EITF Issue No. 15-E: Contingent Put and Call Options in Debt Instruments
Last updated on March 24, 2016. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.
(Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
Project Objective and BackgroundTopic 815, Derivatives and Hedging, requires that embedded derivatives be separated from the host contract and accounted for as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risks of the embedded derivative are not clearly and closely related to the economic characteristics and risks of the host contract (the “clearly and closely related” criterion).
Generally accepted accounting principles (GAAP) provide specific guidance for assessing whether call (put) options that can accelerate the repayment of principal on a debt instrument meet the clearly and closely related criterion. The guidance states that for contingent call (put) options to be considered clearly and closely related, they can be indexed only to interest rates or credit risk. However, that guidance raised interpretative questions that the Derivatives Implementation Group (DIG) tried to clarify through implementation guidance in a four-step decision sequence applicable to all call (put) options. The four-step decision sequence requires an entity to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount, and (4) the call (put) option is contingently exercisable.
Questions have emerged about how the four-step decision sequence interacts with the original guidance for assessing embedded contingent call (put) options in debt instruments. Two divergent approaches developed in practice. Under the first approach, the assessment of whether contingent call (put) options are clearly and closely related to the debt host only requires an analysis of the four-step decision sequence. Under the second approach, an assessment of whether the event that triggers the ability to exercise the call (put) option is indexed only to interest rates or credit risk is required in addition to the four-step decision sequence. Those two approaches, which resulted from different interpretations of the intent of the four-step decision sequence, may result in different conclusions about whether the embedded call (put) option is clearly and closely related to its debt host, and, thus, may result in different conclusions about which call (put) options should be bifurcated and accounted for separately as derivatives.
The purpose of this Issue is to resolve the diversity in practice resulting from those two approaches.
*Due Process DocumentsOn August 6, 2015, the Board issued proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The comment deadline was October 5, 2015.
- Read comment letters on the Exposure Draft
- Download the Accounting Standards Update
Decisions Reached at Last Meeting (December 11, 2015)The Board ratified the consensus reached at the November 12, 2015 EITF Meeting. The Board directed the staff to draft an Accounting Standards Update finalizing the consensus for vote by written ballot.
The EITF reached a consensus that clarifies that the determination of whether the economic characteristics and risks of call (put) options are clearly and closely related to their debt hosts only requires an assessment of the four-step decision sequence in paragraph 815-15-25-42. Consequently, for contingently exercisable call (put) options, an assessment of whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risk is not required.
EITF/Board Public Meeting DatesThe EITF and Board meeting minutes are provided for the information and convenience of constituents who want to follow the EITF’s and the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future EITF or Board meetings. Decisions become final only after a formal written ballot to issue a final standard.
|December 11, 2015
|EITF Ratification Minutes|
|November 12, 2015
|EITF Meeting Minutes
|July 9, 2015
|EITF Ratification Minutes|
|June 18, 2015
|EITF Meeting Minutes
Issue Summary, Appendix D
|May 14, 2015
EITF Education Session
|EITF Education Session Slides EITF Issue 15-D|
|March 18, 2015
|Agenda Prioritization Minutes|
Contact InformationMark Pollock
Postgraduate Technical Assistant