FSP FAS 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133
This new FSP is effective for financial periods ending after November 15, 2008. This would be for the 2008 10K for calendar year companies.
The FSP clarifies that FAS 161 is effective for any reporting period, annual or interim, beginning after November 15, 2008. There was some controversy over whether FAS 161 was to be applied in the interim periods and this FSP claifies that it does.
This FSP applies to credit derivatives within the scope of FAS 133, hybrid instruments with embedded credit derivatives and guarantees within the scope of FIN 45. Examples would be credit default swaps, credit spread options, and credit index products.
The disclosures on the credit derivatives would apply to the seller of the contract (the party that assumes the credit risk, the guarantor or the party that provides the credit protection).
The disclosures would include:
1. The nature of the credit derivatives including the approximate term of the credit derivative, the reasons for entering into the credit derivative, the circumstances that would require the seller to perform under the credit derivative, and the current status of the payment/ performance risk based on either external or internal ratings.
2. The maximum potential amount of future payments the seller could be required to make under the credit derivative. This amount is not to be netted against any collateral.
3. The fair value of the credit derivative as of the date of the balance sheet.
4. The nature of any recourse provisions that would enable the seller to recover from third parties and any assets either held as collateral that the seller can obtain and liquidate to recover all or a portion of the amounts paid under the credit derivative. This disclosure would include any purchased credit protection with identical underlyings.
5. For any embedded credit derivatives, the seller of the embedded credit derivative shall disclose the required information for the entire hybrid instrument, not just the embedded credit derivatives.
FIN 45 is amended to include disclosure of the current status of the payment/performance risk of the guarantee. This would require the same disclosures for credit derivatives and guarantees.
Due to the current credit crisis, there has been a lot of literature and guidance released dealing with credit derivatives and other financial instruments. This FSP is trying to get more information to the investor so they can make informed decisions regarding the risk involved with a company who buys or sells these kinds of instruments.
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.