSP FAS 13-2, Accounting for a Change or Projected
Change in the Timing of Cash Flows Relating to Income
Taxes Generated by a Leveraged Lease Transaction
• FSP FAS 123(R)-4, Classification of Options and Similar
Instruments Issued as Employee Compensation that Allow
for Cash Settlement upon the Occurrence of a Contingent
Event
• FSP FAS 123(R)-5, Amendment of FASB Staff Position
FAS 123(R)-1
• FSP FAS 123(R)-6, Technical Corrections of FASB
Statement No. 123(R)
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FSPs Issued in 2006/2007
• FSP FAS 126-1, Applicability of Certain Disclosure and Interim
Reporting Requirements for Obligors for Conduit Debt Securities
• FSP FIN 46(R)-6, Determining the Variability to be Considered
in Applying FASB Interpretation No. 46(R)
• FSP FTB 85-4-1, Accounting for Life Settlement Contracts by
Third-Party Investors
• FSP EITF 00-19-2, Accounting for Registration Payment
Arrangements
• FSP AIG AIR-1, Accounting for Planned Major Maintenance
Activities
• FSP FAS 158-1, Conforming Amendments to the Illustrations in
FASB Statements No. 87, No. 88, and No. 106 and to the
Related Staff Implementation Guides
Proposed FSPs
• Proposed FSP FAS 144-c, Classifying and Accounting for a
Depreciable Asset as Held-for-Sale When an Equity Method
Investment is Obtained (comment period ended December 15,
2006)
• Proposed FSP EITF 03-6-a, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are
Participating Securities (comment period ended December 19,
2006)
• Proposed FSP FIN 46(R)-d, Application of FASB Interpretation
No. 46(R) to Investment Companies (comment period ended
December 22, 2006)
Proposed FSPs
• Proposed FSP FIN 39-a, Amendment of FASB Interpretation
No. 39 (comment deadline is January 31, 2007)
• Proposed FSP FAS 128-a, Computational Guidance for
Computing Diluted EPS under the Two-Class Method (comment
deadline March 27, 2007)
• Proposed FSP FIN 48-a, Definition of Settlement in FASB
Interpretation No. 48 (comment deadline March 28, 2007)
• Proposed FSP FAS 154-a, Considering the Effects of Prior-Year
Misstatements When Quantifying Misstatements in Current-Year
Financial Statements (comment deadline April 30, 2007)
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EITF Consensuses in 2006
•
•
•
•
•
•
EITF 05-1, Accounting for the Conversion of an Instrument that Became
Convertible upon the Issuer’s Exercise of a Call Option
EITF 06-1, Accounting for Consideration Given by a Service Provider to
Manufacturers or Resellers of Equipment Necessary for an End-Customer to
Receive Service from the Service Provider
EITF 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant
to FASB Statement No. 43
EITF 06-3, How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That
Is, Gross Versus Net Presentation)
EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements
EITF 06-5, Accounting for Purchases of Life Insurance – Determining the
Amount That Could be Realized in Accordance with FTB No. 85-4
EITF Consensuses in 2006
• EITF 06-6, Debtor’s Accounting for a Modification (or Exchange)
of Convertible Debt Instruments
• EITF 06-7, Issuer’s Accounting for a Previously Bifurcated
Conversion Option in a Convertible Debt Instrument When the
Conversion Option No Longer Meets the Bifurcation Criteria in
FASB Statement No. 133
• EITF 06-8, Applicability of the Assessment of a Buyer’s
Continuing Investment under FASB Statement No. 66 for Sales
of Condominiums
• EITF 06-9, Reporting a Change In (or the Elimination of) a
Previously Existing Difference between the Fiscal Year-End of a
Parent Company and That of a Consolidated Entity or between
the Reporting Period of an Investor and That of an Equity
Method Investee
EITF Issues Discussed in 2006
• EITF 06-10, Accounting for the Deferred Compensation and
Postretirement Benefit Aspects of Collateral Assignment SplitDollar Life Insurance Arrangements (Tentative Conclusion –
Comment Deadline is January 22, 2007)
• EITF 06-11, Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards (Tentative Conclusion –
Comment Deadline is January 22, 2007)
• EITF 06-12, Accounting for Physical Commodity Inventories for
Entities within the Scope of the AICPA Audit and Accounting
Guide, Brokers and Dealers in Securities
– Task Force recommended that Board address the accounting for traded
physical commodity inventory
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DIG Issues in 2006/2007
• Final and tentative DIG Issues:
– DIG B40, Embedded Derivatives: Application of Paragraph 13(b) to
Securitized Interests in Prepayable Financial Assets
– DIG G26, Cash Flow Hedges: Hedging Interest Cash Flows on VariableRate Assets and Liabilities That Are Not Based on a Benchmark Interest
Rate
– DIG H17 (tentative), Foreign Currency Hedges: Hedging FunctionalCurrency-Equivalent Proceeds to Be Received from a Forecasted ForeignCurrency-Denominated Debt Issuance
• During 2007, the Board will decide whether to provide guidance on the
following issues:
– Clarification of the Application of the Shortcut Method
– Convertible Debt with Foreign Exchange Risk
Questions?
Statement 140
Servicing Rights
Statement 133
IAS 39
Beneficial
StatementInterests
140
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