Derivatives Implementation Group

Summary of February 17, 1999 Board Meeting Discussion on Statement 133 Implementation Issues

Summary of February 17, 1999 Board Meeting Discussion on Statement 133 Implementation Issues

The Board decided not to object to the staff's issuing implementation guidance in a question-and-answer format (Q&A) on the following 14 implementation issues regarding FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities:

1. Issue No. A2, "Market Mechanism That Facilitates Net Settlement"

2. Issue No. A3, "Net Settlement Provisions"

3. Issue No. B2, "Leveraged Embedded Terms"

4. Issue No. C1, "Exception Related to Physical Variables"

5. Issue No. C2, "Application of the Exception to Contracts Classified in Temporary Equity"

6. Issue No. C3, "Exception Related to Stock-Based Compensation Arrangements"

7. Issue No. C4, "Interest-Only and Principal-Only Strips"

8. Issue No. C5, "Exception Related to a Nonfinancial Asset of One of the Parties"

9. Issue No. E1, "Hedging the Risk-Free Interest Rate"

10. Issue No. F1, "Stratification of Servicing Assets"

11. Issue No. G1, "Hedging an SAR Obligation"

12. Issue No. H1, "Hedging at the Operating Unit Level"

13. Issue No. J1, "Embedded Derivatives Exercised or Expired Prior to Initial Application"

14. Issue No. K1, "Determining Whether Separate Transactions Should Be Viewed as a Unit"

Those issues previously had been discussed by the FASB's Derivatives Implementation Group and the staff's related tentative conclusions had been posted for several months at this web site of Derivatives Implementation Group.

The Board also discussed an implementation issue related to Statement 133's requirement that, for a foreign currency hedge, the operating unit with the foreign exchange exposure must be a party to the hedging instrument. The Board agreed that, if a subsidiary exposed to foreign exchange risk has the same functional currency as its parent company (or other member of the consolidated group), the parent company (or that other member of the consolidated group) may designate a derivative or nonderivative instrument that it has entered into with an unrelated third party as the hedging instrument in the hedge of the subsidiary's foreign currency exchange risk. Consequently, a parent company that has centralized its hedging activities can avoid having to enter into an intercompany derivative with that subsidiary to qualify for hedge accounting in the consolidated financial statements. That decision, which provides greater flexibility than the staff's guidance to Issue No. H2, "Requirement That the Operating Unit Must Be a Party to the Hedge," posted on the web site in January 1999, will be incorporated into the staff's Q&A.

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