Derivatives Implementation Group
Statement 133 Implementation Issue No. J1
| Title: |
Transition Provisions:
Embedded Derivatives Exercised or Expired Prior to Initial
Application |
| Paragraph
references: |
50, 518-522 |
| Date cleared by
Board: |
February 17, 1999
(Revised August 2, 1999 for the issuance of Statement
137) |
QUESTION
An entity issued, acquired, or substantively modified
a hybrid instrument on or after the entity's selected transition
date for embedded derivatives (that is, January 1, 1998 or January
1, 1999) that contained an embedded derivative that warranted
separate accounting (such as the conversion option in convertible
debt). However, that embedded derivative expired or was exercised
prior to the date that the entity initially applied Statement 133
(for example, prior to January 1, 2001). Must that entity include
in its transition adjustment the results of separate accounting for
both the host contract and the embedded derivative from the date of
the hybrid instrument's issuance, acquisition, or modification?
RESPONSE
The application of Statement 133 to a hybrid
instrument issued, acquired, or substantively modified on or after
the entity's selected transition date for embedded derivatives
(that is, January 1, 1998 or January 1, 1999) that contains an
embedded derivative depends on whether, at the date of initial
application, the entity continues to hold or report any component
of the hybrid instrument (either the host contract or both the host
contract and the embedded derivative).
If the entity no longer holds or reports any
component of the hybrid instrument at the date of initial
application (such as when the conversion option in convertible debt
has been exercised and the debt security has been surrendered in
conjunction with that exercise), the entity should not include in
its transition adjustment the results of separate accounting for
either the host contract or the embedded derivative from the date
of the hybrid instrument's issuance, acquisition, or
modification.
In contrast, if the entity continues to hold or
report any component of the hybrid instrument at the date of
initial application (such as when an embedded conversion option has
expired unexercised but the host debt security is still held as an
investment), the entity should include in its transition adjustment
the results of separate accounting for both the host contract and
the embedded derivative from the date of the hybrid instrument's
issuance, acquisition, or modification.
The above response also applies to a hybrid
instrument issued, acquired, or substantively modified prior to the
entity's selected transition date for embedded derivatives (that
is, January 1, 1998 or January 1, 1999) if the entity has not
elected the optional scope exclusion described in paragraph 50. (A
hybrid instrument issued, acquired, or substantively modified on or
after the entity's selected transition date for embedded
derivatives (that is, January 1, 1998 or January 1, 1999) is not
eligible for the optional scope exclusion described in paragraph
50.)
The above response has been authored by the FASB
staff and represents the staff's views, although the Board has
discussed the above response at a public meeting and chosen not to
object to dissemination of that response. Official positions of the
FASB are determined only after extensive due process and
deliberation.
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