EITF 08-5 Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement
This EITF was ratified in September 2008 by the FASB Board and is effective on a prospective basis in the first reporting period beginning on or after December 15, 2008. Early adoption is allowed.
In the period of adoption, the valuation techniques used to measure the fair value of liabilities should be disclosed and a discussion of any changes from prior periods.
This EITF was issued to help in the determination of the issuer’s unit of accounting for a liability that is recorded at fair value that has an inseparable third-party credit enhancement.
EITF 08-5 does not apply to credit enhancements provided by a government or government agencies, between a parent and its subsidiary or between corporations under common control. It also does not apply to the holder of the credit-enhanced liability or for liabilities not measured at fair value on a recurring basis (recorded at amortized cost).
Any third-party enhancements should not be included in the fair value determination by the issuer of the debt. The issuer should consider its own credit rating, not that of the guarantor.
Also the two parts (debt and guarantee) should be accounted for separately. The proceeds received from the investor are to be allocated to both the premium for the credit enhancement and to the issued liability.
As with other issues related to fair value of items dealing with credit, you have to disclose any third-party credit enhancements. I would recommend (again) that you make these disclosures robust. More is better when dealing with this issue.
This has turned out to be an issue at my company because people do not understand the scope of this EITF. This EITF applies to the issuer of debt measured or disclosed at fair value that has an inseparable third party credit enhancement. If you have invested in debt securities that are recorded at fair value under FAS 115, they do not fall under the guidance of this EITF.
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.