Derivatives Implementation Group
Summary of January 30, 2002 Board Meeting Discussion on Statement 133 Implementation
Issues
Financial Instruments: amendment to Statement 133. The Board discussed comments received on the implementation issues related to the proposed amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, regarding its application to beneficial interests issued in securitization transactions subject to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Comments were received for the following five Statement 133 Implementation Issues that were posted to the FASB website on October 12, 2001:
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Issue A20 |
Application of Paragraph 6(b) regarding Initial Net Investment |
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Issue B12 |
Embedded Derivatives in Beneficial Interests Issued by Qualifying Special-Purpose Entities |
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Issue C17 |
Application of the Exception in Paragraph 14 to Beneficial Interests That Arise in a Securitization |
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Issue D2 |
Applying Statement 133 to Beneficial Interests in Securitized Financial Assets (a Resolution of the Issues Raised in Implementation Issue D1) |
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Issue E21 |
Continuing the Shortcut Method after a Purchase Business Combination |
The Board reached the following conclusions in connection with Implementation Issue A20, which details the proposed amendment of paragraph 6(b) of Statement 133:
(1) For the purposes of applying paragraph 6(b), contracts with embedded fair value options (that is, options with a strike price equal to the underlying’s fair value at the time of exercise) will be considered non-option-based contracts rather than option-based contracts.
(2) In describing contracts that are non-option-based, the term small in paragraph 6(b) will be replaced by the term less than 5 percent of the fully prepaid amount.
The Board reached the following conclusions in connection with the guidance in Implementation Issue B12:
(1) Implementation Issue B12 will be revised to clarify the approach for determining whether certain beneficial interests in a qualifying special-purpose entity (SPE) contain embedded derivatives that must be bifurcated. Specifically, investors must consider the aggregate sources of cash flows that service the beneficial interest when evaluating whether or not the beneficial interest contains an embedded derivative that must be bifurcated.
(2) The scope of Implementation Issue B12 will continue to be limited to qualifying SPEs as defined in Statement 140.
(3) All beneficial interests issued by a qualifying SPE in the scope of Implementation Issue B12 will be considered to be debt host contracts for the purposes of Statement 133.
In addition, the Board concluded that a credit-linked note issued by an SPE should be bifurcated into a debt host and an embedded credit derivative. The Board directed the staff to develop an implementation issue to address bifurcation of credit-linked notes.
The Board also discussed the possibility that some existing structures may no longer be considered qualifying SPEs under Statement 133 after applying the staff’s guidance related to application of Statement 133 to beneficial interests issued in securitization transactions. The Board decided to grandfather current qualifying SPE structures that would not meet the requirements to be a qualifying SPE after applying the guidance in the proposed amendment to Statement 133. However, the Board indicated that those structures could not issue additional beneficial interests after the effective date of that provision in the amendment to Statement 133. All new and revised tentative guidance will be posted to the FASB website for comment when the Exposure Draft of the amendment to Statement 133 is issued.
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