Linda Cavanaugh, CPA: Plugged In
| Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer. |
Times read: 4607/01/08
Plugged In Linda CavanaughCPA |
By: Linda Cavanaugh, CPA, This proposed Statement is being issued due to concerns expressed by financial statement users that current disclosures on loss contingencies are not adequate. The concern is partly over quantitative disclosures and the “overuse” of the “not estimatable” criteria. Investors stated “they prefer to have a highly uncertain estimate supplemented with a qualitative description than no quantification of a potential loss as commonly occurs in existing practice (paragraph A16). This proposed Statement would expand the current disclosures and will result in a larger pool of contingencies being disclosed.
Paragraph 3 of the proposed Statement states that it is applicable for all loss contingencies that are within the scope of FAS 5 or FAS 141(R), except for the following:
1.Asset impairments
2.Guarantees within the scope of FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”
3.Unpaid claim costs or reinsurance contracts within the scope of FASB Statements 60, 97, 113, 120 or 163
4. Insurance-related assessments within the scope of SOP 97-3 “Accounting by Insurance and Other Enterprises for Insurance-Related Assessments”
5.Employment-related costs including pensions and other post employment benefits, except for withdrawal from a multi-employer plan
Under paragraph 5 a loss contingency does not have to be disclosed if:
1.An entity has made an assessment and determined that the likelihood of a loss is remote.
2.An unasserted claim or assessment in which there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment unless:
a. It is probable that a claim will be asserted
b. The likelihood of a loss, if the claim were to be asserted, is more than remote.
However, under paragraph 6, even if the likelihood of a loss is remote, the loss contingency should still be disclosed if it is expected to be resolved within one year from the date of the financial statements or if the loss would have such a severe impact on the entity that it would cause a significant financial disruptive effect on the normal functioning of the entity.
Per paragraph 7, the following items are to be disclosed for loss contingencies that fall under the above paragraphs. The disclosures may be aggregated by the nature of the loss contingency (i.e. product liability).
1. The amount of the claim or assessment against the entity or if there is no claim or assessment amount, the entity’s best estimate of the maximum exposure to the loss. An entity may also disclose (but is not required) its best estimate of the possible loss or range of loss if the amount of the claim or the estimated maximum exposure is not representative of the entity’s actual exposure. These amounts should include any amount already recognized in the financial statement and exclude potential recoveries.
2. A description of the contingency, how it arose, its legal or contractual basis, its current status, the anticipated timing of its resolution, factors that are likely to affect the ultimate outcome and their potential effect on the outcome, the most likely outcome, significant assumptions concerning the estimate of amounts disclosed and in assessing the most likely outcome.
3. Any relevant insurance or indemnification arrangements that could lead to a recovery of some or all of the possible loss.
Per paragraphs 8 and 9, for loss contingencies recognized in the financial statements a tabular reconciliation of the beginning and ending balances must be disclosed.
2010 2009 2008
Beginning Balance
Increases for loss
contingencies recognized
during the period
Increases resulting from
changes in estimates of
the amounts of loss
contingencies previously
recognized
Decreases resulting from
changes in estimates or
de-recognition of loss
contingencies previously
recognized
Decreases resulting from
cash payments (or other
forms of settlement) for
loss contingencies
Ending Balance
An entity should also disclose the total amount of recoveries from insurance or indemnification arrangements recognized in each statement of financial position or statement of income presented that are related to the loss contingencies included in the above table.
The table disclosures are to be on a prospective basis and prior year comparisons do not need to be included for 2008 and 2009. (one year in 2008, two years in 2009, and three years in 2010 and beyond)
Per paragraph 10, a Type II subsequent event (occurs after reporting period but before financial statements are filed) should be disclosed pursuant to paragraph 7. If the loss contingency can be reasonably estimated, pro forma financial data may be provided as if the loss had occurred at the date of the financial statements.
Paragraph 11 gives an exemption from disclosure for information that is prejudicial, such as in pending or threatened litigation. If the information to be disclosed is considered to be prejudicial, then the entity may aggregate the disclosures required by paragraph 7 at a higher level such that the information is no longer prejudicial.
If the information is still prejudicial after aggregation, then the entity is not required to disclose the most likely outcome; significant assumptions concerning the estimate of amounts disclosed and in assessing the most likely outcome; or any insurance recoveries or indemnification arrangements. The other disclosures in paragraph 7 still need to be disclosed. This will be considered a rare event, but the FASB states that rare does not mean never.
If approved, this Statement would be effective for fiscal years ending after December 15, 2008 (i.e. the 2008 10K).
Stay tuned to see what changes take place over the next couple of months.
FASB Issues Some Standards and Proposes Others
Times read: 6906/20/08
| Plugged In Linda Cavanaugh CPA |
By: Linda Cavanaugh, CPA I am really far behind in my reading and I thought I would just give you a quick update on what is going on in the FASB realm.
Approved
FAS 161 - Derivative Disclosures
This is a new standard that is effective for fiscal years beginning after December 15, 2008. It requires tabular disclosures of derivatives by risk group. Much more to come later.
FAS 163 - Accounting for Financial Guarantee Insurance Contracts
This new standard is effective for fiscal years beginning after December 15, 2008 and is in response to the recent credit market meltdown. Statement 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. I know nothing about insurance contracts, so I will try to summarize this one later this year.
FSP EITF 03-6-1 - Determining Whether Instruments Granted in Share-Based Payment Transaction are Participating Securities
This one was proposed in 2004 and is just now being approved. It is effective for fiscal years beginning after December 15, 2008. It calls for certain share-based compensation to be included in basic earning per share (eps). If a person is granted a stock award and receives dividends during the vesting period that he/she does not have to give back if they later forfeit the stock, then those shares are to be included in part of the calculation of basic eps. Net income is to be divided into two pieces, distributed income (dividends paid) and undistributed income (what is left). Distributed income is to be divided by outstanding shares plus participating securities and undistributed income is to be divided by just outstanding shares. These two numbers are then added together to get to basic eps.
I have read this one several times and am still not sure how to practically apply it. More to come.
Soon to be approved
The EITF has approved three consenses and the FASB will probably approve them at their June 25 meeting.
EITF 07-5 Meaning of “Indexed to a Company’s Own Stock” states that derivative contracts on a company’s own stock may be accounted for as equity instruments rathan as assets and liabilities, only if htey are both indexed solely to the company’s stock and settleable in shares. If approved it would be effective for fiscal years beginning after December 15, 2008.
EITF 08-3 Lessee Accounting for Maintenance Deposits states that lessees should account for nonrefundable mainenance dposits as deposit assets if it is probable that maintenance activities will occur and the depaist is therefore realizable. Amounts on deposit that are not probable of being used to fund future maintenance activities should be charged to expense. If approved it would be effective for fiscal years beginning after December 15, 2008.
EITF 08-4 Conforming Changes to Issue 98-5 revises EITF 98-5 to conform to Statement 150 and EITF 0027. If approved it would be effective for fiscal years ending after December 15, 2008. I have no idea what EITF 98-5 or 00-27 are about, so I will have to read them first to see what has changed.
Proposed
EITF 08-5 Liabilities Measured at Fair Value with a Third-Party Guarantee states the fair value measurement of the debt by the issuer of the debt should not include the effect of the credit-enhancement feature (i.e. guarantee), because, in the event of default and payment by the guarantor to the holder, the issure would continue to be obligated to repay the debt to the guarantor. If approved it would be effective beginning in the first reporting period after approval.
FSP on Disclosures about Credit Derivatives and Financial Guarantees
This FSP would require additional disclosures for credit derivatives under FAS 133 and financial guarantees under FIN 45. If approved it would be effective for fiscal and interim periods ending after November 15, 2008.
FSP ARB 43-a Trading Inventories
This FSP would require inventory that is held for trading purposes to be recorded at fair value. It would also add disclosures about inventory that is held for trading purposes.
Proposed Standard on Hedge Accounting for Derivative Instruments
This standard is suppose to make it easier to get hedge accounting. It lower the effectiveness test to probably effective instead of highly effective. This will allow most of those economic hedges to qualify as accounting hedges.
Proposed Standard on Loss Contingency
This standard would amend FAS 5 and cause more contingencies to end up on the balance sheet.
I think that is all of the new stuff. I will eventually read all this stuff and post a better summary of them.
FASB 162 The Hierarchy of Generally Accepted Accounting Principles
Times read: 14406/11/08
In May, 2008, the FASB issued Statement 162 which moves the GAAP hierarchy out of the auditing standards and into the accounting guidelines. The FASB and SEC believe that the hierarchy should be addressed to the entity preparing the financial statements and not to the auditors.Here is your new hierarchy:
Level A:
1. FASB standards and interpretations
2. FAS 133 DIG issues
3. FASB staff positions
4. AICPA Accounting Research Bulletins and Accounting Principles Board Opinions
Level B:
1. FASB technical bulletins
2. cleared AICPA industry audit and accounting guides and statements of position
Level C:
1. AICPA accounting standards
2. cleared Executive Committee Practice Bulletins
3. FASB EITF issues
4. Topics discussed in Appendix D of EITF Abstracts
Level D:
1. FASB implementation guides
2. not cleared AICPA industry audit and accounting guides and statements of position
3. industry practice
Interesting to note, is that the FASB codification project that is due to be adopted in April, 2009 will make this hierarchy obsolete. When the codification becomes GAAP, anything outside the codification will be considered non-GAAP.
This standard may have been a waste of paper to print and a waste of our time to read and interpret. They should have just waited until next April.
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Times read: 12606/05/08
| Plugged In Linda Cavanaugh CPA |
By: Linda Cavanaugh, CPA, To be a derivative under FAS 133, a contract must meet three criteria: 1) have a notional and underlying, 2) have little or no net investment, and 3) net settle.
Most contracts have the first two characteristics, i.e. they have a price and a quantity and generally you do not pay for item under contract until it is delivered. It is the net settlement criteria in paragraph 6 that causes all the problems when trying to determine if a contract is a derivative.
Paragraph 9 of FAS 133 gives three methods that a contract can net settle.
1. Contractually net settle
This means that there is a clause in the contract that allows the parties to settle the contract without delivering the underlying commodity. This is usually detailed in the default clause. A symmetrical default clause is equivalent to net settlement, while an asymmetrical default clause does not permit net settlement. (An asymmetrical default clause means that the defaulting party can not profit from defaulting.)
If the contract does not net settle, then you have to determine if there is a market mechanism that would facilitate net settlement.
2. Market Mechanism
Derivative Implementation Group Issue A3 states that “any institutional arrangement or other agreement that enables either party to be relieved of all rights and obligations under the contract and to liquidate its net position without incurring a significant transaction cost is considered net settlement.”
Per DIG issue A21, the four primary characteristics of a market mechanism must be met for there to be a market mechanism:
1) There is a means to settle a contract that enables one party to readily liquidate its net position under the contract.
This means that there is access to potential counter parties regardless of the seller’s size or market position and there is a standard contract that enables a market maker to transfer a contract without repackaging the original contract.
2) The counterparties are fully relieved of their rights and obligations.
This means there are multiple market participants willing and able to enter into a transaction at market prices and there are binding market prices available.
3) Liquidation of the net position does not require significant transaction costs.
This includes transportation cost and excess legal costs.
4) Liquidation of the net position occurs without significant negotiation and due diligence and occurs within a time frame that is customary for settlement of this type of contract.
This means there is a standard contract that can be signed without excessive due diligence.
DIG Issue A15, states that an offsetting contract is not a market mechanism if the parties are not relieved of all rights and obligations under the contract. So, just because you can enter into an offsetting contract to flatten out your position, does not mean there is a market mechanism to facilitate net settlement.
If there isn't a market mechanism, then you have to determine if the asset under the contract is readily convertible to cash.
3. Readily Convertible to Cash
As discussed in DIG A10, “An asset can be considered to be readily convertible to cash, only if the net amount of cash that would be received from a sale of the asset in an active market is either equal to or not significantly less than the amount an entity would typically have received under a net settlement provision (i.e. The costs to transport the asset from your plant to a liquid delivery point, should not be more than 10% of the gross proceeds of the contract.)
Paragraph 83(a) of FASB Concept Statement No. 5, defines readily convertible to cash as an asset that is fungible and in an active market that can rapidly absorb the quantity held by the entity.
1) Fungible means a standardized product. Gold is fungible because one ounce of 14K gold is the same as another ounce of 14K gold.
2) An active market is not defined in the FASB literature, however, a rule of thumb is that in an active market it should not take longer than 3 to 7 days to complete a transaction.
3) Rapidly absorb the quantity held by the entity means that you can sell out of a contract without affecting the market price of the asset. This is assessed on a contract by contract basis and generally if the contract volume is greater than 10% of the daily market volume, the contract can not be rapidly absorb and is not readily convertible to cash. Under this criterion, you could have some contracts that fail this test, while a smaller contract would pass the test and be considered a derivative.
If you determine that the contract is a derivative instrument and must be marked to market each reporting period or you have to go through the whole hedging process, you should take a look at paragraphs 10 and 58 of FAS 133 to see if the contract will qualify for a scope exception.
I don't want to climb the corporate ladder
Times read: 15805/28/08
I have had several jobs in my career and the ones I disliked the most were supervisor positions. I do not like being responsible for others work, making sure it is correct or making sure they do the work or even show up for work. I do not want to cover for somebody else.I like coming to work, doing my job and going home. My current boss does not understand this. He likes to "groom" his employees so that they can move up in the company. He simply does not understand how someone could be happy being in the same position year after year.
There are a couple of reasons why I think I will be happy in this position year after year.
1. As a research accountant, I deal with different topics every day. I do not have a routine job where I am performing the same task month after month. Therefore, it is not really the same position because it changes every day.
2. I come to work so that they will pay me so I can pay my bills. I have a life outside of work that I enjoy very much. If I win the lottery, I will not continue to go to work.
3. Being promoted would mean more responsibility, more stress and more hours. As I stated in point 2, I have a life outside of work that I enjoy very much. I do not want to work more hours or be stressed out about what I forgot to do before I left. I do not want a blackberry, so the office can contact me whenever and wherever they want. I like being disconnected after I walk out of the building.
I would ask all the motivated, gung-ho people to leave us slackers alone. We are very happy where we are and are even happier when we are not at the office.
Times read: 31605/06/08
| Plugged In Linda Cavanaugh CPA |
By: Linda Cavanaugh, CPA - FAS 159: The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115
FAS 159 permits entities to choose to measure, at fair value and on an instrument-by-instrument basis, financial instruments that are not currently reported at fair value. This Statement was effective for fiscal years beginning after November 15, 2007 and is to be applied prospectively. Early adoption was allowed if FAS 157: Fair Value Measurements was also adopted.
Election of the Fair Value Option
Per paragraph 7 of FAS 159, a recognized financial asset or liability, a firm commitment that would otherwise not be recognized at inception and that only involves financial instruments, a written loan commitment, the rights and obligations under an insurance contract or warranty that is not a financial instrument but permit the insurer to settle by paying a third party to provide goods or services, and a host financial instrument resulting from the separation of an embedded non-financial derivative instrument from a non-financial instrument are eligible to be measured at fair value.
However, an investment in a subsidiary or variable interest entity that is required to be consolidated, employers’ and plans’ obligations for pensions, stock awards and other deferred compensation plans, financial assets and liabilities recognized under leases, deposit liabilities or withdrawable on demand of depository institutions and financial liabilities that are classified in shareholder’s equity are scoped out of the fair value option and can not be measured at fair value.
An entity can chose to value any eligible items at fair value on the balance sheet with changes in fair value running through earnings. This election can be made at inception, upon entering into a firm commitment, when the financial instrument ceases to qualify for specialized accounting, when the accounting treatment for an investment in another entity changes or an event requires an eligible item to be measured at fair value but does not require subsequent re-measurement (i.e. a business combination).
The fair value election can be made on an instrument-by-instrument basis except i) if multiple advances are made to one borrower under one contract, the entire balance must be fair valued and not the individual advances; ii) if the option is applied to an equity investment, the entity’s complete interest in the equity investment must be fair valued including any debt; iii) if the option is applied to an insurance or re-insurance contract, all of the claims and obligations under the contract must be fair valued; or iv) if the option is applied to an insurance contract that has integrated or non-integrated contract features, then the entire contract including both the integrated and non-integrated features must be fair valued.
Presentation
Items valued at fair value can be presented on the balance sheet either as a separate line item or aggregately with similar items with the amount of fair value presented parenthetically (similar to accounts receivable.
Disclosures
For interim and annual balance sheets for each period presented:
1. Management’s reason for electing the fair value option
2. If using the instrument-by-instrument option:
a. a description of similar items and the reasons for the partial election
b. reconciliation between the aggregate number and the fair valued number
3. For each line item that includes an item that has been fair valued:
a. information to enable users to understand how each line item in the balance sheet relates to major categories of assets and liabilities presented in accordance with FAS 157.
b. the aggregate carrying amount of items included in each line item in the balance sheet that are not eligible for the fair value option, if any.
4. The difference between the aggregate fair value and the aggregate unpaid principal balance of:
a. loans and long-term receivables that have contractual principal amounts
b. long-term debt instruments that have contractual
principal amounts
5. For loans held as assets:
a. the aggregate fair value of loans that are 90 days or more past due
b. the aggregate fair value of loans in non-accrual status if interest income is recognized separately from other changes in fair value
c. the difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, in non-accrual status, or both
6. For equity investments:
a. the information required by paragraph 20 of APB OP. 18.
For interim and annual income statements for each period presented:
1. For each line item in the balance sheet:
a. the amounts of gains and losses for fair value changes included in earnings
b. where the gains and losses are reported in the income statement
2. A description of how interest and dividends are measured and where they are reported in the income statement
3. For loans and other receivables held as assets:
a. the estimated amount of gains or losses included in earnings during the period attributable to changes in instrument-specific credit risk
b. how the gains and losses were determined
4. For liabilities with fair values that have been significantly affected during the period by changes in the instrument-specific credit risk:
a. the estimated amount of gains and losses included in earnings that are attributable to changes in instrument-specific credit risk
b. qualitative information about the reasons for the changes
c. how the gains and losses were determined
In annual periods only:
1. The methods and significant assumptions used to estimate the fair value of items for which the fair value option has been elected.
If the election date is chosen because the accounting treatment for an investment in another entity changes or an event requires an eligible item to be measured at fair value but does not require subsequent re-measurement, then an entity should disclose qualitative information about the nature of the event and quantitative information by line item in the balance sheet indicating which line item in the income statement includes the effect on earnings of initially electing the fair value option for that item.
This Statement is a prelude to more items being recognized on the balance sheet at fair value. Part II is going to consider fair value for non-financial instruments.
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Fresh Start Accounting has been amended (SOP 90-7)
Times read: 30305/06/08
| Plugged In Linda Cavanaugh CPA |
By: Linda Cavanaugh, CPA FSP SOP 90-7-1 An Amendment of AICPA Statement of Position 90-7
The FASB approved this FSP on April 24, 2008 and it is effective immediately.
This FSP resolves the conflict between early adoption of new standards for fresh-start reporting and other standards that prohibit early adoption.
SOP 90-7 is amended by reversing the guidance in paragraph .38 and stating that companies emerging from Chapter 11 bankruptcy reorganization should follow only those accounting standards in effect at the date fresh-start reporting is adopted.
This one was short and to the point. I wish they all were like this.
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FSP FAS 142-3 Determination of the Useful Life of Intangible Assets
Times read: 33005/02/08
The FASB issued this FSP on April 25, 2008 with the intent to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under Statement 141R. It is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements are to be applied prospectively to all intangible assets.Paragraph 9 of the FSP “amends paragraph 11(d) of FAS 142 so that a company will use its own assumptions about renewal or extension of an arrangement, adjusted for the company-specific factors in paragraph 11, even when there is likely to be substantial cost or material modifications.”
The FSP also states that there might continue to be a difference between the estimated useful life of the intangible asset and the period of expected cash flows under FAS 141R. It states that this could be due to different assumptions held by the company than a market participant would hold. This situation is considered appropriate because amortization of an intangible asset should reflect the period over which the asset will contribute both directly and indirectly to the expected future cash flows of the company.
Basically this FSP is recognizing that the assumptions used to estimate the useful life are different than the assumptions used to calculate fair value and that a company should use their own assumptions and not a market participant.
Three new disclosures were added with this FSP:
1. The company’s accounting policy on the treatment of costs incurred to renew or extend the term of a recognized intangible asset.
2. In the period of acquisition or renewal, the weighted-average period prior to the next renewal or extension (both explicit and implicit) by major intangible asset class.
3. For an company that capitalizes renewal or extension costs, the total amount of costs incurred in the period to renew or extend the term or a recognized intangible asset for each period for which an income statement is presented, by major intangible asset class.
Good Luck and if you need some examples, look up this FSP on the FASB website at www.fasb.org.
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Times read: 32804/27/08
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By Linda Cavanaugh, CPA - FAS 141R – Disclosures
Disclosures for business combinations are to be for the current reporting period or after the reporting date but before the financial statements are issued. I.e. any subsequent events are to be disclosed.
The following information is to be disclosed for each business combination:
1.The name and a description of the acquiree
2.The acquisition date
3.The percentage of voting equity interests acquired
4.The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree
5.A qualitative description of the factors that make up the goodwill recognized
6.The acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as:
a.Cash
b.Other tangible or intangible assets, including a business or subsidiary of the acquirer
c.Liabilities incurred, for example, a liability for contingent consideration
d.Equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of determining the fair value of those instruments or interest.
7.For contingent consideration arrangements and indemnification assets
a.The amount recognized as of the acquisition date
b.A description of the arrangement and the basis for determining the amount of the payment
c.An estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquiree shall disclose that fact.
8.For acquired receivables not subject to the requirements of SOP 03-3:
a.The fair value of the receivables
b.The gross contractual amounts receivable
c.The best estimate at the acquisition date of the contractual cash flows not expected to be collected.
That's it. That is all I have to say about FAS141R. I am going to be so excited to move on to another topic!
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FAS 141R – Subsequent Measurement and Accounting
Times read: 39904/22/08
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By Linda Cavanaugh, CPA - FAS 141R – Subsequent Measurement and Accounting
FAS 141R provides guidance for the subsequent measurement and accounting for the following transactions:
1) Reacquired rights
2) Assets and liabilities arising from contingencies recognized as of the acquisition date
3) Indemnification assets
4) Contingent consideration
1) Reacquired Rights
A reacquired right recognized as an intangible asset is to be amortized over the remaining contractual period of the contract in which the right was granted. If the asset is sold to a third party, the carrying amount of the intangible asset is included in determining the gain or loss on the sale.
2) Assets and Liabilities Arising from Contingencies
An asset or liability that would be in the scope of FAS 5 if it had not been acquired or assumed in a business combination is continued to be accounted for at its acquisition-date fair value unless new information is obtained. The acquirer is to de-recognize an asset or a liability arising from a contingency only when the contingency has been resolved.
A liability is to be measured at the higher of its acquisition-date fair value or the amount that would be recognized if applying FAS 5.
An asset is to be measured at the lower of its acquisition-date fair value or the best estimate of its future settlement amount.
3) Indemnification Assets
At each subsequent reporting date, an indemnification asset is to be accounted for on the same basis as the indemnified liability or asset. If the indemnification asset is not subsequently measured at its fair value, management’s assessment of the collectibility of the indemnification asset is to be taken into account.
4) Contingent Consideration
Any adjustments to a contingent consideration that is not a measurement period adjustment is to be accounted for as follows:
Equity – is not to be re-measured and its subsequent settlement is to be accounted for within equity.
Asset or Liability – is re-measured to fair value at each reporting date until the contingency is resolved. The changes in fair value are recognized in earnings unless the arrangement is a hedging instrument and is to be recognized in other comprehensive income.
Remember that FAS 141R has a ton of appendices to help you sort through things. I will post the disclosures requirements for FAS 141R next week and then we can move on to other topics unless someone has an issue.
Thanks for your patience with this topic.
If this statement is going to affect your company I would highly recommend taking a look at it now and not waiting until the last quarter of the year!!
FAS 141R – Measurement Period and Business Combinations in Stages
Times read: 37504/16/08
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By Linda Cavanaugh, CPA - 1) Business Combination in Stages and Combinations by Contract
If you obtain a company in stages you will need to re-measure your previously held equity interest in the company at its acquisition-date fair value and recognize the resulting gain or loss on the previously held interest, if any, in earnings. Any fair value changes recognized in other comprehensive income are to be reclassified and included in the calculation of the gain or loss.
A business combination may be achieved without the transfer of consideration in the following situations:
1. the acquiree repurchases a sufficient number of its own shares for an exiting investor (the acquirer) to obtain control
2. minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held the majority voting interest
3. the acquirer and acquiree agree to combine their businesses by contract alone as in a stapling arrangement or forming a dual listed corporation.
If you have acquired a company by contract alone, the amount of the company’s net assets recognized in accordance with the requirements of this Statement are used to measure the company’s equity value. The equity interests in the company held by parties other than you are a non-controlling interest even if all of the equity interests in the company are attributed to the non-controlling interest.
2) Measurement Period
The measurement period is the period after the acquisition date during which you may adjust the provisional amounts recognized for a business combination. The measurement period ends as soon as you receive the information you need about facts and circumstances that existed as of the acquisition date or learn that more information is not obtainable. However, the measurement period is not to exceed one year from the acquisition date.
If the initial accounting for a business combination is incomplete by the end of the reporting period, you will need to report in your financial statements provisional amounts for the items for which the accounting is incomplete. These provisional amounts can be retrospectively adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date. New assets and liabilities can also be recognized if new information is obtained about facts and circumstances that existed as of the acquisition date. You will need to consider all pertinent factors in determining whether to adjust the provisional amounts or whether that information results from events that occurred after the acquisition date.
Adjustments to provisional amounts are recognized by means of a decrease or increase in goodwill. The company is to revise comparative information for prior periods presented, as needed, including making any changes in depreciation, amortization or other income effects recognized in completing the initial accounting.
Almost done with this topic. Let me know if you have run into any specific problems, so we can share them with the world.
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FAS 141R – Consideration Transferred, Contingent Consideration and Share Based Payment Awards
Times read: 56704/07/08
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By Linda Cavanaugh, CPA - The second half of FAS 141R provides guidance on 1) how to measure the consideration transferred, 2) what to do with contingent consideration and 3) how to measure share-based awards of the acquiree.
1) Consideration Transferred
The fair value of the consideration transferred is calculated as the sum of
1. the acquisition date fair values of the assets transferred by the acquirer
2. the liabilities incurred by the acquirer to former owners of the acquiree
3. the equity interest issued by the acquirer.
If the consideration transferred by the acquirer has a book value different than the fair value of the consideration then the acquirer must re-measure the consideration at fair value as of the acquisition date and recognize the resulting gain or loss in earnings. However, if the consideration is transferred to the acquiree and not to the former owners and will remain in the control of the acquirer, in that case, the consideration is measured at its book value on the day before the acquisition and no gain or loss is recognized.
Translation: If your company buys a business and the purchase price is paid to that business that the money (or assets) is still in your control and you transfer it at book value.
2) Contingent Consideration
The acquirer must recognize the acquisition date fair value of any contingent consideration. The contingent consideration is classified as a liability or equity in accordance with the applicable GAAP such as FAS 150 or EITF 00-19. A right to the return of previously transferred consideration should be classified as an asset.
Translation: If your company has to pay the former shareholders if the EPS of the purchased company increases by 25%, then that amount needs to be fair-valued and recorded on the balance sheet.
3) Share Based Payment Awards
Exchanges of share options or other share based payment awards are considered a modification under the guidance of FAS 123R. If the acquirer is not obligated to replace the awards, none of the fair-value-based award is part of the consideration transferred and all of the fair-value-based measure of the replacement awards is to be recognized as compensation cost in the post-combination financial statements.
If the acquirer is obligated to replace the acquiree awards, either all or a portion of the fair-value-based measure of the acquirer’s replacement awards is to be included in measuring the consideration transferred. Both the new awards and the old awards are to be re-measured in accordance with FAS 123R and the value of the old award is part of the consideration transferred because it is attributable to pre-combination service. If the employee must render service for the new awards to vest, the remaining fair-value-based measure of the new award is recognized in the post-combination financial statements.
Translation: If part of the contract states that current stock options must be replaced by your company’s stock options, then part of the fair value of the awards are part of the purchase price. If, however, your company issues new stock options out of the goodness of your heart, then these new awards are not considered part of the purchase price.
Stayed tuned to the same Bat channel at the same Bat time for continued interpretation of this issue.
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FAS 141R - Business Combinations
Times read: 157303/30/08
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By Linda Cavanaugh, CPA - This new Statement was a lot more involved than I thought at first glance. Here is the first installment.
FAS 141R –"Business Combinations" was issued to improve relevance, representational faithfulness and comparability of the information surrounding business combinations.
The first step to applying this Statement is to determine whether a transaction is a business combination by applying the definition in Paragraph 3. FAS 141R defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. This includes a merger of equals.
A business is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. The entity does not have to be producing outputs; it just has to be capable of producing outputs. This definition does not include joint ventures, acquisition of an asset or a group of assets, a combination between entities under common control, or a combination between not-for-profit organizations or the acquisition of a for-profit business by a non-profit.
A developmental stage entity may not have outputs and other factors need to be assessed to determine whether the developmental stage entity is a business. The factors include but are not limited to, whether the set: 1) has begun planned principal activities, 2) has employees, intellectual property, and other inputs and processes that could be applied to those inputs, 3) is pursuing a plan to produce outputs, and 4) will be able to obtain access to customers that will purchase the outputs.
This definition will cause more entities to be classified as businesses and be subjected to the guidance in this Statement.
As with FAS 141, the acquisition method is used to account for the business combination. To apply the acquisition method an entity must 1) identify the acquirer, 2) determine the acquisition date, 3) recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, and 4) recognize and measure goodwill or gain from a bargain purchase (negative goodwill).
1) Identify the acquirer.
The guidance in ARB 51 as amended is used to identify the acquirer and paragraphs A11-A15 are to be used if ARB 51 does not clearly indicate who the acquiring party is. However, if the entity being combined is a variable interest entity under FIN 46, then the primary beneficiary is always the acquirer.
ARB 51 says that the acquirer is the entity that has ownership of the majority voting interest or over 50% of the outstanding voting shares.
Other factors to be considered in determining the acquirer include: the relative voting rights in the combined entity after the business combination, the existence of a large minority voting interest, the composition of the governing body, the composition of the senior management, or the terms of exchange of equity interests.
2) Determine the acquisition date.
The acquisition date is the date that the acquirer obtains control of the acquiree and is not necessarily the traditional closing date. For example if a written contract provides for a change of control before the consideration is legally transferred.
3) Recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.
This is where most of the revisions took place.
An asset or liability must meet the definition in Concept Statement 6 to be recognized as an identifiable asset or liability in the acquisition. Expected future costs to exit an activity, to terminate employees, or relocate employees are no longer recognized as part of the acquisition costs. These costs are to be recognized per other applicable GAAP.
If there is a pre-existing arrangement or other arrangement before or during negotiations these arrangements are not considered part of the business combination transaction and are accounted for under other applicable GAAP.
A transaction for the benefit of the acquirer is likely to be a separate transaction, such as
1. a transaction that in effect settles pre-existing relationships between the acquirer and acquiree (more guidance in paragraphs A78-A85)
2. a transaction that compensates employees or former owners of the acquiree for future services (more guidance in paragraphs A86-A90)
3. a transaction that reimburses the acquiree or its former owners for paying the acquirer’s acquisition related costs.
The acquirer’s acquisition related costs are to be expensed in the period costs are incurred and benefits received. These costs may include advisory fees, legal, accounting, valuation, and the costs of registering debt or equity securities. The exception to this rule is the costs to issue debt and equity securities which are to be accounted for under other applicable GAAP.
Assets such as brand names, patents, or customer relationships that the acquiree could not recognize because it had developed them internally, could be recognized by the acquirer under the new guidelines.
Paragraphs A16-A56 provide additional guidance on recognizing leases and intangible assets acquired in a business combination.
At the acquisition date, the assets and liabilities need to be classified or designated according to other applicable GAAP, such as available for sale or trading under FAS 115. However, leases and certain insurance contracts are to be classified as of the contract date unless they are modified, then the modification date is used.
The assets, liabilities and non-controlling interest are to be measured at fair value using the guidance in FAS 157. This is a change from past guidance, where some items were measured at historical costs.
And of course there are exceptions and the following are not measured at fair value:
1. Assets and liabilities arising from contingencies
2. Income taxes
3. Employee benefits
4. Indemnification assets
5. Reacquired rights
6. Share-based payment awards
7. Assets held for sale
Each of the above are to measured in accordance with the guidance of the Statements that they currently fall under. (I.e. Share-based payment awards follow the guidance in FAS123R)
4.) Recognize and measure goodwill or a gain from a bargain purchase (negative goodwill)
Goodwill is now measured as:
1. the consideration transferred (measured at fair value)
2. the fair value of any non-controlling interest in the acquiree
3. the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree (control achieved in stages)
Less:
1. the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Statement.
If only equity interests are transferred, the fair value may be more reliably measured using the acquiree’s equity interests.
If no consideration is transferred, the acquisition date fair value of the acquirer’s interest in the acquiree determined using a valuation technique in place of the acquisition date fair value of the consideration transferred should be used.
When a bargain purchase is made, as in a forced sale, and the fair value of the identifiable assets and liabilities is greater than the consideration transferred, the acquirer must first re-assess whether it has correctly identified the assets acquired and the liabilities assumed. The acquirer must then re-assess the measurement of the identified assets and liabilities, any non-controlling interest in the acquiree, any previously acquired interests in the acquiree, and the consideration transferred.
If the fair value of the identifiable assets and liabilities is still greater than the consideration transferred, then the acquirer is to recognize a gain for the difference on the acquisition date. This is different from previous guidance, where the fair value of the identifiable assets and liabilities would have been reduced by the difference.
That is the basic concept of FAS 141R. The main difference between the previous guidance and the new guidance is what is being measured and how it is being measured. FAS 141R has 7 appendices that provide further guidance on how to implement this new Statement.
Stay tuned to the same bat channel and the same bat time for further blogs on this issue.
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New statement on Derivative Disclosures and Proposed FSP on Pension Disclosures
Times read: 54003/20/08
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By Linda Cavanaugh, CPA - The FASB have been busy people in the last couple of days. They issued Statement 161 - Disclosures about Derivative Instruments and Hedging Activities and issued a proposed FSP 132R-a Employers' Disclosures about Postretirement Benefit Plan Assets.
The FSP on Pensions is basically calling for the FAS 157 disclosures to be added to the pension footnote. It will more than likely be effective for the 2008 10K.
FAS 161 - Disclosures on derivatives is effective for fiscal years after November 15, 2008 with early adoption encouraged. Per the FASB news release, the Statement improves disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit risk related. It requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments.
As always, more to come later. I am almost finished going through 141R and then I will work on this one!! The FASB is very interested in my job security.
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EITF 07-01 Accounting for Collaborative Arrangements
Times read: 55403/14/08
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By Linda Cavanaugh, CPA - EITF 07-01 “Accounting for Collaborative Arrangements” was ratified by the FASB Board on December 12, 2007 and is effective for fiscal years starting after December 15, 2008.
EITF 07-01 defines a collaborative arrangement as a contractual arrangement that involves a joint operating activity. These arrangements involve multiple entities that are active participants and are exposed to significant risks and rewards depending on the commercial success of the activity. The arrangement does not have to involve the creation of a new legal entity and are often used in intellectual property development (such as R&D or movies).
To determine if a business relationship is a collaborative arrangement, you must decide if all parties are active participants and share in the risk and rewards of the operation.
EITF 07-01 gives examples of active participation as:
1. directing and carrying out the activities of the joint operating activity
2. participating on a steering committee or other oversight or governance mechanism
3. holding a contractual or other legal right to the underlying intellectual property.
EITF 07-01 also gives examples of terms and conditions that indicate that participants are not exposed to significant risks and rewards as:
1. services being performed in exchange for fees paid at market rates,
2. ability to exit the arrangement without cause and recover all or a significant portion of its cumulative economic participation to date
3. there is a limit on the reward that accrues to a participant.
If your business relationship is a collaborative arrangement then transactions with third parties should be reported in each partner’s respective income statement using the guidance in EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent.”
Transactions with other participants in the collaborative arrangement should be accounted for using relevant provisions of the applicable GAAP. For example, transactions involving inventory should be accounted for using ARB 41 as a guide. If the transactions are not within the scope of any existing GAAP, then the accounting should be based on an analogy to existing GAAP or a reasonable, rational and consistent policy.
Each participant should disclose information about the nature and purpose of its collaborative arrangements, its rights and obligations under the arrangement, the accounting policy in accordance with Opinion 22, and the income statement classification and amounts attributable to transactions with partners.
Chances are you are already following the guidance in this EITF, but the FASB felt that clarification was needed concerning the appropriate income statement presentation and classification of these activities as well as the sufficiency of the disclosures relating to collaborative arrangements.
Have Fun!
Linda Cavanaugh
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Are you ready to implement FAS 157?
Times read: 60403/11/08
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By Linda Cavanaugh, CPA - FAS 157 "Fair Value Measurements" became effective on January 1, 2008 and will need to be included in the footnotes of the 1st Qtr 10Qs for the March 31, 2008 close.
There has been some good news. The FASB issued two FSPs to help us out. FSP157-1 excludes leasing transactions from the scope of FAS 157. However, assets and liabilities realted to leases that are assumed in a business combination are not excluded from the requirements of FAS 157. In other words, you have to fair value the lease for its share of the value in the business combination, but you would apply the fair value rules in FAS 13 "Leases" to determine the residual value and such.
FSP157-2 delays the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed on a non-recurring basis. Applying fair value measurements to these assets and liabilities is pushed back a year to financial periods beginning after November 15, 2008. The deferral includes such items as: impairment tests of goodwill and intangible assets and impairment tests of long-lived assets. It also applies to asset retirement obligations and nonfinancial liabilities for exit or disposal activities under FAS 146.
This deferral does not include items within the scope of FAS 159 "Fair Value Option, Fas 107 "Disclosures and Fair Value of Financial Instruments, FAS 133 "Accounting for Derivative Instruments and Hedging Activities, and FAS 156 "Accounting for Servicing of Financial Assets.
So we get a little break, but not much. Hopefully you have already written a draft disclosure and had several people look at it. Good Luck as we head into Q1 reporting time.
Linda Cavanaugh
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Minority Interest become Non-controlling interest with FAS 160
Times read: 131502/24/08
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By Linda Cavanaugh, CPA - Sorry for the delay in getting this posted but I got overwhelmed filing my Company's 10K.
FAS 160 amends ARB 51 to establish rules for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends some of the consolidation procedures to agree with the business combination statement, FAS 141R.
This statement is effective for fiscal years beginning after December 15, 2008 and is to be adopted prospectively.
Changes in Consolidation Rules
When a subsidiary is initially consolidated during the year, the consolidated financial statements will include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated. The other alternative methods are no longer allowed.
Shares of the parent held by the subsidiary are not treated as outstanding but should be reflected as treasury shares.
>font color="purple">Non-controlling Interests (Minority Interests)
A non-controlling interest is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The non-controlling interest in a subsidiary is part of the equity of the consolidated group.
A major change with this Statement is the requirement that the non-controlling interest contribute to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance. Prior guidance had any losses being charged against the majority interest.
A Company will need to disclose pro forma consolidated net income attributable to the parent and pro forma earnings per share if an entity’s consolidated net income would have been significantly different had the previous guidance been applied. In other words, if the new rules change net income significantly, the old rules should be presented in the notes with a pro forma income statement.
The non-controlling interest is to be reported in the consolidated statement of financial position within equity, separately from the parent’s equity. A Company with non-controlling interest in more than one subsidiary can present all the non-controlling interests in aggregate.
A financial instrument issued by a subsidiary that is classified as a liability in the subsidiary’s financial statement is not a non-controlling interest because it is not an ownership interest.
Revenues, expenses, gains, losses, net income or loss and other comprehensive income is to be reported at the consolidated amounts which includes both the parent and non-controlling amounts. The amount attributable to the non-controlling interest is then shown as a deduction from net income on the income statement.
Revenues xxx
Expenses xxx
Income from continuing operations xxx
Income tax expense xxx
Net income xxx
Less: Net income attributable
to the non-controlling interest xxx)
Net income attributable to parent xxx
Changes in a parent’s ownership interest while the parent retains its controlling interest in its subsidiary will be accounted for as equity transaction and therefore no gain or loss is recognized in consolidated net income or comprehensive income. Any difference between the fair value of the consideration received or paid and the amount by which the non-controlling interest is adjusted is to be recognized in equity.
Deconsolidation of a Subsidiary
A parent will deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in the subsidiary. If a parent deconsolidates a subsidiary through a non-reciprocal transfer to owners, such as a spin-off, the accounting guidance in APB Op. 29, Accounting for Non-monetary Transactions, applies. Otherwise any gain or loss is recognized in net income.
This gain or loss is measured as the:
a) the aggregate of the fair value of any consideration received, the fair value of any retained investment in the former subsidiary, and the carrying amount of any non-controlling interest in the former subsidiary less
b) the carrying amount of the former subsidiary’s assets and liabilities.
Appendix B of FAS 160 has several examples that help explain the new provisions, so check them out if you have questions.
There are several disclosures that are to be applied retrospectively. These will be in a forthcoming blog. Soon.
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Disclosures for FAS 160 - Non-controlling Interests
Times read: 62702/24/08
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By Linda Cavanaugh, CPA - As promised here are the disclosures required to be applied retrospectively for FAS 160.
The presentation and disclosure requirements are to be applied retrospectively for all periods presented.
a.The non-controlling interest is to be reclassified to equity.
b.Consolidated net income will be adjusted to include the net income attributed to the non-controlling interest.
c.Consolidated comprehensive income is to be adjusted to include the comprehensive income attributed to non-controlling interest.
d.The following disclosures will be presented retrospectively:
a. On the face of the consolidated financial statements, the amounts of consolidated net income and consolidated comprehensive income and the related amounts attributable to the parent and non-controlling interest.
b. Either in the notes or on the face of the consolidated income statement:
i. Income from continuing operations
ii. Discontinued operations
iii. Extraordinary items
c. On the face of the consolidated statement of changes in equity or in the notes if a consolidated statement of changes in equity is not presented, a reconciliation at the beginning and ending of the period of the carrying amount of total equity, equity attributable to the parent, and equity attributable to the non-controlling interest. That reconciliation shall separately disclose:
i. Net income
ii. Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners.
iii. Each component of other comprehensive income.
iv. In the notes a separate schedule that shows the effect of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent.
e.If a subsidiary is deconsolidated, the parent will disclose:
a. The amount of any gain or loss recognized in accordance with paragraph 36 (see Deconsolidation of a Subsidiary from yesterday's blog)
b. The portion of any gain or loss related to the re-measurement of any retained investment in the former subsidiary to its fair value.
c. The caption in the income statement in which the gain or loss is recognized unless separately presented on the face of the income statement.
Remember from the previous blog that a Company will need to disclose pro forma consolidated net income attributable to the parent and pro forma earnings per share if an entity’s consolidated net income would have been significantly different had the previous guidance been applied.
Also, don't forget that Appendix B has several examples to help you out.
The FASB has given us a year to get this implemented, so don't wait until October to get started. The earlier you get started, the better off you will be!
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3 Rules Implementation Dates Delayed
Times read: 64502/08/08
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By Linda Cavanaugh, CPA - Small business and nonpublic businesses have gotten a break from the SEC and the FASB.
The SEC proposed a one year extension of the SOX Section 404(b) external audit requirement for smaller companies. The companies will still need to comply with the management's assessment of internal control as of December 31, 2007, but they don't have to get their auditor's to sign off on the assessment until next year. The SEC wants to conduct a cost study to determine the real world costs and benefit of Section 404.
The FASB issued FSP Fin 48-2 which defers the effective date of FIN 48 "Accounting for Income Taxes" until fiscal years beginning after December 15, 2007, (which is this year)for certain nonpublic companies. These companies do not need to comply with the uncertain tax position disclosures for their 2007 10Ks.
The effective date for AICPA SOP 07-1 "Clarification of the Scope of the Audit and Accounting Guide, Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies" has been deferred indefinitely by the FASB. Maybe they are waiting until the AICPA shortens the name.
I hope you are lucky enough to fall into the categories of business who get to take these deferrals. It is always better to put off until tomorrow, so you can play this weekend.
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Just as I started to memorize those Standard numbers, the FASB changes the playing field!!
Times read: 64102/04/08
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By Linda Cavanaugh, CPA - The FASB has decided that the current GAAP hierarchy is just too complicated with all the Standards, EITFs, DIG issues, AICPA SOPs, SEC guidance and other stuff. They have been working on a "codification project" for years and have finally introduced it to the public.
The FASB states that the "new stucture and system will reduce the amount of time and effort required to solve an accounting research issue and improve usability of the literature thereby mitigating the risk of non-compliance with the standards."
The new codification will replace the current heirarchy and will become the only source of GAAP. If it is not part of the codification then it is not considered authoritative.
I agree that it is difficult to make sure you have checked all of the different sources when researching an issue, but I am just starting to be able to quote FASB. Such as "according to FAS 123R, you can't reverse the expense from a market condition." Now I am going to have to learn to quote a whole new system, such as, "according to Section 405, sub section xxx, paragraph xxx". I am not a happy camper, I do not like change.
For those of you who are adventurous go out to the website at http://asc.fasb.org/home and give it a try. You have to register, but the system is free for a year. There is no mention of how the system will work after the trial year, but I called my accounting research provider and he said that they would be offering the new product.
The FASB asks that you provide feedback on the system, especially the accuracy and completeness of the information. You are not suppose to rely on the information until it has become approved after the one year trial period.
So go take a look and start learning the new system. And try to remember that learning keeps our brains young.