FASB Summary of December 19, 2001 Board Meeting Discussion

FASB: Summary of December 19, 2001 Board Meeting Discussion

Derivatives Implementation Group

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

Financial instruments: derivatives implementation.
On December 19, 2001 the Board discussed the application of Statement 133 to loan commitments and other off-balance sheet credit arrangements. The Board decided not to finalize the tentative guidance in Statement 133 Implementation Issue No. C13, "When a Loan Commitment Is Included in the Scope of Statement 133." Instead, the Board decided to adopt an alternative approach that would require evaluation of loan commitments under Statement 133’s characteristic-based definition of a derivative. For loan commitments that meet the definition of a derivative, the Board decided to provide a scope exception for the holder of the commitment (that is, the potential borrower under the arrangement), such that the holder would not be required to account for its loan commitment contract as a derivative. That scope exception applies to this limited situation and no analogy to other derivative contracts will be permitted. The Board also decided that the existence of a material adverse change clause in a loan commitment agreement that may be invoked by a lender based on a subjective evaluation that a material adverse change has occurred does not affect whether the arrangement is within the scope of Statement 133. The Board decided that the staff should post on the FASB website for a 35-day comment period two tentative derivatives implementation issues related to the application of Statement 133’s definition of a derivative to loan commitments and other credit arrangements.

The Board did not object to the staff’s recommendation to revise Statement 133 Implementation Issue No. C15, "Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity". The revision replaces the quantitative criterion for determining when a power purchase or sales agreement qualifies for the normal purchases and normal sales exception with a qualitative criterion, while maintaining the Board’s original intent that the exception provided by this Issue be extended only to capacity contracts for the purchase or sale of electricity. Other revisions include: (1) adding a requirement to document the basis for concluding that an agreement is a capacity contract; (2) restricting the Issue to exclude contracts that have a price based on an underlying that is not clearly and closely related to the electricity being sold or purchased or that are denominated in a foreign currency that meets neither of the criteria in paragraphs 15(a) and 15(b) of Statement 133; and (3) clarifying the requirement that the terms of the contract require physical delivery of electricity, that is, the contract does not permit net settlement, as described in paragraphs 9(a) and 57(c)(1). The revised Issue will be posted to the FASB website as cleared guidance and will be effective the first day of the second fiscal quarter beginning after the date posted. Additionally, the Board did not object to the staff’s recommendation to revise Statement 133 Implementation Issue No. C16, "Applying the Normal Purchases and Normal Sales Exception to Contracts That Combine a Forward Contract and a Purchased Option Contract," to clarify its references to Implementation Issue C15.

The Board also decided not to object to the staff’s issuing guidance in a question-and-answer (Q&A) format for the following two Statement 133 Implementation Issues related to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities:

Issue B34

Period-Certain Plus Life-Contingent Variable-Payout Annuity Contracts with a Guaranteed Minimum Level of Periodic Payments

Issue J19

Application of the Normal Purchases and Normal Sales Exception on Initial Adoption to Certain Compound Derivatives

Implementation Issue B34 is the response to one unanswered aspect of Question 4 in Implementation Issue B25. The guidance from Implementation Issue B34 will be incorporated into Implementation Issue B25.