Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final standard.

January 28, 2009 Board Meeting

Financial instruments with characteristics of equity. The Board discussed the classification of puttable and mandatorily redeemable instruments with characteristics of equity. The Board decided to further analyze an approach that would divide such instruments into two categories:

  1. Instruments that are puttable or mandatorily redeemable upon the occurrence of an event that is certain to occur (such as death or retirement)
  2. All other puttable and mandatorily redeemable instruments.

At a future meeting, the Board will discuss classification and possible separation of instruments in each category. One possible outcome would be to classify instruments in category 1 as equity while either classifying instruments in category 2 as liabilities or separating them into liability and equity components.

The Board also discussed the conceptual definitions of a liability and of equity.The Board directed the staff to further develop an approach focused on separating recognition decisions from classification decisions. That approach will entail:

  1. Developing a concept to be used to decide which things qualify for potential recognition
  2. Developing additional standards-level or concepts-level principles for distinguishing between liabilities and equity.

Statement 140 implementation: transfers of financial assets. The Board redeliberated significant issues raised in comments received on FASB proposed Statement, Accounting for Transfers of Financial Assets, and decided to limit the circumstances in which a transfer of a portion of a financial asset is eligible for derecognition. The Board affirmed the definition of participating interest with the following changes:

  1. Remove the proposed exception to participating interests for transfers of portions of equity instruments, derivative financial instruments, and hybrid financial instruments with an embedded derivative that is not clearly and closely related, as described in FASB Statement No.133, Accounting for Derivative Instruments and Hedging Activities.
  2. Exclude from the determination of proportional cash flows the cash flows related to (a) the origination of financial assets (b) effectuating the transfer of the financial assets and (c) servicing the financial assets.
  3. Clarify that third-party guarantees should not be considered in the evaluation of whether the participating interest definition is met.
  4. Clarify that set-off rights of the borrower, in the event of bankruptcy or receivership of the transferor, do not preclude meeting the definition of a participating interest.
  5. Clarify that a financial instrument that is legally a single contract is considered an individual financial asset. For example, a loan transferred to a special-purpose entity before securitization should be considered an individual financial asset. In addition, a beneficial interest (in the loan) issued after the securitization process has been completed should be considered an individual financial asset.
  6. Clarify that transfers of portions of a financial asset that do not individually qualify for sale accounting because they do not meet the participating interest definition, but result in the transferor transferring all of the interests in the original financial asset, should be derecognized when all portions of the financial asset have been transferred.

The Board also decided not to provide an exception to the definition of a participating interest for transfers where the transferor retains a non–pro rata senior interest in the financial asset.

The Board decided to retain the existing language in paragraph 9(b) of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, but to remove the notion of a qualifying special-purpose entity. The Board decided to require look-through provisions to consider the abilities of the beneficial interest holders to pledge or exchange their beneficial interests when the transferee entity is a special-purpose entity involved in a securitization or asset-backed financing arrangement.

Reconsideration of Interpretation 46(R). The Board began redeliberations of six issues related to FASB proposed Statement, Amendments to FASB Interpretation No. 46(R) and decided the following:

  1. Reconsideration of an entity’s status as a variable interest entity (VIE). The Board decided to retain the guidance in paragraph 7 of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which requires an entity to reassess whether an entity is a VIE when certain triggering events occur, and add an additional criterion for reassessing an entity’s status. The preliminary language describing this criterion is as follows (subject to refinement during drafting):
  2. An event occurs which causes the equity holders of the entity to lose the direct or indirect ability through voting rights or similar rights to make decisions about the entity’s activities that have a significant effect on the success of the entity.
  3. Deconsolidation guidance. The Board decided to provide explicit guidance on accounting for the derecognition of VIEs, both upon transition to the final Statement and upon a deconsolidation event occurring after the final Statement’s effective date. The Board decided that an entity should account for such a deconsolidation event using the accounting for the loss of control of a subsidiary in ARB No. 51, Consolidated Financial Statements, as amended by FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements.
  4. Significant variable interests. The Board decided to remove the significance exception from paragraphs 6 and 24 of the proposed amendments to Interpretation 46(R). The Board decided that it also would reconsider the concept of “significance” as it relates to the disclosure requirements after all remaining issues have been redeliberated.
  5. Elimination of the quantitative analysis. The Board decided to eliminate the quantitative analysis in Interpretation 46(R) and paragraph 14C of the proposed Statement, which explicitly factors in expected losses and expected residual returns. The Board also decided to analyze the implications of eliminating the previously required quantitative calculation for determining the primary beneficiary of a VIE (the “expected losses calculation”) on other guidance within the proposed Statement. Further, the Board asked the staff to analyze and provide recommendations as to the feasibility of uniformly amending the expected losses concept throughout the proposed Statement.  
  6. Transition guidance. The Board decided to utilize a transition method similar to the transition provided in paragraph 37 of Interpretation 46(R). That is, enterprises must recognize and measure consolidated elements at their carrying values as if they had been consolidated at the inception of the entity or a subsequent reconsideration date. If ascertaining the carrying value is not practicable, enterprises can measure consolidated elements at fair value.
  7. Separate classification of elements. The Board decided to further analyze the implications of separate classification of elements of consolidated VIEs. This includes determining whether the separate classification should be permitted or required to be presented on the face of the financial statements or in disclosures. Further, the Board asked the staff to provide a recommendation on which consolidated elements should be allowed separate classification.