Derivatives Implementation Group

Summary of June 28, 2000 Board Meeting Discussion on Statement 133 Implementation Issues

Financial instruments: derivatives implementation. The Board decided not to object to the staff's issuing guidance in a question-and-answer format (Q&A) for the following 19 implementation Issues regarding FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities:

• Issue A11, "Determination of an Underlying When a Commodity Contract Includes a Fixed Element and a Variable Element"
• Issue A12, "Impact of Daily Transaction Volume on Assessment of Whether an Asset Is Readily Convertible to Cash"
• Issue B17, "Term-Extending Options in Contracts Other Than Debt Hosts"
• Issue B18, "Applicability of Paragraph 12 to Contracts That Meet the Exception in Paragraph 10(b)"
• Issue B19, "Identifying the Characteristics of a Debt Host Contract"
• Issue B20, "Must the Terms of a Separated Non-Option Embedded Derivative Produce a Zero Fair Value at Inception?"
• Issue B21, "When Embedded Foreign Currency Derivatives Warrant Separate Accounting"
• Issue C9, "Mandatorily Redeemable Preferred Stock Denominated in Either a Precious Metal or a Foreign Currency"
• Issue E8, "Assessing Hedge Effectiveness of Fair Value and Cash Flow Hedges Period-by-Period or Cumulatively under a Dollar-Offset Approach"
• Issue E9, "Is Changing the Method of Assessing Effectiveness through Dedesignation of One Hedging Relationship and the Designation of a New One a Change in Accounting Principle?"
• Issue E10, "Application of the Shortcut Method to Hedges of a Portion of an Interest-Bearing Asset or Liability (or its Related Interest) or a Portfolio of Similar Interest-Bearing Assets or Liabilities"
• Issue G9, "Assuming No Ineffectiveness When Critical Terms of the Hedging Instrument and the Hedged Transaction Match in a Cash Flow Hedge"
• Issue G10, "Need to Consider Possibility of Default by the Counterparty to the Hedging Derivative"
• Issue G11, "Defining the Risk Exposure for Hedging Relationships Involving an Option Contract as the Hedging Instrument"
• Issue H11, "Designation of a Foreign-Currency-Denominated Debt Instrument as Both the Hedging Instrument in a Net Investment Hedge and the Hedged Item in a Fair Value Hedge"
• Issue H12, "Designation of an Intercompany Payable as the Hedging Instrument in a Fair Value Hedge of an Unrecognized Firm Commitment"
• Issue H13, "Reclassifying into Earnings Amounts Accumulated in Other Comprehensive Income Related to a Cash Flow Hedge of a Forecasted Foreign-Currency-Denominated Intercompany Sale"
• Issue J10, "Transition Adjustment for a Fixed-Price Purchase or Sale Contract That Meets the Definition of a Derivative upon Initial Application"
• Issue J12, "Intercompany Derivatives and the Shortcut Method"

During the meeting the staff noted that in preparing materials for discussion at DIG meetings, it sometimes presents an issue as an "inquiry resolved by the staff." The staff noted that those drafts are presented simply for discussion by DIG members and, if not subsequently posted on the FASB web site as tentative conclusions under "Guidance on Statement 133 Implementation Issues," those drafts (such as Agenda Item 11-4, "When a Loan Commitment Meets the Net Settlement Criteria") have no special standing. The staff plans to revise its description of such drafts in future DIG materials.

The Board also discussed the staff's interim guidance in Derivatives Implementation Group (DIG) Agenda Item 12-12, "Application of Statement 133 to Beneficial Interests Issued in Securitization Transactions." The Board did not object to the staff's guidance that entities may continue to apply the guidance related to accounting for beneficial interests in paragraph 14 and paragraph 233 of FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, pending further guidance on the application of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to those interests. To the extent that paragraph 14 and paragraph 233 of Statement 125 do not apply to certain beneficial interests, an entity is not required to apply Statement 133 to those interests until further guidance is issued. For entities that have not yet adopted Statement 133, the interim guidance applies to all beneficial interests acquired in securitization transactions (not limited to securitizations involving qualifying special-purpose entities). In addition, the Board did not object to the staff's observation that an entity that has previously adopted Statement 133 and has accounted for a beneficial interest as either a derivative in its entirety or a hybrid instrument with an embedded derivative that is required to be accounted for separately shall not change its accounting for that beneficial interest. However, those entities are permitted to apply the staff's interim guidance to beneficial interests purchased after June 28, 2000 and to interests retained in connection with securitization transactions occurring after June 28, 2000. Alternatively, those entities may apply an interpretation of Statement 133 that the beneficial interest is either a derivative in its entirety or a hybrid instrument with an embedded derivative that must be accounted for separately.

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