Proposed Statement 133 Implementation Issue No. C21—Scope Exceptions: Whether Options (Including Embedded Conversion Options) Are Indexed to both an Entity’s Own Stock and Currency Exchange Rates
Last Updated: January 15, 2009 (Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
The objective of this project is to provide implementation guidance on determining whether convertible debt with elements of foreign exchange risk qualifies for the scope exception provided in paragraph 11(a) of FASB Statement No. 133, Accounting for Derivatives Instruments and Hedging Activities.
Due Process Documents
On April 19, 2007, the Board posted tentative guidance as Statement 133 Implementation Issue No. C21, "Scope Exceptions: Whether Options (Including Embedded Conversion Options) Are Indexed to both an Entity's Own Stock and Currency Exchange Rates." The comment period ended on May 24, 2007.
Summary of Decisions Reached to Date
In June 2008, the Board decided that the Proposed Statement 133 Implementation Issue will not be issued as final. The project was removed from the Board’s agenda because that issue was resolved by the consensus in EITF Issue No. 07-5, “Determining “Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.”
Board/Other Public Meeting Dates
The Board meeting minutes 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 become final only after a formal written ballot to issue a final Statement, Interpretation, FSP, or Statement 133 Implementation Issue.
|June 25, 2008||Board Meeting—Project removed from the agenda|
|July 25, 2007||Education Session—Proposed Statement 133 Implementation Issue C21 Redeliberations|
|March 14, 2007||Board Meeting—Discussion of the issuance of proposed Statement 133 Implementation Issue|
|February 15, 2006||Board Meeting—Addition of project to agenda|
The issue centers on whether an equity option embedded in a convertible debt instrument qualifies for the paragraph 11(a) scope exception from the requirements of Statement 133. This exception is granted to contracts issued or held by a reporting entity that are both (1) indexed to that reporting entity’s own stock and (2) classified in stockholders’ equity in its statement of financial position. There appears to be a diversity in practice as to whether foreign currency risk causes the embedded equity option, when analyzed on a freestanding basis, to no longer be considered indexed to that reporting entity’s own stock. The following two instruments are presented as examples to demonstrate when this issue arises: (a) a U.S. functional currency company domiciled in Europe issues Euro-denominated convertible debt with conversion terms referencing the U.S. denominated common stock, and (b) a U.S. functional currency company domiciled in Europe issues U.S. denominated convertible debt with conversion terms referencing the Euro-denominated and Euro-traded common stock.