NOTE: You are previewing the GENERAL content asset. If you would like to see the content with navigation menus, remember to associate the general asset with the page. Navigate to the PAGE and then click on preview.

Description and Status of Current Issues

The following Issues described below are currently on the Task Force's list of Open Issues or have been resolved over the past year.

[13-G] [13-F] [13-E] [13-D] [13-C] [13-B] [13-A] [12-H] [12-G] [12-F] [10-B] [09-D] [06-12] [03-15] 

Downloading Documents



Issue No. 13-G, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” Under Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, an entity that issues or invests in a hybrid financial instrument is required to bifurcate an embedded derivative from the host contract and account for the feature as a derivative. One criterion in paragraph 815-15-25-1(a) is that the economic characteristics and risks of the embedded derivative are not clearly and closely related to the economic characteristics and risks of the host contract. When determining whether an embedded derivative is clearly and closely related to the host contract, an entity must first determine the nature of the host contract; for example, whether the host contract is more akin to debt or to equity. The staff received feedback indicating diversity in practice with respect to the methods used in evaluating the nature of the host contract; the use of different methods can result in different accounting outcomes for economically similar instruments. The FASB staff understands that there are two methodologies that exist in practice (the whole-instrument approach and the chameleon approach). In addition, a third approach (the pure-host approach) has been advocated by some who believe that it is the approach that is the most consistent with the principles of Topic 815.
In addition to the diversity in practice with respect to the methods used in evaluating the nature of the host contract, the staff also considered the issue of how an entity should determine the nature of the host contract when an investor in a convertible preferred equity instrument holds a non-contingent, fixed-price redemption option.
Status: At the September 13, 2013 EITF meeting, the Task Force reached a consensus-for-exposure to that an entity would determine the nature of the host contract by considering all stated and implied substantive terms and features of the hybrid financial instrument, weighing each term and feature on the basis of relevant facts and circumstances.
The Task Force further reached a consensus-for-exposure that in evaluating the terms and features of a hybrid financial instrument, the existence or omission of any single term or feature, including a fixed-price, noncontingent redemption feature held by the investor, would not necessarily determine the economic characteristics and risks of the host contract. Although the consideration of an individual term or feature may be weighted more heavily in the evaluation on the basis of facts and circumstances, judgment would be required based on an evaluation of all of the relevant terms and features.
The Task Force also reached a consensus-for-exposure that the effects of initially adopting the amendments in this proposed Update would be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the annual reporting period for which the proposed amendments are effective.
At its October 2, 2013 meeting, the Board ratified the consensus-for exposure and approved the issuance of a proposed Update for a 60-day public comment period.
At the March 13, 2014 EITF meeting, the Task Force, the Task Force considered the feedback received from the nine comment letters received on the proposed Update for this Issue, which was issued on October 23, 2013, with a comment period that ended on December 23, 2013.
The Task Force reaffirmed its consensus-for-exposure that the scope of the proposed amendments would apply to both issuers and holders of hybrid financial instruments issued in the form of a share.
The Task Force reaffirmed its consensus-for-exposure that for a hybrid financial instrument issued in the form of a share, an entity should consider all terms and features—including the embedded derivative feature being evaluated for bifurcation—when determining whether the nature of the host contract is more akin to debt or to equity (that is, the whole-instrument approach).
The Task Force discussed but did not favor establishing a feature-specific weighting system, rebuttable presumptions, or other bright-lines as they believe doing so would be inconsistent with the principles of the whole-instrument approach.
Some Board members indicated that they would prefer that the staff further explore the possibility of introducing more determinative guidance under the whole-instrument approach. Consequently, the Task Force directed the staff to research this Issue further and present its findings in a future education session, which is tentatively scheduled for May 15, 2014.
Dates discussed: September 13, 2013; March 13, 2014


Issue No. 13-F, "Classification of Certain Government Insured Residential Mortgage Loans upon Foreclosure." The financial reporting for foreclosed loans on residential properties fully guaranteed by the Federal Housing Administration (FHA) is diverse. Some creditors do not transfer FHA guaranteed loans out of the loan receivable category and into other real estate owned (OREO) based on obtaining physical possession. Additionally, most creditors do not account for the guarantee as a separate unit of account due to operational difficulties and income statement immateriality.
Specifically, some believe that two units of account should be accounted for; foreclosed real estate as OREO and FHA guarantee amounts as other receivable. Others prefer to reclassify the loan, but recognize the foreclosed real estate at the recorded loan balance including the guarantee. Some suggest that the loan should continue to be classified as loans to the FHA. Finally, some choose to reclassify the loan as other receivables for the pending claim of the total recorded loan balance, interest, and fees expected to be paid by the FHA.
Status: The Board added this Issue to the EITF agenda as part of Issue 13-E and the Task Force decided to address the two Issues separately.
At the November 14, 2013 EITF meeting, the Task Force reached a consensus-for-exposure that that this Issue would apply to residential mortgage loans for which there is a government guarantee that is not separable from the loan, entitling the creditor to recover the full unpaid principal balance of the loan, and at the time of foreclosure the creditor has the intent and ability to recover under the guarantee.
The Task Force reached a consensus-for-exposure that a creditor should reclassify a government guaranteed residential mortgage loan for which the creditor has the intent and ability to recover the full unpaid principal balance of the loan to a separate receivable at the time of foreclosure.
The Task Force considered whether entities should be required to disclose the full amount expected to be received under the guarantee and the fair value less cost to sell of the property collateralizing the government guaranteed loans. The Task Force decided that such recurring disclosures should not be required because the creditor is not exposed to the changes in the fair value of the real estate collateralizing the loans.
The Task Force reached a consensus-for-exposure that this Issue should be applied using the same transition method as Issue 13-E, which will likely be on a modified retrospective basis by means of a cumulative-effect adjustment as of the beginning of the annual reporting period for which the Issue is effective or a prospective transition method.
At its December 11, 2013 meeting, the Board ratified the consensus-for-exposure reached by the Task Force on this Issue and approved the issuance of a proposed Update for a 60-day public comment period that will end on April 30, 2014.
Dates discussed: November 14, 2013


Issue No. 13-E, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The number of vacant or abandoned residential properties resulting from the weakness in the housing market has increased the potential for higher levels of foreclosed other real estate owned (OREO) by banks or similar lenders (creditors). Because of the extended foreclosure processes, creditors are reviewing and updating their policies on when to reclassify a collateralized mortgage loan to OREO. The U.S. GAAP guidance for recognition of foreclosed real estate is set forth in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors; Subtopic 310-10, Receivables—Overall; and Subtopic 360-10, Property, Plant, and Equipment—Overall. However, the terms in substance a repossession or foreclosure and physical possession are not defined in the accounting literature and, also, there is diversity in the timing of their application for purposes of reclassifying the loan receivable.
Status: The Task Force reached a consensus-for-exposure that the guidance in this proposed Update would apply to consumer mortgage loans issued by creditors that are collateralized by the residential real estate property for which the loan was obtained.
The Task Force reached a consensus-for-exposure that an in substance repossession or foreclosure occurs, that is, a creditor is considered to have taken physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be reclassified, upon (a) the creditor obtaining legal title to the residential real estate property or (b) completion of a deed in lieu of foreclosure or similar legal agreement under which the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan, even though legal title may not yet have passed.
The Task Force reached a consensus-for-exposure that creditors should be required to disclose the amount of residential consumer mortgage loans secured by residential properties that are in the process of foreclosure. In addition, the Task Force reached a consensus-for-exposure that creditors that obtain physical possession of real estate property collateralizing a residential consumer mortgage loan should be required to disclose a roll-forward of such foreclosed properties.
The Task Force reached a consensus-for-exposure that entities should apply the amendments in this proposed Update on a modified retrospective basis to residential consumer mortgage loans and foreclosed residential real estate properties existing at the date of adoption by means of a cumulative effect adjustment as of the beginning of the reporting period for which the guidance is effective.
The Task Force decided to permit early adoption of the proposed amendments to eliminate existing diversity as soon as is practicable.
At its June 26, 2013 meeting, the Board ratified the consensus-for exposure and approved the issuance of a proposed Update for a 60-day public comment period.
At the November 14, EITF meeting, the Task Force decided to limit the scope of this Issue to consumer mortgage loans collateralized by residential real estate properties and noted that the prevalent practice issue and diversity related to those arrangements stems from the extended foreclosure timelines and processes, including those resulting from regulatory and legal safeguards afforded to residential borrowers.
The Task Force decided that an in substance repossession or foreclosure occurs, that is, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, when (a) the creditor obtains legal title to the residential real estate property upon completion of a foreclosure sale or (b) the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
The Task Force also decided that a creditor should not wait until the redemption period has expired to reclassify a consumer mortgage loan to residential real estate. The Task Force concluded that an entity should be considered to have obtained physical possession when it obtains legal title because the creditor generally has the right to sell the property subject to the borrower’s right of redemption. In addition, the Task Force observed that redemption rights of the borrower are not considered substantive since they are rarely exercised by the borrower.
The Task Force decided that creditors should disclose the recorded investment in residential consumer mortgage loans secured by residential real estate that are in the process of foreclosure.
The Task Force decided that entities can elect to apply this Issue on either a modified retrospective or prospective basis. The Task Force reached a consensus to permit early adoption of the amendments to eliminate existing diversity as soon as is practicable.
The Task Force decided that the effective date provided sufficient time for both nonpublic and public entities to comply. The Task Force concluded that no additional delay was necessary for nonpublic entities since an entity has an option to apply the amendments on a prospective basis and a nonpublic entity is not required to apply this Issue to interim periods in the year of adoption.
At its December 11, 2013 meeting, the Board ratified the consensus reached by the Task Force on this Issue and approved issuance of the final Update. No further EITF discussion is planned.
Date discussed: June 11, 2013, November 14, 2013


Issue No. 13-D, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.” At the June 11, 2013 EITF meeting, the Task Force considered the issue of whether a performance target that can be achieved after the requisite service period is a performance condition or a condition that affects the grant-date fair value of the awards ("nonvesting condition"). The definition of a performance condition does not specify that the employee must be rendering service when the performance target is achieved. Accordingly, when a performance target can be achieved after the requisite service period ends and there is no forfeiture of the award, stakeholders indicate that there is diversity in practice about whether the performance target should be treated as (a) a performance condition that affects the vesting of an award, (b) a non-vesting condition that affects the grant-date fair value of the award, or (c) a factor that would result in the award being classified as a liability in accordance with paragraph 718-10-25-13.
A majority of the Task Force members expressed initial support for treatment of the performance target as a performance condition because the measurement of the grant-date fair value of the awards is less complex when applying this approach, when compared with applying the non-vesting condition approach. However, some Task Force members and some Board members raised concern that this approach would weaken the main recognition principle of Topic 718, Compensation—Stock Compensation, that compensation cost should be recognized when the employee services are received, and would result in a different approach than under IFRS. The Task Force directed the FASB staff to perform additional analysis on this Issue to assist the Task Force in making a decision on this Issue.
At the September 13, 2013 EITF meeting, the Task Force discussed the results of additional outreach and staff analyses on this Issue as requested at the previous meeting
Status: The Task Force decided that the amendments in this proposed Update would apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that the performance target could be achieved after the requisite service period.
For awards within the scope of this proposed Update, the Task Force decided that a reporting entity would apply existing guidance in Topic 718 as it relates to share-based payments with performance conditions that affect vesting.
The Task Force reached a consensus-for-exposure not to add incremental disclosure requirements to those already required by Topic 718.
The Task Force decided that the amendments in this proposed Update should be applied prospectively to share-based payment awards granted or modified on or after the effective date. Earlier adoption would be permitted.
At its October 2, 2013 meeting, the Board ratified the consensus-for exposure and approved the issuance of a proposed Update for a 60-day public comment period.
At the March 13, 2014 EITF meeting, the Task Force reached a consensus that the amendments resulting from this Issue would apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period.
The Task Force reached a consensus that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition.
The Task Force reached a consensus not to add incremental disclosure requirements to those already required by Topic 718.
The Task Force also reached a consensus that for all entities (both public business entities and all other entities), the guidance would be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption would be permitted. Entities would be permitted to apply the amendments resulting from this Issue either (a) prospectively to all awards granted or modified after the effective date, or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect as of the beginning of the earliest annual period presented in the financial statements would be recognized as an adjustment to the opening retained earnings balance in that period. If retrospective transition is adopted, use of hindsight would be permitted in the measurement and recognition of compensation cost.
The Board ratified the consensus on this Issue at its March 26, 2014 Board meeting.
Dates discussed: June 11, 2013; September 13, 2013; March 13, 2014


Issue No. 13-C, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The settlement of a liability for an unrecognized tax benefit may be reduced by a net operating loss (NOL) carryforward or a tax credit carryforward as required by U.S. tax law. The IRS does not require a disallowed uncertain tax position to be settled in cash if sufficient NOL carryforwards are available to eliminate the additional taxable income, but a taxpayer is required to use NOL carryforwards in the first year taxable income arises.
Topic 740, Income Taxes, does not include explicit guidance on whether and when an entity should present an unrecognized tax benefit as a liability or as a reduction of NOL carryforwards or other related tax credits. In practice, the presentation of the liability for an unrecognized tax benefit depends on the relationship with the NOL carryforwards. If the liability for an unrecognized tax benefit is directly associated with a tax position taken in a tax year that results in or that resulted in the recognition of an NOL carryforward for that year (and the NOL carryforward has not yet been utilized), the unrecognized tax benefit should be presented as a reduction to the NOL; otherwise, it should be presented as a liability.
The issue is how an entity should present a liability for an unrecognized tax benefit in the statement of financial position when nonrecognition of the tax benefit would otherwise reduce a deferred tax asset related to an NOL or tax credit carryforward under the provisions of the tax law.
Status: At the January 17, 2013 EITF meeting, the Task Force reached a consensus-for-exposure. At its January 31, 2013 meeting, the Board ratified the consensus-for-exposure and approved the issuance of a proposed Update for a 60-day public comment period.
At the June 11, 2013 EITF meeting, the Task Force considered the comment letters on the proposed Update. The Task Force concluded that an unrecognized tax benefit or a portion of an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except under certain circumstances.
The Task Force affirmed as a consensus its consensus-for-exposure that no additional recurring disclosures would be required by this Issue because the amendments do not affect the recognition or measurement of uncertain tax positions under Topic 740 and the currently required tabular reconciliation of the gross amount of unrecognized tax benefits will provide public entity users with relevant information about the unrecognized tax benefits offset against net operating loss carryforwards, similar tax losses, or tax credit carryforwards. The Task Force therefore reached a consensus that the amendments resulting from this Issue should be applied prospectively for public entities for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013, and for nonpublic entities for fiscal years (and interim reporting periods within those years) beginning after December 15, 2014. The Task Force also decided to permit an entity to elect a full retrospective transition. The Task Force decided to permit early adoption of the amendments to eliminate existing diversity in practice as soon as is practicable. The Task Force decided that nonpublic entities should have additional time to implement the amendments.
At its June 26, 2013 meeting, the Board ratified the consensus reached by the Task Force on this Issue. No further EITF discussion is planned.
Dates discussed: January 17, 2013, June 11, 2013


Issue No. 13-B, "Accounting for Investments in Qualified Affordable Housing Projects." The low income housing tax credit program is designed to encourage investment of private capital for use in the construction and rehabilitation of low income housing. This program is an indirect tax subsidy that allows investors in a flow-through limited liability entity that manages or invests in a qualified affordable housing project, to receive the benefits of the tax credits allocated to the entity that owns the qualified affordable housing project.
However, investments in qualified affordable housing projects through flow-through limited liability entities have different risks and rewards than traditional equity investments. Accordingly, the principal risk associated with qualified affordable housing investments is potential noncompliance with the tax code requirements resulting in unavailability or recapture of the tax credits and other tax benefits.
Currently, under U.S. generally accepted accounting principles (U.S. GAAP), a reporting entity that invests in a qualified affordable housing project may elect to account for that investment using the effective yield method if all the conditions in paragraph 323-740-25-1 are met. Some stakeholders have said that the conditions requiring the availability of tax credits to be guaranteed by a creditworthy entity and projected yield based solely on the cash flows from guaranteed tax credits to be positive in order to use the effective yield method are overly restrictive and therefore should be reconsidered. To these stakeholders, those conditions prevent many investments from qualifying for the use of the effective yield method, which they believe provides users with a better understanding of the returns from such investments than the equity or cost methods.
At the March 14, 2013 EITF meeting, the Task Force reached a consensus-for-exposure that an entity may elect to account for its Low Income Housing Tax Credit (LIHTC) investment using the effective yield method if all of the following conditions are met: (a) It is probable that the tax credits allocable to the investor will be available, (b) The investor retains no operational influence over the LIHTC investment other than protective rights, and substantially all of the projected benefits are from tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment), (c) The investor's projected yield based solely on the cash flows from the tax credits and other tax benefits is positive, and (d) The investor is a limited liability investor in the affordable housing project for both legal and tax purposes, and the investor's liability is limited to its capital investment. Seventy-three comment letters were received on the proposed Update. All 73 comment letters received on the proposed Update generally agreed with the main principles of the proposed amendments but suggested changes to make the Update more operable.
Status: Based on the comment letter responses, the Task Force revised the condition in paragraph 323-740-25-1(aa) of the proposed Update.
The Task Force also decided that other transactions between the reporting entity and the limited liability entity should not be considered in determining whether the conditions in the proposed Update are met.
The Task Force also tentatively decided that a reporting entity should evaluate its eligibility to use the guidance in the proposed Update (a) based on facts and conditions that exist at the time of the initial investment or (b) upon a change in the nature of the investment or in the relationship with the limited liability entity that could result in the reporting entity no longer meeting the conditions to be able to use the guidance in the proposed Update.
The Task Force also decided that a reporting entity should test a LIHTC investment for impairment when it is more likely than not that the investment will not be realized through the receipt of tax credits and other tax benefits.
In determining whether other types of tax credit investments would meet the revised conditions in the proposed Update, the Task Force requested that the FASB staff perform further outreach and research.
The Task Force further affirmed its consensus-for-exposure that the guidance would include disclosure objectives that would enable users of financial statements to understand the nature of the investments in qualified affordable housing tax projects, the financial statement effect of those investments, and the related tax credits. The Task Force decided to add a separate disclosure showing the amount of deferred tax assets arising from such investments. The Task Force also decided to remove the example disclosure about ongoing regulatory reviews and the status of such reviews, because several respondents were concerned about the cost and effort necessary to provide that disclosure.
Finally, the Task Force affirmed its consensus-for-exposure that an entity should apply the proposed amendments retrospectively, with early adoption permitted as of the beginning of the fiscal year of adoption for financial statements not yet issued. The Task Force also decided that a reporting entity that uses the effective yield method to account for its LIHTC investments prior to the date of adoption of the proposed amendments would be permitted to continue to apply the effective yield method for those LIHTC investments.
At the November 14, 2013 EITF meeting, the Task Force reached a consensus that an entity may elect to account for a limited liability investment in a qualified affordable housing project using the proportional amortization method if certain conditions are met. Under that method, an investor amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the amortization in the income statement as a component of income taxes attributable to continuing operations.
The Task Force reached a consensus that the cost of the investment should be amortized over the period in which the investor receives the tax credits and other tax benefits, and that the resulting amortization would be recognized as a component of income taxes attributable to continuing operations.
The Task Force reached a consensus that this Issue should include required disclosure objectives for all reporting entities that invest in qualified affordable housing projects.
The Task Force reached a consensus that this Issue should be applied on a retrospective basis using the requirements for accounting changes in paragraphs 250-10-45-5 through 45-10 because investments in qualified affordable housing projects have long terms. However, a reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects prior to the date of adoption of this Issue would be permitted to continue to apply the effective yield method.
This Issue would be effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. For all entities other than public business entities, the amendments are effective for the annual period beginning after December 15, 2014, and interim and annual reporting periods thereafter. The Task Force decided not to extend the effective date further for entities other than public business entities because of the elective nature of the guidance.
The Task Force also recommended that the Board consider adding a separate project to the Task Force’s agenda to assess the applicability of this Issue to other types of tax credit investments not just investments in qualified affordable housing projects.
The Board directed the staff to perform pre-agenda decision research on the applicability of this Issue to other types of tax credit investments. The results of that research will be presented to the Board at a later date. On the basis of those results, the Board will decide whether to address this Issue and, if so, whether to add it to the FASB’s or the EITF’s agenda.
At its December 11, 2013 meeting, the Board ratified the consensus reached by the Task Force on this Issue and approved issuance of the final Update. No further EITF discussion is planned.
Dates discussed: March 14, 2013, September 13, 2013, November 14, 2013


Issue No. 13-A, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes." Topic 815, Derivatives and Hedging, provides guidance on the risks that are permitted to be hedged in a fair value or cash flow hedge. Among those risks for financial assets and financial liabilities is the risk of changes in a hedged item's fair value or a hedged transaction's cash flows attributable to changes in the designated benchmark interest rate (referred to as benchmark interest rate risk). Permitting the hedge of the benchmark interest rate risk provides a practical means to designate the risk of changes in the hedged item attributable to changes in the risk-free component of the interest rate (that is, benchmark interest rate risk) in isolation, without requiring that an entity also hedge changes in the spread (which is deemed to reflect credit risk) above the benchmark interest component.
In FASB Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, the FASB decided that, in the U.S., the interest rate on direct Treasury obligations of the U.S. government provides the best measure of the risk-free component for hedge accounting purposes. Thus, the FASB considered defining benchmark interest rate risk based only on U.S. Treasury rates (UST); however, the FASB decided to make an exception and extend the definition to also include interest rate swap rates based on LIBOR. Currently other such indexes may not be used as the benchmark interest rate in the U.S.
The Fed Funds rate is the interest rate at which depository institutions (for example, banks) actively trade balances held at the Federal Reserve with each other, usually overnight. Institutions with surplus balances in their accounts at the Federal Reserve Banks lend those balances to institutions in need of additional reserves in their accounts to meet reserve requirements. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions on any given day is the daily Fed Funds Effective Rate (FFE). The related OIS ("Overnight Index Swap Rate" or "Fed Funds Effective Swap Rate") is the fixed rate swapped in exchange for a floating overnight rate, which is the FFE.
The demand for hedging products incorporating the Fed Funds rate has increased significantly and is driven by an increased focus by banks on their sources of funding, the widening of spreads between LIBOR and OIS, and new regulatory measures to curb systemic risks (such as increased collateralization of derivatives).
As a result, instead of discounting the future cash flows of derivatives using LIBOR, practice is evolving such that some derivative counterparties believe that the appropriate discount rate to use in the valuation of collateralized derivatives should be based on OIS because that rate reflects the lower cost of financing of a collateralized instrument. This has caused derivative counterparties to be more exposed to overnight rates even on derivatives whose cash flows are based on LIBOR resets. That is, because of the widened spreads between LIBOR and OIS, if the fair value of collateralized derivatives is measured by discounting the instruments' LIBOR-based cash flows at OIS, in some cases it may result in significantly different valuations than discounting with LIBOR, which may affect the measurement of ineffectiveness being reported for certain hedges of interest rate risk. Some derivative counterparties believe that OIS should be permitted as a benchmark interest rate in the U.S. for hedge accounting purposes.
The issue is whether the Fed Funds Effective Swap Rate (OIS) should be included as a U.S. benchmark interest rate for hedge accounting purposes.
Status: At the January 17, 2013 EITF meeting, the Task Force reached a consensus-for exposure.
At the January 31, 2013 meeting, the Board ratified the consensus-for exposure and approved the issuance of a proposed Update for a 60-day public comment period.
At the June 11, 2013 EITF meeting, the Task Force considered the comment letters on the proposed Update and affirmed as a consensus its consensus-for-exposure that the Fed Funds Effective Swap Rate (OIS) should be added as a U.S. benchmark interest rate.
The Task Force decided to amend paragraph 815-20-25-6, by removing the following two sentences: "Ordinarily, an entity shall designate the same benchmark interest rate as the risk being hedged for similar hedges, consistent with paragraphs 815-20-25-80 through 25-81. The use of different benchmark interest rates for similar hedges shall be rare and shall be justified."
The Task Force affirmed as a consensus its consensus-for-exposure that no additional recurring disclosures should be required by this Issue.
The Task Force affirmed as a consensus its consensus-for-exposure that the amendments resulting from this Issue should be applied on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Task Force also affirmed as a consensus its consensus-for-exposure that no additional transition disclosures should be required by this Issue.
The Task Force reached a consensus that the amendments resulting from this Issue should be effective immediately upon issuance of the Update.
At its June 26, 2013 meeting, the Board ratified the consensus reached by the Task Force on this Issue. No further EITF discussion is planned.
Dates discussed: January 17, 2013, June 11, 2013


Issue No. 12-H, "Accounting for Service Concession Arrangements." At its January 17, 2013 meeting, the Task Force discussed how an operating entity should account for rights acquired in a service concession arrangement with a grantor and tentatively concluded that the scope of this Issue applies to an operating entity of a public-to-private service concession arrangement that meets both of the following conditions: (a) the grantor controls or has the ability to modify or approve what services the operating entity must provide with the infrastructure, to whom it must provide them, and at what price and (b) the grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. The Task Force acknowledged that in many service concession arrangements, the operating entity receives substantially all of the economic output from the infrastructure during the term of the arrangement (and price paid is not fixed per unit of output or at current market price per unit of output). As such, service concession arrangements would generally meet one or more of the conditions in paragraph 840-10-15-6 to qualify as a lease. However, the Task Force concluded that the accounting for service concession arrangements should be determined based on whether the operating entity controls the infrastructure that is being used to provide the public service. Additionally, the Task Force noted that the notion of control as used in the proposed definition of a lease in the FASB and IASB joint project on leases in paragraphs 842-10-15-2 through 15-3 of the proposed Update, Leases (Topic 842), points to a tentative conclusion that service concession arrangements within the scope of this Issue would generally not meet the definition of a lease under the leasing proposals. The Task Force also discussed whether guidance may be needed for other aspects of service concession arrangements and decided to limit the guidance in this Issue to initial recognition of an operating entity's rights in a public-to-private service concession arrangement.
Status: The Task Force reached a consensus-for-exposure that a service concession arrangement is defined as an arrangement under which a grantor (a public sector entity) enters into a contract with an operating entity to operate the grantor's infrastructure for purposes of providing a public service. A public sector entity includes a governmental body or a nongovernmental entity to which the responsibility to provide public service has been delegated. In a public-to-private service concession arrangement, both of the following conditions exist: (a) the grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price and (b) the grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.
The Task Force also reached a consensus-for-exposure that a service concession arrangement that is within the scope of this Issue would not be a lease under Topic 840, Leases. An operating entity would look to other relevant Codification Topics, as applicable, to account for the various aspects of a service concession arrangement. Infrastructure used in a service concession arrangement would not be recognized as property, plant, and equipment of the operating entity.
The Task Force also reached a consensus-for-exposure that no additional recurring disclosures would be required by this Issue, and the amendments in the proposed Update would be applied on a modified retrospective basis. Entities would apply the transition disclosure requirements in paragraphs 250-10-50-1 through 50-3 for an accounting change resulting from this Issue. No additional transition disclosures would be required. The effective date would be determined after considering stakeholder feedback on the proposed Update.
At its June 26, 2013 meeting, the Board ratified the consensus-for exposure and approved the issuance of a proposed Update for a 60-day public comment period.
At the November 14, 2013 EITF meeting, the Task Force reached a consensus that the scope of this Issue should include only service concession arrangements for which the grantor is a public-sector entity. The Task Force also reached a consensus that such service concession arrangements should not be accounted for as leases under Topic 840 and that the related infrastructure should not be recognized as property, plant, and equipment of the operating entity.
The Task Force reached a consensus that this Issue should be applied on a modified retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption, which would require the cumulative effect of applying the final Update to arrangements existing at the beginning of the period of adoption to be recognized as an adjustment to the opening retained earnings for the period of adoption.
The Task Force reached a consensus that the amendments should be effective for public business entities for annual periods (and interim reporting periods within those annual periods) beginning after December 15, 2014. For all other entities, the amendments should be effective for the annual reporting period beginning after December 15, 2014, and interim and annual reporting periods thereafter. Early adoption is permitted for all entities.
At its December 11, 2013 meeting, the Board ratified the consensus reached by the Task Force on this Issue and approved issuance of the final Update. No further EITF discussion is planned.
Dates discussed: January 17, 2013, June 11, 2013, November 14, 2013


Issue No. 12-G, "Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity." FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), was codified in Topic 810, Consolidation, by ASU 2009-17. ASU 2009-17 states that if a reporting entity holds a controlling financial interest in a variable interest entity (VIE), that entity is determined to be the primary beneficiary of the VIE and is required to consolidate the VIE. Characteristics of a controlling financial interest in a VIE are (a) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance (the power criterion) and (b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE (the losses/benefits criterion).
Reporting entities are often required to consolidate collateralized financing entities (CFEs), such as collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) entities.
Upon adoption of the Update, many reporting entities elected the fair value option to account for all eligible financial assets and financial liabilities of CFEs, which were consolidated upon the effective date of the Update. In many instances, when the entity was initially consolidated the aggregate fair value of the assets of the CFE exceeded the aggregate fair value of the CFE's beneficial interests (liabilities).
This Issue applies to all entities that subsequent to the effective date of ASU 2009-17, are required to consolidate a CFE as a result of (a) a reassessment of the consolidation conclusion, (b) a business combination, or (c) the acquisition of a management contract that results in the consolidation of a CFE.
The Issue is how a reporting entity should initially and subsequently account for the difference between the fair value of the financial assets and the fair value of the financial liabilities of a consolidated CFE.
Status: At the September 11, 2012 EITF meeting, the Task Force reached a consensus-for-exposure, and at the September 27, 2012 meeting, the Board ratified that consensus-for exposure and approved the issuance of a proposed Update for a 60-day public comment period.
At the March 14, 2013 EITF meeting, the Task Force considered the comment letters on the proposed Update. The Task Force affirmed its consensus-for-exposure as a final consensus and clarified that the scope of the Update should include (a) all reporting entities that consolidate a VIE meeting the definition of a CFE, including those that retain beneficial interests in the CFE, and (b) CFEs that hold nonfinancial assets temporarily as a result of default by the debtor on the underlying debt instruments held as assets by the collateralized financing entity or an effort to restructure the debt instruments held as assets by the collateralized financing entity. The Task Force agreed that the definition of a CFE in the proposed Update should be amended to include those CFEs that have nominal equity.
At its March 28, 2013 meeting, the Board ratified the consensus reached by the Task Force on this Issue; however, the final Update was not issued because of concerns raised during the final review. Those concerns related to (a) the use of the term net risk exposure to describe a reporting entity's interest in a CFE, (b) the measurement consequences when the fair value of the financial liabilities is more observable than the fair value of the financial assets and the reporting entity holds nonfinancial assets, and (c) how the prospective transition method should be applied.
At the June 11, 2013 EITF meeting, the Task Force deliberated those concerns and decided to amend certain provisions of the Update by reaching a new consensus-for-exposure (and possible exposure of a revised proposed Update).
The Task Force reached a consensus-for-exposure that a reporting entity that has previously measured the financial assets and financial liabilities of a consolidated CFE at fair value would be required to apply the revised proposed amendments in measuring the financial liabilities of the CFE.
The Task Force considered but decided against permitting the value of the financial assets to be measured on the basis of the fair value of the financial liabilities.
The Task Force reached a consensus-for-exposure that beneficial interests that represent compensation for services (such as management fees) and nonfinancial assets that are being held temporarily by a CFE as a result of default by the debtor on the underlying debt instruments held as assets by the CFE or in an effort to restructure the debt instruments held as assets by the CFE would be measured in accordance with other applicable U.S. GAAP.
The Task Force decided that a reporting entity would be required to apply the guidance in the revised proposed Update if it had previously elected or was required to measure the financial assets and financial liabilities of a consolidated CFE at fair value. Reporting entities that had not previously measured all eligible financial assets and financial liabilities of the consolidated CFE at fair value would be permitted to elect to apply the amendments in the revised proposed Update at the date of adoption. The Task Force also decided that a reporting entity that consolidates a CFE would not be permitted to elect to measure the financial liabilities of the CFE using the fair value option under Topic 825 on financial instruments. The Task Force decided to eliminate the ability to elect the fair value option for the financial liabilities of a collateralized financing entity because doing so promotes comparability among entities that measure the assets and liabilities of the collateralized financing entity using a method other than amortized cost. In reaching its consensus-for-exposure, the Task Force clarified that the scope of the revised proposed Update would apply to (a) all reporting entities that consolidate a VIE that meets the definition of a CFE, including those that retain beneficial interests in the CFE, and (b) CFEs that hold nonfinancial assets temporarily.
The Task Force agreed that a reporting entity that consolidates a CFE and measures the financial liabilities of the CFE using the guidance in the revised proposed Update would disclose all of the information required by Topic 820, Topic 825, and other relevant Topics, as applicable, for the financial assets. The Task Force clarified that the disclosure guidance in the revised proposed Update would be applied only by reporting entities to their consolidated collateralized financing entities and should not be analogized to in other circumstances.
At its June 26, 2013 meeting, the Board ratified the consensus-for-exposure reached by the Task Force in this Issue and approved the issuance of a revised proposed Update for a 60-day public comment period.
At the November 14, 2013 EITF meeting, the Task Force reached a consensus to define a collateralized financing entity as a variable interest entity that holds financial assets, issues beneficial interests in those financial assets, and has no more than nominal equity.
The Task Force reached a consensus that a reporting entity should measure both the financial assets and the financial liabilities of the collateralized financing entity using the more observable of the fair value of the financial assets or the fair value of the financial liabilities.
The Task Force reached a consensus to clarify that a reporting entity’s consolidated statement of income (loss) should reflect the reporting entity’s own economic interests.
The Task Force reached a consensus that a reporting entity that consolidates a collateralized financing entity and measures the financial assets or the financial liabilities of the collateralized financing entity using this guidance should disclose all of the information required by Topic 820, Topic 825, and other relevant Topics, as applicable.
A reporting entity within the scope of this Issue should not be required to comply with the fair value measurement disclosures in Topic 820 and Topic 825 for the amount derived from the above measurement because it would not necessarily represent fair value. For the less observable of the financial assets or the financial liabilities, the Task Force decided that a reporting entity is only required to disclose that the amount was determined based on the more observable fair value of the financial assets or the financial liabilities.
The Task Force reached a consensus that reporting entities may apply the amendments in this Update using a modified retrospective approach. In addition, the Task Force agreed that reporting entities may apply the amendments retrospectively to all relevant prior periods beginning with the fiscal year in which the amendments in Update 2009-17 were initially adopted.
The Task Force reached a consensus that the amendments in this Issue would be effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this Update are effective for the annual period beginning after December 15, 2015, and interim and annual periods thereafter. Early adoption is permitted.
At its December 11, 2013 meeting, the Board ratified the consensus reached by the Task Force on this Issue at the November 14, 2013 EITF meeting and approved issuance of the final Update. However, during the review of the draft, different interpretations emerged about the scope of financial assets subject to the new measurement guidance. As currently drafted, the guidance applies to financial assets held by a CFE except when there are transfers of financial assets from the reporting entity that do not meet the conditions for a sale under Topic 860.
Some interpret that language as a broad scope-out for all CFEs with financial assets that originated from the parent (View C). Others have interpreted it as a narrower scope-out only for financial assets that would have failed the conditions for sale if the CFE were not consolidated (View B). Yet others believe that there is no scope-out for financial assets that are legally held by a CFE even if those assets originated from the parent (View A).
Since the scope of the guidance must be clarified in the draft Update to ensure its consistent interpretation, a decision was made not to issue the final Update and to discuss the Issue further at a future meeting.
At the March 13, 2014 EITF meeting, concerns were raised about whether View A could lead to the recognition of a gain or loss by a reporting entity on the transfer of assets to a consolidated CFE, even when the reporting entity has not surrendered control of those assets (which would conflict with the requirements in Topic 810 and Topic 860). However, View A was supported because the other alternatives may make it very difficult and complex to appropriately define which CFEs are in the scope of this Issue.
Some favored View C because it eliminates the issues related to the transfer of financial assets to a consolidated entity. Others pointed out that reporting entities in the scope of View C truly have the potential for an uneconomic mismatch related to their consolidated CFEs, which is the reason this Issue was addressed originally.
Many Task Force members indicated that View A' or variations of View A' might be reasonable because it would eliminate the potential for significant gains and losses and also resolve the measurement difference when both the financial assets and financial liabilities of a CFE are measured at fair value.
A Board member noted that a potential solution could be to provide this guidance as an exception to the measurement guidance in FASB Statement No. 157, Fair Value Measurements (contained in Topic 820). That way, the guidance would serve as a practical expedient for entities that wish not to apply the requirement to separately measure the financial assets and financial liabilities of a CFE. That is, the guidance would not provide the opportunity for entities to recharacterize their CFE’s financial assets and financial liabilities from amortized cost to fair value, or vice versa. Rather, the guidance would provide a practical expedient for the measurement of CFEs by entities that under other Topics already measure at fair value both the CFE’s financial assets and its financial liabilities.
The Task Force raised some questions about the new practical expedient alternative, including:
  1. Whether financial assets that were measured at fair value through other comprehensive income prior to transfer by the reporting entity should also be in the scope of the practical expedient.
  2. How the initial difference between the fair value of the financial assets and the fair value of the financial liabilities, and related subsequent changes, should be presented when the practical expedient is not elected.
  3. Whether the practical expedient should be an accounting policy election applied consistently to all CFEs within the scope of the guidance or whether it should be a decision made on a CFE-by-CFE basis.
The Task Force decided that it would be beneficial for the staff to further develop the practical-expedient alternative because of the complexity of this Issue and the various views expressed by Task Force members throughout the meeting. The Task Force asked the staff to present its analysis as part of an education session tentatively scheduled for May 15, 2014, to help facilitate a more productive discussion of this Issue at the June 12, 2014 EITF meeting. The Task Force will have to determine whether reexposure will be necessary.
Dates discussed: September 11, 2012; March 14, 2013; June 11, 2013; November 14, 2013; March 13, 2014


Issue No. 12-F, "Recognition of New Accounting Basis (Pushdown) in Certain Circumstances." Current U.S. GAAP offers limited guidance for determining when, if ever, the cost of acquiring an entity should be used to establish a new accounting and reporting basis (pushdown) in the acquired entity's separate financial statements. SEC SAB Topic No. 5.J, New Basis of Accounting Required in Certain Circumstances, EITF Topic No. D-97, “Push-Down Accounting,” and other comments made by the SEC Observer at EITF meetings (paragraphs 805-50-S99-1 through S99-4), provide guidance for SEC registrants on the pushdown basis of accounting. Additionally, certain financial institutions are required by their regulators to apply pushdown accounting in certain circumstances. Since the SEC staff's guidance is only applicable to SEC registrants, diversity in practice exists on the application of pushdown accounting by entities that are not SEC registrants. In addition, comparability issues arise for both public and nonpublic entities due to the option provided in the SEC staff’s guidance to apply pushdown accounting when between 80 and 95 percent of an entity has been acquired. There appears to be a number of practice issues that continue to arise on the application of pushdown accounting as a result of the limited guidance, including the absence of a basis for conclusions and a principle for when pushdown accounting should be applied.
At the January 17, 2013 EITF meeting, the Task Force discussed the following three alternative views regarding the Issue of whether a reporting entity should establish a new accounting basis in its standalone financial statements as a result of a transaction or other event in which an acquirer obtains controlling financial interest in the reporting entity. The Task Force also discussed what the resulting level of controlling ownership should be if a new accounting basis is established. Most Task Force members expressed a preference for pushdown accounting, but there was no conclusion on the threshold at which it should be applied. Task Force members asked the FASB staff to perform additional outreach with users of financial statements to understand the relevance of pushdown accounting in standalone financial statements of an acquired entity before reaching a consensus-for-exposure on any of the three alternative views.
Status: The Task Force concluded that the FASB staff should pursue development of a model under which pushdown accounting could be applied when an acquirer obtains control of a reporting entity. The Task Force will consider at a future meeting whether pushdown accounting should be made mandatory and, if the Task Force decides that it should be mandatory, then it will work to specify the threshold at which the application of pushdown accounting should be mandatory. In developing the pushdown accounting model, the Task Force asked the FASB staff to consider the issues outlined in paragraphs 11 and 15 of Issue Summary No. 1, dated October 17, 2012.
At the November 14, 2013 EITF meeting, the Task Force discussed the threshold of applying pushdown accounting and tentatively decided that pushdown accounting would be required for a public business entity if the change-in-control event causes the entity to become substantially wholly owned by the acquirer. The Task Force also tentatively decided that both public business entities and non-public entities would have the option to apply pushdown accounting in their separate financial statements upon occurrence of a change-in-control event in which an acquirer obtains control of the entity. .
The working group on this Issue will be reconvened to research a number of issues regarding the application of pushdown accounting.
The Task Force discussed a series of other issues pertaining to the change-in-control-based pushdown accounting model and tentatively decided that, consistent with business combinations accounting, a change in control event for purposes of pushdown accounting would include events in which control is obtained by the acquirer without transfer of consideration. The acquired entity would follow the recognition, measurement, and disclosure guidance in Topic 805, Business Combinations, for its assets, liabilities, and equity instruments, as applicable. Acquisition-related debt incurred by the acquirer would not be recognized in the acquired entity’s separate financial statements unless the acquired entity is required to recognize a liability for the debt. An acquired entity would recognize goodwill that arises from the change in control event, but not bargain purchase gains.
Further discussion on this Issue will be held at a future meeting.
At the March 13, 2014 EITF meeting, the Task Force reached a consensus-for-exposure that the proposed amendments resulting from this Issue would apply to an entity that is a business or nonprofit activity, both public and nonpublic, when an acquirer obtains control of the entity. While the recognition and measurement provisions of the proposed amendments are elective, to comply with the disclosure provisions, all entities would be required to assess at each reporting date whether an acquirer has obtained control of the entity.
The Task Force reached a consensus-for-exposure to provide an entity whose control has been obtained by an acquirer, with an option to apply pushdown accounting in its separate financial statements. That option would be evaluated and can be elected by the acquired entity for each individual acquisition separately. If elected, it would follow the initial recognition and measurement guidance in Topic 805 on business combinations to recognize and measure its assets including goodwill, liabilities, and equity. However, if the application of Topic 805 results in a bargain purchase gain, the acquired entity would not recognize such gain in its income statement.
The Task Force reached a consensus-for-exposure that the acquisition-related debt incurred by the acquirer would not be recognized in the acquired entity’s separate financial statements unless the acquired entity is required to recognize a liability for such debt in accordance with other applicable U.S. GAAP.
The Task Force also reached a consensus-for-exposure to require the acquired entity applying pushdown accounting to provide the disclosures required in Topic 805 (except Subtopic 805-50), as applicable, as if the acquired entity were the acquirer. If the acquired entity does not elect to apply pushdown accounting, it would disclose (a) that the entity has undergone a change in control event whereby an acquirer has obtained its control during the reporting period, and (b) its decision to continue to prepare its financial statements using its historical basis that existed prior to the acquirer obtaining control of the entity.
The Task Force reached a consensus-for-exposure that pushdown accounting should be applied prospectively to an event in which an acquirer obtains control of the entity for which the acquisition date is on or after this Issue's effective date, which will be determined after the Task Force considers stakeholder feedback on the proposed amendments.
The Board ratified the consensus-for-exposure on this Issue at its March 26, 2014 Board meeting.
Dates discussed: January 17, 2013; March 14, 2013; November 14, 2013; March 13, 2014


Issue No. 10-B, "Accounting for Multiple Foreign Exchange Rates."
Status: At the March 13, 2014 EITF meeting, the EITF chairman reported on the January 29, 2014 FASB Board meeting to discuss agenda prioritization. At that meeting, the Board decided to remove this Issue from the EITF agenda.
Dates discussed: July 29, 2010; September 16, 2010; March 13, 2014


Issue No. 09-D, "Application of the AICPA Audit and Accounting Guide, Investment Companies, by Real Estate Investment Companies." The AICPA Real Estate Funds Project task force worked with AcSEC on a project intended to help industry practitioners understand how real estate funds should apply AICPA Audit and Accounting Guide, Investment Companies. While many real estate funds concluded that their funds were within the scope of the Guide and were applying AICPA Statement of Position 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies, the subsequent deferral of the effective date of SOP 07-1 by FSP SOP 07-1-1, Effective Date of AICPA Statement of Position 07-1, did little to reduce diversity in practice for those funds following the Guide. Some entities carry real estate investments at fair value because (a) they are investment companies that are required to apply the Guide, (b) they are wholly-owned by a pension plan that is required to carry investments at fair value, and (c) they believe prevalent industry accounting practices authorize them to carry such non-financial assets at fair value without regard to investment company attributes or pension plan ownership. The issue is whether an entity that is not in the scope of the Guide can carry real estate and other non-financial investments at fair value through analogy to the Guide or on the basis of industry practice. Also, when carrying real estate investments at fair value, the issues are how an entity should report net investment income and how real estate properties that are owned directly (fee simple) by the entity should be reported.
Status: The Working Group on this Issue No. 09-D, "Application of the AICPA Audit and Accounting Guide, Investment Companies, by Real Estate Investment Companies," met in December 2009. Further Task Force discussion on this Issue was indefinitely deferred pending the Board's deliberations on its investment properties project.
At the March 13, 2014 EITF meeting, the EITF chairman reported on the January 29, 2014 FASB Board meeting to discuss agenda prioritization. At that meeting, the Board decided to remove this Issue from the EITF agenda.
Dates discussed: None


Issue No. 06-12, "Accounting for Physical Commodity Inventories for Entities within the Scope of the AICPA Audit and Accounting Guide, Brokers and Dealers in Securities."
Status: At the March 13, 2014 EITF meeting, the EITF chairman reported on the January 29, 2014 FASB Board meeting to discuss agenda prioritization. At that meeting, the Board decided to remove this Issue from the EITF agenda.
Dates discussed: November 16, 2006; March 15, 2007; March 13, 2014


Issue No. 03-15, "Interpretation of Constraining Conditions of a Transferee in a CBO Structure." Collateralized bond obligations (CBOs) are securitizations of high-yield debt, bank loan participations, or similar financial assets. The CBO issuing vehicle is a special-purpose entity (SPE), typically a corporation domiciled (for security law and tax reasons) in the Cayman Islands. The SPE is not a qualifying SPE (QSPE) because the conditions under which it can sell assets violate the provisions of EITF Abstracts, Topic No. D-66, "Effect of a Special-Purpose Entity's Powers to Sell, Repledge, or Distribute Transferred Financial Assets under FASB Statement No. 125." The SPE has, at all times, the discretion to hold or sell defaulted assets or assets deemed to be "credit risk" or "credit improved" assets. The SPE also can sell up to between 20 percent and 30 percent annually of the aggregate principal balance of collateral (as of the beginning of each year) (known in the industry as the "free trade basket") during the reinvestment period. The free trade basket is in addition to the SPE's ability to trade defaulted credit risk and credit improved securities so that if the collateral manager decided that 50 percent of the SPE's assets were "credit improved," the collateral manager would be able to trade 70 percent of the SPE's assets (assuming a 20 percent free trade basket) in that year. Paragraph 9(b) of Statement 140 provides that with respect to a transferee that is not a QSPE, no condition both constrains the transferee (or holder) from taking advantage of right to pledge or exchange the transferred assets and provides more than a trivial benefit to the transferor. If the constraint is not imposed by the transferor, as would be the case in a typical CBO structure, then that constraint may or may not provide more than a trivial benefit to the transferor. The issue is whether the "free trade basket" violates paragraph 9(b) of Statement 140 and therefore precludes sale treatment by the transferor.
Status: At the March 13, 2014 EITF meeting, the EITF chairman reported on the January 29, 2014 FASB Board meeting to discuss agenda prioritization. At that meeting, the Board decided to remove this Issue from the EITF agenda.
Dates discussed: None