Derivatives Implementation Group

Summary of September 19, 2001 Board Meeting Discussion on Statement 133 Implementation Issues

Financial instruments: derivatives implementation. At its September 19, 2001 meeting, the Board decided not to object to the staff's issuing guidance in a question-and-answer format (Q&A) on the following seven Statement 133 Implementation Issues related to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities:

Because a number of the comment letters on Implementation Issue C16 also expressed opposition to the cleared guidance in Statement 133 Implementation Issue No. C10, "Can Option Contracts and Forward Contracts with Optionality Features Qualify for the Normal Purchases and Normal Sales Exception," the Board also discussed whether it should undertake a reconsideration of the guidance in Implementation Issue C10. The Board decided not to reconsider the guidance in Implementation Issue C10.

During the discussion of Implementation Issue C16, it was noted that View A in Agenda Item 15-11, "Application of the Normal Purchases and Normal Sales Exception on Initial Adoption to Certain Compound Derivatives," proposed permitting a derivative contract to be bifurcated into a forward component and an option component at the date of Statement 133's initial application if that contract had both a forward component and an option component that could increase the quantity of the asset delivered. The Board members expressed no support for permitting such bifurcation.

Financial Instruments: Accounting for Beneficial Interests Arising from Securitization Transactions. At its September 19, 2001 meeting, the Board decided not to object to the staff's posting of guidance to the FASB website for a 35-day comment period on the following 5 implementation issues regarding FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities:

Implementation Issues AX and DX, when cleared, will supersede Implementation Issues No. A9, "Prepaid Interest Rate Swaps," and D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets," respectively. Implementation Issue DX will provide the answers to two questions. First, what types of beneficial interests qualify for the scope exception in paragraph 14 of Statement 133? Second, if the exception in paragraph 14 does not apply to some types of beneficial interests issued in securitization transactions, do those beneficial interests meet the definition of a derivative in paragraph 6 of Statement 133? Implementation Issue AX will change the current response in Implementation Issue A9 as a result of changes made to the definition of a derivative in Implementation Issue DX. Implementation Issues B12 and E15 will also be affected by Implementation Issues AX and DX. While the changes to Implementation Issue B12 are relatively minor editorial changes, the answer in Implementation Issue E15 will be changed to note that the use of the shortcut method after a purchase business combination has been facilitated by the change to paragraph 6.

The Board decided not to object to posting the revised guidance to the FASB website for comment; however, the Board concluded that the extent of the changes proposed in the affected implementation issues warrant amending Statement 133. As a result, the Board directed the staff to prepare an Exposure Draft detailing the technical corrections that will affect Statement 133.