EITF 08-4 was ratified by the Board in June of 2008 and was issued to provide transition guidance for conforming changes made to EITF 98-5 that resulted from EITF 00-27 and FAS 150. These changes are effective for financial statements issued for fiscal years ending after December 15, 2008 and earlier application is permitted. The effect of these changes is to be applied retrospectively with the cumulative effect of the change being reported in retained earnings. If a company must make a change in its accounting to implement these changes, then the disclosure requirements in FAS 154 should be followed.
The major changes are as follows:
1. Footnote 1 is changed to further define the commitment date as being the date when an agreement has been reached with an unrelated party, binding on both parties and usually legally enforceable, with the following characteristics:
a. The agreement specifies all significant terms, b. The agreement includes a disincentive for nonperformance that is sufficiently large to make performance probable, c. The Task Force observed that if an agreement includes subjective provisions that permit either party to rescind its commitment to consummate the transaction, a commitment date should not occur until the provisions expire or the convertible instrument is issued, whichever is earlier.
2. If the convertible instrument has a stated redemption date, a discount is to be amortized from the date of issuance to the stated redemption date of the convertible instrument. If there isn’t any stated redemption date, the discount is to be amortized from the date of issuance to the earliest conversion date.
3. If the instrument is converted before the discount is fully amortized, at the date of conversion, the remaining discount should be immediately recognized as interest expense or as a dividend as appropriate. Any expense should not be classified as extraordinary.
There are updates to the examples in EITF 98-5, that you should take a look at for further guidance.
There have been several documents from the FASB and the SEC pertaining to fair value and credit derivatives over the past year. This will be something that your auditors will be taking a close look at as we go through the 10K audit season.