Derivatives Implementation Group

Summary of July 28, 1999 Board Meeting Discussion on Statement 133 Implementation Issues

Financial instruments: derivatives implementation. The Board discussed the staff's tentative guidance for the following 15 implementation issues regarding FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities:

1. Issue B4-Foreign Currency Derivatives

2. Issue B5-Investor Permitted, but Not Forced, to Settle Without Recovering Substantially All of the Initial Net Investment

3. Issue B6-Allocating the Basis of a Hybrid Instrument to the Host Contract and the Embedded Derivative

4. Issue B8-Identification of the Host Contract in a Nontraditional Variable Annuity Contract

5. Issue B10-Equity-Indexed Life Insurance Contracts

6. Issue C7-Certain Financial Guarantee Contracts

7. Issue E4-Application of the Shortcut Method

8. Issue F2-Partial-Term Hedging

9. Issue G4-Hedging Voluntary Increases in Interest Credited on an Insurance Contract Liability

10. Issue H3-Hedging the Entire Fair Value of a Foreign-Currency-Denominated Asset or Liability

11. Issue H4-Hedging Foreign-Currency-Denominated Interest Payments

12. Issue H5-Hedging a Firm Commitment or Fixed-Price Agreement Denominated in a Foreign Currency

13. Issue J2-Hedging with Intercompany Derivatives

14. Issue J3-Requirements for Hedge Designation and Documentation on the First Day of Initial Application

15. Issue J4-Transition Adjustment for Option Contracts Used in a Cash-Flow-Type Hedge

The tentative guidance in the above 15 issues was based on the results of discussion by the Derivatives Implementation Group (DIG) and had been posted on the FASB web site since March 1999.

The Board decided not to object to the staff's issuing guidance in a question-and-answer format (Q&A) for all of the above implementation issues other than Issue E4. However, with respect to Issue E4, the Board directed that its guidance be partially modified to no longer preclude the shortcut method from being applied to a hedging relationship of interest rate risk involving an interest-bearing asset or liability that is prepayable due to an embedded call option provided the hedging interest rate swap contains a mirror-image call option. In all other respects, the Board did not object to the tentative guidance in Issue E4.

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