Financial Accounting Standards Board <ul><li>American Gas Association  </li></ul><ul><li>& Edison Electric Institute </li>...
Disclaimer <ul><li>The views expressed in this presentation are my own and do not represent positions of the Financial Acc...
FASB Overview <ul><li>Originated in 1973 </li></ul><ul><li>Recognized by the SEC under Section 108 of the Sarbanes-Oxley A...
Our   Mission <ul><li>To establish and improve standards of financial accounting and reporting </li></ul><ul><li>Accountin...
Our   Strategic Objectives <ul><li>Improvement in  U.S. financial  reporting </li></ul><ul><li>Simplification of U.S. acco...
Information on Website   www.fasb.org <ul><li>FASB Standards, Concepts, and Interpretations, and Staff Positions (FSPs)  <...
Communication Improvements <ul><li>Weekly e-mail for Action Alert  for free </li></ul><ul><ul><li>under “Action Alert” at ...
Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><ul><li>FAS 157,  Fair Value Measurements   (...
Financial Accounting Standards Board <ul><li>FASB Statement No. 157, </li></ul><ul><li>Fair Value Measurements </li></ul>
Snapshot of Statement 157 <ul><li>A “how to” guide, not expanding its use </li></ul><ul><li>Defines fair value </li></ul><...
Fair Value Definition <ul><li>Price that would be received to  sell  an asset or paid to  transfer  a liability in an orde...
Fair Value Approach THE ASSET OR LIABILITY Indicated Value Unit of Valuation Market Participant Assumptions Fair Value Mea...
The Asset or Liability <ul><li>A fair value measurement is for a specific asset or liability </li></ul><ul><ul><li>The  un...
Unit of Valuation Market Participant Assumptions Highest and Best Use Exit Market Valuation Premise In-use or  in-exchange...
In-Use vs. In-Exchange  <ul><li>Highest and best use is in-use if asset would provide maximum value to market participants...
Exit Market Principal market  is the market with the greatest volume and level of activity for asset or liability Most adv...
Market Participant Assumptions Market participants are buyers and sellers in the exit market (other entities with whom the...
Inputs to Valuation Techniques <ul><li>Market participant assumptions are incorporated in the fair value measurement throu...
Fair Value Hierarchy Unobservable inputs—entity’s own assumptions about market participant assumptions, including assumpti...
Statement 157 Disclosures ($ in 000’s)   <ul><ul><li>Fair value measurements by level in the fair value hierarchy </li></u...
Statement 157 Disclosures Beginning balance $14 $11 $25 Total gains and losses (realized/unrealized) Included in earnings ...
Financial Accounting Standards Board <ul><li>FASB Statement No. 158, </li></ul><ul><li>Changes in Employers’ Accounting fo...
Statement 158 <ul><li>Culmination of Phase I of Postretirement Benefits Project </li></ul><ul><li>Amends Statements 87, 88...
Statement 158:  Recognition <ul><li>Recognize net overfunded or underfunded status on balance sheet. </li></ul><ul><ul><li...
Statement 158:  Recognition <ul><li>Net periodic benefit cost unchanged </li></ul><ul><ul><li>Reconciling amounts between ...
Statement 158:  Measurement <ul><li>Measure plan assets and benefit obligation as of date of organization’s financial stat...
Postretirement Benefit Obligations   Phase Two:  Possible Key Issues <ul><li>Delayed recognition (smoothing) of gains and ...
Financial Accounting Standards Board <ul><li>FASB Statement No. 159, </li></ul><ul><li>The Fair Value Option  </li></ul><u...
Fair Value Option Project <ul><li>Focus of Project:  </li></ul><ul><li>To enable entities to elect irrevocably to report c...
FVO Project Has Two Phases <ul><li>Phase 1 resulted in FASB Statement No. 159, which created a fair value option principal...
Reasons for an FVO <ul><li>Provides entities with the opportunity to mitigate volatility in reported earnings caused by me...
Statement 159 Scope:  Eligible Items <ul><li>All financial assets and financial liabilities, with limited exceptions (see ...
Scope Exceptions for Statement 159 <ul><li>An investment (or interest in VIE) that would otherwise be consolidated  </li><...
FVO Election  <ul><li>The election of the fair value option  </li></ul><ul><ul><li>Is made for each eligible item (see exc...
Exceptions to Item-by-Item Election <ul><li>For an equity-method investee, election applies to all the investor’s financia...
FVO Election Dates <ul><li>Eligible item first recognized  </li></ul><ul><li>Unrecognized firm commitment entered into </l...
Presentation & Disclosures <ul><li>Statement 159 includes presentation and disclosure requirements designed to facilitate ...
Balance Sheet Presentation <ul><li>Must separate the reported fair values from the carrying amounts of similar assets and ...
Cash Flow Presentation <ul><li>FVO election does not affect reporting categories (operating, investing, financing) on the ...
Ongoing Disclosures <ul><li>Management’s reasons for electing a fair value option for each eligible item or group of simil...
Ongoing Disclosures <ul><li>The difference between the carrying amount and the aggregate principal amount for  any long-te...
Income Statement Disclosures <ul><li>For each B/S item reported at fair value due to FVO, the amount of fair value changes...
Income Statement Disclosures <ul><li>Selected information about fair value changes attributable to changes in instrument-s...
Effective Date and Transition <ul><li>Effective as of the beginning of each reporting entity’s first fiscal year that begi...
Effect of Initial Adoption <ul><li>Effect reported as a cumulative-effect adjustment of retained earnings as of the effect...
Disclosures upon Initial Adoption <ul><li>A schedule presenting the following by balance sheet line item: </li></ul><ul><u...
Disclosures upon Initial Adoption <ul><li>Management’s reasons for electing the fair value option for each existing eligib...
Early Adoption of Statement 159 <ul><li>Earlier adoption permitted as of the beginning of an entity’s earlier fiscal year ...
Fair Value Option Next Steps <ul><li>Deliberations on Phase 2 will begin in the third quarter of 2007 </li></ul><ul><li>Ce...
Financial Accounting Standards Board <ul><li>Business Combinations: </li></ul><ul><li>Applying the Acquisition Method  </l...
Business Combinations <ul><li>August 1996 – Business combinations project added to the Board’s agenda  </li></ul><ul><li>P...
Measuring Assets Acquired and Liabilities Assumed <ul><li>Contingent consideration: </li></ul><ul><ul><li>Eliminate practi...
Measuring Assets Acquired and Liabilities Assumed <ul><li>Contingencies:  </li></ul><ul><ul><li>Applies equally to assets ...
Measuring Assets Acquired and Liabilities Assumed <ul><li>Restructuring reserves:  </li></ul><ul><ul><li>Only items that m...
Measuring Assets Acquired and Liabilities Assumed <ul><li>Exceptions to fair value measurement: </li></ul><ul><ul><li>Taxe...
Partial Acquisitions <ul><li>Partial acquisitions:  </li></ul><ul><ul><li>Identifiable net assets:  </li></ul></ul><ul><ul...
Step Acquisitions <ul><li>Step acquisitions: </li></ul><ul><ul><li>On the acquisition date:  </li></ul></ul><ul><ul><ul><l...
Noncontrolling Interests <ul><li>Classification:   </li></ul><ul><ul><li>Report noncontrolling interests as a separate com...
Issuance and Effective Date <ul><li>Issuance of Final Statement planned for 3 nd  Quarter 2007 </li></ul><ul><li>Effective...
Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><li>Other Recent Documents </li></ul><ul><ul>...
FASB Staff Positions Finalized <ul><li>FSP FAS 123(R)-5, “Amendment of FASB Staff Position FAS 123(R)-1”  (10/10/06) </li>...
FASB Staff Positions Finalized <ul><li>FSP FAS 126-1, “Applicability of Certain Disclosure and Interim Reporting Requireme...
FASB Staff Positions Finalized <ul><li>FSP EITF 00-19-2, “Accounting for Registration Payment Arrangements”  (12/21/06) </...
FASB Staff Positions Finalized <ul><li>FSP FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 8...
Statement 133 Implementation  Issues   Finalized <ul><li>Statement 133 Implementation Issue No. G26, “Hedging Interest Cas...
Statement 133 Implementation  Issues   Finalized <ul><li>Statement 133 Implementation Issue No. B40, “Application of Parag...
Derivatives Disclosures <ul><li>Would require:  </li></ul><ul><ul><li>That objectives and strategies for using derivative ...
Derivatives Disclosures <ul><li>Would require:  </li></ul><ul><ul><li>Information about counterparty credit risk and the e...
Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><li>Other Recent Documents </li></ul><ul><li>...
Emission Allowances <ul><li>Request from constituent to add project to address trading emission allowances </li></ul><ul><...
Emission Allowances <ul><li>On February 21, 2007, the Board added a project to its agenda to provide comprehensive guidanc...
Valuation of Commodity Inventory  <ul><li>On March 14, 2007, the Board added a project to its agenda to provide guidance o...
Valuation of Commodity Inventory  <ul><li>The current debate involves the nature of the characteristic used in determining...
Emission Allowances <ul><li>The emission allowances project will be affected by the Board’s decision in the commodity inve...
Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><li>Other Recent Documents </li></ul><ul><li>...
Joint IASB-FASB Projects <ul><li>Conceptual Framework </li></ul><ul><li>Business Combinations </li></ul><ul><ul><li>Applyi...
Joint IASB-FASB Projects <ul><li>Earnings per Share </li></ul><ul><li>Income Taxes </li></ul><ul><li>Research & Developmen...
Conceptual Framework <ul><li>Eight phases: </li></ul><ul><li>A: Objectives and Qualitative Characteristics </li></ul><ul><...
Financial Statement Presentation  Income taxes Income taxes Income taxes Equity Equity Statement of Changes in Equity <ul>...
Financial Statement Presentation <ul><li>Some key changes: </li></ul><ul><ul><li>Treasury activities in financing section ...
Other Major Projects <ul><li>Not-for-Profit Organizations </li></ul><ul><li>Derivatives Disclosures </li></ul><ul><li>Revi...
Codification Project <ul><li>Purpose:  to put all authoritative GAAP in one central, easily retrievable place </li></ul><u...
Questions? Statement 140 Fair Value Option Emission Allowance Statement 157 Int’l Convergence IAS 39
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Financial Accounting Standards Board

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  • Current accounting guidance generally defers recognition of contingent consideration until the contingency is resolved and the contingent consideration is issued or becomes issuable. For example, assume Acquirer purchases Target and the purchase price is $100 million. Also assume that Target has earnings that change from year to year such that the seller negotiated that if the operating income of Target exceeds $10 million in the third year after the acquisition (not on a cumulative basis), Company A would have to pay an additional $20 million of consideration for the acquisition of TargetCo (“contingent consideration”). Current accounting: Record the contingent consideration when it is issued or becomes issuable No amount is recorded in the year of the acquisition. When the cash is paid the offset will generally be recorded to goodwill because the payment is considered an incremental cost to purchase Target. Disclose total exposure. Proposed accounting: Record contingent consideration on the acquisition date at fair value. 80% chance – assume fair value is ($16 million (80% * $20 million) Record $16 million liability. Changes in fair value each quarter will be recorded in income and disclosed. Also have to disclose total exposure.
  • Current accounting guidance generally defers recognition of contingent consideration until the contingency is resolved and the contingent consideration is issued or becomes issuable. For example, assume Acquirer purchases Target and the purchase price is $100 million. Also assume that Target has earnings that change from year to year such that the seller negotiated that if the operating income of Target exceeds $10 million in the third year after the acquisition (not on a cumulative basis), Company A would have to pay an additional $20 million of consideration for the acquisition of TargetCo (“contingent consideration”). Current accounting: Record the contingent consideration when it is issued or becomes issuable No amount is recorded in the year of the acquisition. When the cash is paid the offset will generally be recorded to goodwill because the payment is considered an incremental cost to purchase Target. Disclose total exposure. Proposed accounting: Record contingent consideration on the acquisition date at fair value. 80% chance – assume fair value is ($16 million (80% * $20 million) Record $16 million liability. Changes in fair value each quarter will be recorded in income and disclosed. Also have to disclose total exposure.
  • Restructuring : Argument that the costs of restructuring are embedded in the price the acquirer pays – but in an active market, acquirer is bidding against other potential acquirers and pays fair value. Plans to shut down the Target’s facilities do not represent liabilities. Acquirer can always change its mind – larger reversals of reserves.
  • Financial Accounting Standards Board

    1. 1. Financial Accounting Standards Board <ul><li>American Gas Association </li></ul><ul><li>& Edison Electric Institute </li></ul><ul><li>Accounting Leadership Conference </li></ul><ul><li>June 25, 2007 </li></ul><ul><li>FASB Update </li></ul><ul><li>Robert C. Wilkins </li></ul><ul><li>Senior Project Manager </li></ul><ul><li>[email_address] 203-956-5236 </li></ul>
    2. 2. Disclaimer <ul><li>The views expressed in this presentation are my own and do not represent positions of the Financial Accounting Standards Board. </li></ul><ul><li>Official positions of the FASB Board are arrived at only after extensive due process and deliberations. </li></ul>
    3. 3. FASB Overview <ul><li>Originated in 1973 </li></ul><ul><li>Recognized by the SEC under Section 108 of the Sarbanes-Oxley Act of 2002 </li></ul><ul><ul><li>“ Designated Private-Sector Standard Setter” </li></ul></ul><ul><li>Recognized under Section 203 of the AICPA’s Code of Professional Conduct </li></ul><ul><li>Standard-setter, not a regulator </li></ul><ul><li>No enforcement authority </li></ul>
    4. 4. Our Mission <ul><li>To establish and improve standards of financial accounting and reporting </li></ul><ul><li>Accounting standards are essential to the efficient functioning of the economy </li></ul><ul><li>Good financial reporting reduces the uncertainty premium charged by investors and lenders. </li></ul>
    5. 5. Our Strategic Objectives <ul><li>Improvement in U.S. financial reporting </li></ul><ul><li>Simplification of U.S. accounting standards and the standard-setting process </li></ul><ul><li>Convergence of financial reporting standards internationally </li></ul>
    6. 6. Information on Website www.fasb.org <ul><li>FASB Standards, Concepts, and Interpretations, and Staff Positions (FSPs) </li></ul><ul><li>Audio Webcast of Board Meetings </li></ul><ul><li>Semi-Annual Detailed Technical Plan – April/October </li></ul><ul><li>Separate Summary Page for Each Project </li></ul><ul><li>EITF Material </li></ul>
    7. 7. Communication Improvements <ul><li>Weekly e-mail for Action Alert for free </li></ul><ul><ul><li>under “Action Alert” at left side of home page </li></ul></ul><ul><li>Major codification of all authoritative GAAP being developed. </li></ul><ul><ul><li>A draft will be issued in late 2007 for an extended verification period </li></ul></ul><ul><ul><li>Ultimately, the codification will become the single authoritative source of U.S. GAAP, superseding all existing standards </li></ul></ul>
    8. 8. Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><ul><li>FAS 157, Fair Value Measurements (9/06) </li></ul></ul><ul><ul><li>FAS 158, Changes in Employers’ Accounting for Pensions and Other Postretirement Benefits (9/06) </li></ul></ul><ul><ul><li>FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (2/07) </li></ul></ul><ul><ul><li>FAS 16x, Business Combinations (Acquisition Method & Noncontrolling Interests) (3 Qtr 07) </li></ul></ul><ul><li>Other Recent Documents </li></ul><ul><li>Projects of Particular Interest </li></ul><ul><li>Other Project Activities </li></ul>
    9. 9. Financial Accounting Standards Board <ul><li>FASB Statement No. 157, </li></ul><ul><li>Fair Value Measurements </li></ul>
    10. 10. Snapshot of Statement 157 <ul><li>A “how to” guide, not expanding its use </li></ul><ul><li>Defines fair value </li></ul><ul><li>Establishes approach for measuring fair value </li></ul><ul><li>Enhances disclosures about fair value </li></ul><ul><li>Applies when other FASB standards require fair value measurements </li></ul><ul><li>Effective for fiscal years beginning after November 15, 2007 (e.g. in 2008 for a calendar year-end entity) </li></ul>
    11. 11. Fair Value Definition <ul><li>Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date </li></ul><ul><ul><li>Price in hypothetical transaction to sell an asset or transfer a liability (exit price) </li></ul></ul><ul><ul><li>NOT price in actual transaction to acquire an asset or assume a liability (entry price) </li></ul></ul><ul><ul><li>NOT adjusted for transaction costs </li></ul></ul>
    12. 12. Fair Value Approach THE ASSET OR LIABILITY Indicated Value Unit of Valuation Market Participant Assumptions Fair Value Measurement F/S Presentation and Disclosure Inputs to Valuation Techniques Attribute Value to Asset or Liability at Unit of Account Level Highest and Best Use Exit Market Valuation Premise Unit of Account
    13. 13. The Asset or Liability <ul><li>A fair value measurement is for a specific asset or liability </li></ul><ul><ul><li>The unit of account establishes the asset or liability that is being measured at fair value for purposes of financial reporting </li></ul></ul><ul><ul><li>The unit of valuation establishes whether the asset or liability is measured at fair value within a larger group </li></ul></ul><ul><ul><li>If the fair value of an asset or liability is measured within a group of assets, attribute the indicated fair value of the unit of valuation to the asset or liability </li></ul></ul>
    14. 14. Unit of Valuation Market Participant Assumptions Highest and Best Use Exit Market Valuation Premise In-use or in-exchange Use by market participants that maximizes value of asset (or asset group) <ul><li>The unit of valuation depends on the highest and best use of the asset, which establishes the valuation premise used to measure the fair value of the asset </li></ul>
    15. 15. In-Use vs. In-Exchange <ul><li>Highest and best use is in-use if asset would provide maximum value to market participants through its use with other assets as a group, as installed or otherwise configured for use (market participant synergies) </li></ul><ul><ul><li>In-use valuation premise </li></ul></ul><ul><li>Highest and best use is in-exchange if asset would provide maximum value to market participants through its use on a stand-alone basis (no market participant synergies) </li></ul><ul><ul><li>In-exchange valuation premise </li></ul></ul>
    16. 16. Exit Market Principal market is the market with the greatest volume and level of activity for asset or liability Most advantageous market maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, considering transaction costs <ul><li>The market in which the ENTITY would sell the asset or transfer the liability </li></ul>Market Participant Assumptions Highest and Best Use Exit Market Valuation Premise
    17. 17. Market Participant Assumptions Market participants are buyers and sellers in the exit market (other entities with whom the entity would transact) <ul><li>A fair value measurement should be determined based on the assumptions market participants would use in pricing the asset or liability, including assumptions about risk, highest and best use (if asset), and nonperformance risk (if liability) </li></ul>Market Participant Assumptions Highest and Best Use Exit Market Valuation Premise
    18. 18. Inputs to Valuation Techniques <ul><li>Market participant assumptions are incorporated in the fair value measurement through the inputs to valuation techniques </li></ul><ul><ul><li>Observable inputs are developed based on market data obtained from sources independent of the reporting entity </li></ul></ul><ul><ul><li>Unobservable inputs are developed based on the best information available in the circumstances, subject to cost-benefit constraint </li></ul></ul><ul><li>A fair value measurement should maximize the use of observable inputs </li></ul>
    19. 19. Fair Value Hierarchy Unobservable inputs—entity’s own assumptions about market participant assumptions, including assumptions about risk, developed based on the best information available in the circumstances (subject to cost-benefit constraint); might include the entity’s own data Level 3 Other observable inputs—include quoted prices for similar assets/ liabilities (adjusted) and market-corroborated inputs Level 2 Quoted prices in active markets for identical assets/ liabilities (unadjusted); no blockage factors (PxQ) Level 1
    20. 20. Statement 157 Disclosures ($ in 000’s) <ul><ul><li>Fair value measurements by level in the fair value hierarchy </li></ul></ul>$ 30 $ 25 $ 205 $ 260 Total 10 10 Venture capital investments $ 20 15 25 60 Derivatives 75 75 Available-for-sale securities $ 10 $ 105 $ 115 Trading securities Level 3 Level 2 Level 1 12/31/XX Description Fair Value at Reporting Date
    21. 21. Statement 157 Disclosures Beginning balance $14 $11 $25 Total gains and losses (realized/unrealized) Included in earnings 11 (3) 8 Included in OCI 4 4 Purchases, issuances, and settlements (7) 2 (5) Transfers in/out of Level 3 (2) 0 (2) Ending balance $20 $10 $30 Change in unrealized gains or losses in earnings relating to assets still held $ 7 $ 2 $ 9 <ul><ul><li>For recurring fair value measurements using significant unobservable inputs (Level 3), a reconciliation of beginning and ending balances </li></ul></ul>($ in 000’s) Level 3 Fair Value Measurements Venture Capital Derivatives Investments Total
    22. 22. Financial Accounting Standards Board <ul><li>FASB Statement No. 158, </li></ul><ul><li>Changes in Employers’ Accounting for Pensions and Other Postretirement Benefits </li></ul>
    23. 23. Statement 158 <ul><li>Culmination of Phase I of Postretirement Benefits Project </li></ul><ul><li>Amends Statements 87, 88, 106, and 132(R) </li></ul><ul><li>Puts funded status on the balance sheet, without changing measurement of postretirement benefit cost or obligation (recognition provisions) </li></ul><ul><li>Aligns measurement date with balance sheet date (measurement date provisions) </li></ul><ul><li>Simplifies existing disclosures, while adding a few new ones (disclosure provisions) </li></ul>
    24. 24. Statement 158: Recognition <ul><li>Recognize net overfunded or underfunded status on balance sheet. </li></ul><ul><ul><li>Plan assets (at FV) less benefit obligation (PBO for pensions, APBO for OPEBs) </li></ul></ul><ul><ul><li>Determined on plan-by-plan basis </li></ul></ul><ul><ul><li>Aggregate overfunded (non-current) and underfunded (non-current and current) plans separately </li></ul></ul><ul><ul><li>No more minimum pension liabilities! </li></ul></ul><ul><ul><li>Effective for years ending after 6-15-07 or 12-15-06 if employer’s stock is publicly traded </li></ul></ul>
    25. 25. Statement 158: Recognition <ul><li>Net periodic benefit cost unchanged </li></ul><ul><ul><li>Reconciling amounts between funded status and cumulative recognition in net periodic benefit cost: </li></ul></ul><ul><ul><ul><li>Gains and losses </li></ul></ul></ul><ul><ul><ul><li>Prior service costs and credits </li></ul></ul></ul><ul><ul><ul><li>Transition assets and liabilities </li></ul></ul></ul><ul><ul><li>Separate line item(s) apart from expenses </li></ul></ul><ul><ul><li>Subsequently reclassified to net periodic benefit cost </li></ul></ul>
    26. 26. Statement 158: Measurement <ul><li>Measure plan assets and benefit obligation as of date of organization’s financial statements </li></ul><ul><ul><li>No longer permits measurement up to three months ahead </li></ul></ul><ul><li>Effective for years ending after 12-15-2008 </li></ul><ul><ul><li>Two transition methods </li></ul></ul><ul><ul><li>No retrospective application </li></ul></ul><ul><ul><li>Early adoption permitted </li></ul></ul><ul><ul><ul><li>Must be for all plans </li></ul></ul></ul>
    27. 27. Postretirement Benefit Obligations Phase Two: Possible Key Issues <ul><li>Delayed recognition (smoothing) of gains and losses </li></ul><ul><li>Net or gross display of costs in earnings and/or other comprehensive income </li></ul><ul><li>Measurement of the obligation, including for plans with lump-sum settlement benefits and multi-employer plans </li></ul><ul><li>Consolidation of plan assets in employer’s financial statements </li></ul>
    28. 28. Financial Accounting Standards Board <ul><li>FASB Statement No. 159, </li></ul><ul><li>The Fair Value Option </li></ul><ul><li>for Financial Assets </li></ul><ul><li>and Financial Liabilities </li></ul>
    29. 29. Fair Value Option Project <ul><li>Focus of Project: </li></ul><ul><li>To enable entities to elect irrevocably to report certain selected assets and liabilities at fair value with the changes in fair value included in earnings as they occur </li></ul>
    30. 30. FVO Project Has Two Phases <ul><li>Phase 1 resulted in FASB Statement No. 159, which created a fair value option principally for certain financial assets and financial liabilities. It was issued on February 15, 2007. </li></ul><ul><li>Phase 2 will consider permitting the fair value option for other certain assets and liabilities, principally nonfinancial ones </li></ul>
    31. 31. Reasons for an FVO <ul><li>Provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions </li></ul><ul><li>Achieves further convergence with international financial reporting standards and should expand the use of fair value measurement </li></ul>
    32. 32. Statement 159 Scope: Eligible Items <ul><li>All financial assets and financial liabilities, with limited exceptions (see next slide) </li></ul><ul><li>Firm commitments (only financial items) </li></ul><ul><li>Written loan commitments </li></ul><ul><li>Nonfinancial warranties & insurance contracts that can be settled by paying a third party to provide those goods or services </li></ul><ul><li>Financial host contracts resulting from a nonfinancial hybrid instrument </li></ul>
    33. 33. Scope Exceptions for Statement 159 <ul><li>An investment (or interest in VIE) that would otherwise be consolidated </li></ul><ul><li>Employers’ and plans’ financial obligations for pension benefits, other postretirement benefits, & deferred compensation </li></ul><ul><li>Assets and liabilities recognized under lease contracts. </li></ul><ul><li>Withdrawable deposit liabilities </li></ul><ul><li>Items classified as a component of the entity’s shareholder’s equity </li></ul>
    34. 34. FVO Election <ul><li>The election of the fair value option </li></ul><ul><ul><li>Is made for each eligible item (see exceptions to item-by-item election on next slide) </li></ul></ul><ul><ul><li>Is made on a qualifying election date </li></ul></ul><ul><ul><li>Is irrevocable </li></ul></ul><ul><ul><li>Requires that changes in fair value be recognized in earnings (or other performance indicators for entities that do not report earnings) as those changes occur </li></ul></ul>
    35. 35. Exceptions to Item-by-Item Election <ul><li>For an equity-method investee, election applies to all the investor’s financial interests in that entity </li></ul><ul><li>If multiple loan advances become part of larger loan balance, election applies to overall loan balance </li></ul><ul><li>Election applies to all claims & obligations under an insurance or reinsurance contract </li></ul><ul><li>Election applies to base insurance contract & any nonintegrated features (SOP 05-1) </li></ul>
    36. 36. FVO Election Dates <ul><li>Eligible item first recognized </li></ul><ul><li>Unrecognized firm commitment entered into </li></ul><ul><li>Consolidation no longer required </li></ul><ul><li>Equity method accounting newly required </li></ul><ul><li>Event requires remeasurement at FV without requiring subsequent measurement at FV </li></ul><ul><li>Entity ceases to qualify for specialized accounting (with fair value through earnings) </li></ul>
    37. 37. Presentation & Disclosures <ul><li>Statement 159 includes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities </li></ul>
    38. 38. Balance Sheet Presentation <ul><li>Must separate the reported fair values from the carrying amounts of similar assets and liabilities measured using another measurement attribute </li></ul><ul><ul><li>Present two separate line items to display the fair value and non-fair-value carrying amounts, or </li></ul></ul><ul><ul><li>Present single aggregate amount and parenthetically disclose the amount of the portion measured at fair value </li></ul></ul>
    39. 39. Cash Flow Presentation <ul><li>FVO election does not affect reporting categories (operating, investing, financing) on the Statement of Cash Flows </li></ul><ul><li>Cash flows for trading securities no longer required to be reported as operating (amendments of Statements 115 and 145) </li></ul>
    40. 40. Ongoing Disclosures <ul><li>Management’s reasons for electing a fair value option for each eligible item or group of similar eligible items </li></ul><ul><li>If done for some but not all eligible items within a group of similar eligible items, the reasons for only partial election </li></ul><ul><li>Information to relate the group of similar eligible items to balance sheet line items </li></ul>
    41. 41. Ongoing Disclosures <ul><li>The difference between the carrying amount and the aggregate principal amount for any long-term receivables or financial liabilities reported at fair value due to FVO </li></ul><ul><li>Information about certain past due assets reported at fair value </li></ul><ul><li>Correlating with Statement 157’s fair value disclosure requirements </li></ul>
    42. 42. Income Statement Disclosures <ul><li>For each B/S item reported at fair value due to FVO, the amount of fair value changes included in earnings and in which income statement line items </li></ul><ul><li>A description of how interest and dividends are measured and where reported in the income statement </li></ul>
    43. 43. Income Statement Disclosures <ul><li>Selected information about fair value changes attributable to changes in instrument-specific credit risk </li></ul><ul><li>Qualitative information about the reasons for those changes </li></ul>
    44. 44. Effective Date and Transition <ul><li>Effective as of the beginning of each reporting entity’s first fiscal year that begins after November 15, 2007 </li></ul><ul><li>At initial adoption, entity may elect the fair value option for existing eligible items (including available-for-sale and held-to-maturity securities accounted for under Statement 115) </li></ul>
    45. 45. Effect of Initial Adoption <ul><li>Effect reported as a cumulative-effect adjustment of retained earnings as of the effective date </li></ul><ul><li>Items removed from balance sheet: </li></ul><ul><ul><li>Unamortized deferred costs, fees, premiums, and discounts </li></ul></ul><ul><ul><li>Valuation allowances </li></ul></ul><ul><ul><li>Accrued interest, which would be reported as part of the fair value of the eligible item </li></ul></ul>
    46. 46. Disclosures upon Initial Adoption <ul><li>A schedule presenting the following by balance sheet line item: </li></ul><ul><ul><li>Pre-election carrying amount and the fair value upon the FVO election </li></ul></ul><ul><ul><li>Pre-tax portion of cumulative-effect adjustment to retained earnings </li></ul></ul><ul><li>Net effect on the entity’s deferred tax assets and liabilities of electing FVO </li></ul><ul><li>(Continued) </li></ul>
    47. 47. Disclosures upon Initial Adoption <ul><li>Management’s reasons for electing the fair value option for each existing eligible item or group of similar eligible items </li></ul><ul><li>If for some but not all eligible items within a group of similar eligible items, the reasons for only partial election </li></ul><ul><li>Information to relate the group of similar eligible items to balance sheet line items </li></ul>
    48. 48. Early Adoption of Statement 159 <ul><li>Earlier adoption permitted as of the beginning of an entity’s earlier fiscal year provided that: </li></ul><ul><ul><li>The choice to adopt early shall be made after February 15, 2007 but within 120 days of the beginning of the fiscal year of adoption </li></ul></ul><ul><ul><li>No financial statements for any interim period of that fiscal year have been issued </li></ul></ul><ul><ul><li>All requirements of Statement 157 (on fair value measurement) adopted early </li></ul></ul>
    49. 49. Fair Value Option Next Steps <ul><li>Deliberations on Phase 2 will begin in the third quarter of 2007 </li></ul><ul><li>Central issue will be deciding which assets and liabilities should be included in its scope </li></ul><ul><ul><li>Could include natural gas storage contracts, transportation contracts, tolling (lease) contracts, etc. </li></ul></ul>
    50. 50. Financial Accounting Standards Board <ul><li>Business Combinations: </li></ul><ul><li>Applying the Acquisition Method </li></ul><ul><li>and Accounting and Reporting of </li></ul><ul><li>Noncontrolling Interests </li></ul>
    51. 51. Business Combinations <ul><li>August 1996 – Business combinations project added to the Board’s agenda </li></ul><ul><li>Phase One ended in June 2001 - Issued Statements No.141, Business Combinations , and No. 142, Goodwill and Other Intangible Assets </li></ul><ul><li>Phase Two started </li></ul><ul><ul><li>June 30, 2005 – Issued two Exposure Drafts: </li></ul></ul><ul><ul><ul><li>Proposed Statement, Business Combinations </li></ul></ul></ul><ul><ul><ul><li>Proposed Statement, Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries </li></ul></ul></ul>
    52. 52. Measuring Assets Acquired and Liabilities Assumed <ul><li>Contingent consideration: </li></ul><ul><ul><li>Eliminate practice of deferring recognition </li></ul></ul><ul><ul><li>Include fair value of contingent consideration in the fair value of the total consideration </li></ul></ul><ul><ul><li>Determine whether the obligation is a liability or equity </li></ul></ul><ul><ul><ul><li>Liability - changes in fair value would be recognized in income </li></ul></ul></ul><ul><ul><ul><li>Equity - no subsequent remeasurement </li></ul></ul></ul><ul><ul><li>Decision reaffirmed at 6/14/07 Board meeting </li></ul></ul>
    53. 53. Measuring Assets Acquired and Liabilities Assumed <ul><li>Contingencies: </li></ul><ul><ul><li>Applies equally to assets and liabilities </li></ul></ul><ul><ul><li>Recognize at fair value as of the acquisition date contractual contingencies or non-contractual contingencies if it is MLTN that they meet the definition of an asset or liability </li></ul></ul><ul><ul><li>Recognize in income changes in fair value of those contingencies recognized at the acquisition date </li></ul></ul><ul><ul><li>Contingencies not recognized at the acquisition date follow Statement 5 </li></ul></ul><ul><li>Acquisition-related costs: </li></ul><ul><ul><li>Not part of the consideration transferred </li></ul></ul><ul><ul><li>Generally expense </li></ul></ul>
    54. 54. Measuring Assets Acquired and Liabilities Assumed <ul><li>Restructuring reserves: </li></ul><ul><ul><li>Only items that meet the definition of a liability at the acquisition date (Statement 146) should be recognized as liabilities assumed </li></ul></ul><ul><ul><li>Eliminate practice or recognizing liabilities “prematurely” </li></ul></ul><ul><ul><li>Recognize as expenses in post-combination period </li></ul></ul>
    55. 55. Measuring Assets Acquired and Liabilities Assumed <ul><li>Exceptions to fair value measurement: </li></ul><ul><ul><li>Taxes – use Statement 109 </li></ul></ul><ul><ul><li>Operating leases – no separate recognition of the asset and the liability embodied in the acquiree’s operating leases </li></ul></ul><ul><ul><li>Employee benefits – use existing standards (e.g. Statements 87, 106, and 112) </li></ul></ul><ul><ul><li>Goodwill – measure as a residual </li></ul></ul>
    56. 56. Partial Acquisitions <ul><li>Partial acquisitions: </li></ul><ul><ul><li>Identifiable net assets: </li></ul></ul><ul><ul><ul><li>Recognize at fair value </li></ul></ul></ul><ul><ul><ul><li>Eliminate current practice of recognizing mixture of fair value and carry over value for noncontrolling interest portion </li></ul></ul></ul><ul><ul><li>Goodwill: </li></ul></ul><ul><ul><ul><li>Recognize 100% of the acquiree’s goodwill (Area of divergence with the IASB) </li></ul></ul></ul><ul><ul><ul><li>Eliminate current practice of recognizing goodwill only for the controlling interest </li></ul></ul></ul><ul><ul><ul><li>Amount reported for noncontrolling interest will reflect its portion of goodwill </li></ul></ul></ul>
    57. 57. Step Acquisitions <ul><li>Step acquisitions: </li></ul><ul><ul><li>On the acquisition date: </li></ul></ul><ul><ul><ul><li>Remeasure any preacquisition equity investments held by the acquirer to fair value. </li></ul></ul></ul><ul><ul><ul><li>Recognize any unrealized gains or losses on those preacquisition investments in consolidated net income. </li></ul></ul></ul>
    58. 58. Noncontrolling Interests <ul><li>Classification: </li></ul><ul><ul><li>Report noncontrolling interests as a separate component of equity rather than in liabilities or “mezzanine” </li></ul></ul><ul><li>Changes in controlling ownership interests: </li></ul><ul><ul><li>If there is no change in control, recognize subsequent increases or decreases in the parent’s ownership interests in its subsidiary as capital transactions </li></ul></ul>
    59. 59. Issuance and Effective Date <ul><li>Issuance of Final Statement planned for 3 nd Quarter 2007 </li></ul><ul><li>Effective Date – Calendar year companies – January 1, 2009 </li></ul>
    60. 60. Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><li>Other Recent Documents </li></ul><ul><ul><li>Various FASB Staff Positions (FSPs) and Statement 133 Implementation Guidance </li></ul></ul><ul><ul><li>Disclosures about Derivative Instruments and Hedging Activities </li></ul></ul><ul><li>Projects of Particular Interest </li></ul><ul><li>Other Project Activities </li></ul>
    61. 61. FASB Staff Positions Finalized <ul><li>FSP FAS 123(R)-5, “Amendment of FASB Staff Position FAS 123(R)-1” (10/10/06) </li></ul><ul><li>FSP FAS 123(R)-6, “Technical Corrections of FASB Statement No. 123(R)” (10/10/06) </li></ul><ul><ul><li>The former indicates when a modification of an instrument related to an equity restructuring should not change its recognition & measurement </li></ul></ul><ul><ul><li>The latter involves technical corrections of Statement 123(R). </li></ul></ul>
    62. 62. FASB Staff Positions Finalized <ul><li>FSP FAS 126-1, “Applicability of Certain Disclosure and Interim Reporting Requirements for Obligors for Conduit Debt Securities” (10/25/06) </li></ul><ul><ul><li>Requires that conduit bond obligors for conduit debt securities that are traded in a public market be considered public entities/enterprises for the purposes of selected accounting pronouncements </li></ul></ul>
    63. 63. FASB Staff Positions Finalized <ul><li>FSP EITF 00-19-2, “Accounting for Registration Payment Arrangements” (12/21/06) </li></ul><ul><ul><li>The contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with FAS 5 </li></ul></ul><ul><ul><li>A financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration </li></ul></ul>
    64. 64. FASB Staff Positions Finalized <ul><li>FSP FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides” (2/21/07) </li></ul><ul><ul><li>Updates numerous illustrations in the listed pronouncements </li></ul></ul><ul><ul><li>Does not change the provisions of Statement 158. </li></ul></ul><ul><ul><li>Warning! It’s 257 pages long. </li></ul></ul>
    65. 65. Statement 133 Implementation Issues Finalized <ul><li>Statement 133 Implementation Issue No. G26, “Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate” (1/8/07) </li></ul><ul><ul><li>To hedge interest rate risk in a cash flow hedge, the cash flows of the hedged transaction must be explicitly based on a benchmark interest rate (thus, auction rate notes fail that requirement) </li></ul></ul>
    66. 66. Statement 133 Implementation Issues Finalized <ul><li>Statement 133 Implementation Issue No. B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets” (1/17/07) </li></ul><ul><ul><li>Creates a narrow scope exception from paragraph 13(b) of Statement 133 for securitized interests that contain only an embedded derivative that is tied to the prepayment risk of the underlying prepayable financial assets </li></ul></ul>
    67. 67. Derivatives Disclosures <ul><li>Would require: </li></ul><ul><ul><li>That objectives and strategies for using derivative instruments be discussed in terms of underlying risk and accounting designation </li></ul></ul><ul><ul><li>Tabular disclosure of notional and fair value amounts of derivatives instruments and the gains and losses on derivatives instruments and related hedged items </li></ul></ul>
    68. 68. Derivatives Disclosures <ul><li>Would require: </li></ul><ul><ul><li>Information about counterparty credit risk and the existence and nature of contingent features in derivative instruments </li></ul></ul><ul><li>Would be effective for financial statements issued for fiscal years and interim periods ending after December 15, 2007 </li></ul>
    69. 69. Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><li>Other Recent Documents </li></ul><ul><li>Projects of Particular Interest </li></ul><ul><ul><li>Emission Allowances </li></ul></ul><ul><ul><li>Valuation of Commodity Inventory </li></ul></ul><ul><li>Other Project Activities </li></ul>
    70. 70. Emission Allowances <ul><li>Request from constituent to add project to address trading emission allowances </li></ul><ul><li>Constituent noted differing views about emission allowances being either trading inventory or an intangible asset </li></ul><ul><li>Constituent supported reporting emission allowances at fair value </li></ul>
    71. 71. Emission Allowances <ul><li>On February 21, 2007, the Board added a project to its agenda to provide comprehensive guidance for participants in emission trading programs </li></ul><ul><li>Project will provide guidance for emission allowances as well as liability recognition and measurement as a result of an entity emitting pollutants </li></ul>
    72. 72. Valuation of Commodity Inventory <ul><li>On March 14, 2007, the Board added a project to its agenda to provide guidance on whether ARB No. 43 should be amended to require fair value accounting (through earnings) for certain nonfinancial assets with readily determinable fair values that are held in trading inventory, including possibly traded emissions allowances </li></ul>
    73. 73. Valuation of Commodity Inventory <ul><li>The current debate involves the nature of the characteristic used in determining which items should be required to be reported at fair value with changes in earnings. That is, should the distinction be based on: </li></ul><ul><ul><li>The nature of the asset (for example, only those that have readily determinable fair values), or </li></ul></ul><ul><ul><li>The nature of the activity (for example, only assets used in trading activities)? </li></ul></ul>
    74. 74. Emission Allowances <ul><li>The emission allowances project will be affected by the Board’s decision in the commodity inventory project regarding the scope breadth and nature of the characteristic to be used in determining when fair value accounting would be required. </li></ul><ul><li>Consequently, the Board’s deliberations on emission allowances is being delayed until that decision is made (hopefully in mid-July) </li></ul>
    75. 75. Organization of Topics <ul><li>Recent & Forthcoming Statements </li></ul><ul><li>Other Recent Documents </li></ul><ul><li>Projects of Particular Interest </li></ul><ul><li>Other Project Activities </li></ul><ul><ul><li>Joint IASB-FASB Projects </li></ul></ul><ul><ul><li>Other Major Projects </li></ul></ul>
    76. 76. Joint IASB-FASB Projects <ul><li>Conceptual Framework </li></ul><ul><li>Business Combinations </li></ul><ul><ul><li>Applying the Acquisition Method </li></ul></ul><ul><ul><li>Noncontrolling Interests </li></ul></ul><ul><li>Liabilities & Equity </li></ul><ul><li>Financial Statement Presentation </li></ul><ul><li>Revenue Recognition </li></ul><ul><li>(Continued) </li></ul>
    77. 77. Joint IASB-FASB Projects <ul><li>Earnings per Share </li></ul><ul><li>Income Taxes </li></ul><ul><li>Research & Development </li></ul><ul><li>Research Projects: </li></ul><ul><ul><li>Accounting for Insurance Contracts </li></ul></ul><ul><ul><li>Financial Instruments </li></ul></ul>
    78. 78. Conceptual Framework <ul><li>Eight phases: </li></ul><ul><li>A: Objectives and Qualitative Characteristics </li></ul><ul><li>B: Elements and Recognition </li></ul><ul><li>C: Measurement </li></ul><ul><li>D: Reporting Entity </li></ul><ul><li>E: Presentation and Disclosure, including Financial Reporting Boundaries </li></ul><ul><li>F: Framework Purpose and Status in GAAP Hierarchy </li></ul><ul><li>G: Applicability to the Not-for-Profit Sector </li></ul><ul><li>H: Entire Framework </li></ul>
    79. 79. Financial Statement Presentation Income taxes Income taxes Income taxes Equity Equity Statement of Changes in Equity <ul><li>Financing </li></ul><ul><li>Financing asset cash flows </li></ul><ul><li>Financing liability cash flows </li></ul><ul><li>Financing </li></ul><ul><li>Financing income </li></ul><ul><li>Financing expenses </li></ul><ul><li>Financing </li></ul><ul><li>Financing assets </li></ul><ul><li>Financing liabilities </li></ul>Discontinued operations Discontinued operations Discontinued operations <ul><li>Business </li></ul><ul><li>Operating cash flows </li></ul><ul><li>Investing cash flows </li></ul><ul><li>Business </li></ul><ul><li>Operating income </li></ul><ul><li>Investment income </li></ul><ul><li>Business </li></ul><ul><li>Operating assets and liabilities </li></ul><ul><li>Investing assets and liabilities </li></ul>Statement of Cash Flows Statement of Earnings and Comprehensive Income Statement of Financial Position
    80. 80. Financial Statement Presentation <ul><li>Some key changes: </li></ul><ul><ul><li>Treasury activities in financing section </li></ul></ul><ul><ul><li>Peripheral business activities in investing section </li></ul></ul><ul><ul><li>Fixed asset acquisitions in business section </li></ul></ul><ul><ul><li>Income taxes in separate section </li></ul></ul><ul><ul><li>Elimination of “Extraordinary” category </li></ul></ul><ul><ul><li>Requirement of direct method for cash flows (likely) </li></ul></ul>
    81. 81. Other Major Projects <ul><li>Not-for-Profit Organizations </li></ul><ul><li>Derivatives Disclosures </li></ul><ul><li>Revisions to Hedge Accounting </li></ul><ul><li>Financial Guarantee Insurance </li></ul><ul><li>GAAP Hierarchy </li></ul><ul><li>Subsequent Events </li></ul><ul><li>Codification </li></ul>
    82. 82. Codification Project <ul><li>Purpose: to put all authoritative GAAP in one central, easily retrievable place </li></ul><ul><ul><li>Integrate and topically organize all relevant accounting guidance issued by US standard setters (FASB, AICPA, EITF, SEC) </li></ul></ul><ul><ul><li>Relationship to GAAP hierarchy project </li></ul></ul><ul><li>Currently in authoring/ technical review phases </li></ul><ul><li>Anticipated “beta version” release in late 2007 (for extended verification by constituents) </li></ul><ul><li>Ultimately will become single authoritative source of US GAAP and supersede all existing standards </li></ul>
    83. 83. Questions? Statement 140 Fair Value Option Emission Allowance Statement 157 Int’l Convergence IAS 39

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