FASB Summary of December 4, 2002 Board Meeting Discussion
Derivatives Implementation Group
Summary of December 4, 2002 Board Meeting Discussion on the Proposed Amendment to Statement 133
Amendment of Statement 133. The Board continued its redeliberations of issues raised in connection with the accounting for derivative instruments in the FASB Exposure Draft, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
The Board identified two characteristics often associated with derivatives that contain financing elements: up-front cash payments and off-market terms (for example, terms, rates, or prices that are not consistent with the current market for that type of contract). The Board decided that entities should use those characteristics in conjunction with qualitative judgment to determine whether financing elements are present in derivatives. The Board decided that if significant financing elements are present in derivatives, all cash inflows and outflows associated with those derivatives should be reported as cash flows from financing activities.
The Board decided to give qualitative guidance to the meaning of the phrase an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors in paragraph 6(b) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Board asked the staff to draft language to be used in the standard to indicate that the paragraph 6(b) criterion is met if the initial net investment is smaller than would be required to acquire the underlying asset or incur the obligation related to the underlying. In that regard, the Board also decided that the references to little or no net investment in paragraphs 59(c) and (d) should be corrected to better mirror the criterion in paragraph 6(b) that a derivative require “no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.”
The Board decided that any additional disclosures relating to derivative instruments and hedging activities should be included as part of a future Board project rather than as part of this amendment.