FASB Summary of September 19, 2001 Board Meeting Discussion

FASB: Summary of September 19, 2001 Board Meeting Discussion

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:

Issue A18

Application of Market Mechanism and Readily Convertible to Cash Subsequent to the Inception or Acquisition of a Contract

Issue A19

Impact of a Multiple-Delivery Long-Term Supply Contract on Assessment of Whether an Asset Is Readily Convertible to Cash

Issue C16

Applying the Normal Purchases and Normal Sales Exception to Contracts That Combine a Forward Contract and a Purchased Option Contract

Issue F11

Hedging a Portfolio of Loans

Issue G22

Using a Complex Option as a Hedging Derivative

Issue G23

Hedging Portions of a Foreign-Currency-Denominated Financial Asset or Liability Using the Cash Flow Model

Issue H16

Application of Paragraph 40(e)

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:

Issue AX

Application of Paragraph 6(b) Regarding Initial Net Investment

Issue B12

Embedded Derivatives in Beneficial Interests Issued by Qualifying Special-Purpose Entities

Issue CX

Application of the Exception in Paragraph 14 to Beneficial Interests that Arise in a Securitization

Issue DX

Application of Statement 133 to Beneficial Interests in Securitized Financial Assets

Issue E15

Continuing the Shortcut Method after a Purchase Business Combination

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.

Note: The five implementation issues referred to above related to the discussion of beneficial interests arising from securitization transactions have not yet been posted to the FASB website and, thus, are not yet publicly available. Interested parties who have subscribed to the Derivatives Implementation Notification Service by Email will be notified as soon as any of those implementation issues have been posted.