Top Accounting and Reporting Challenges 2009 - Somerset CPAs - Indianapolis, Indiana REFarticle1.Print.htmSpring 2005

Recent Accounting Pronouncements

Adding to the challenges of reporting amidst economic and financial crises, a new wave of accounting standards is scheduled to take effect in 2009. This section contains summaries of FASB Statements and Interpretations that: (a) were issued in 2008 or the first quarter of 2009 or (b) were issued before April 1, 2009, and are effective for periods beginning after November 15, 2008, or later.

FASB Statements

FASB Statement No. 163 - Accounting for Financial Guarantee Insurance Contracts
In May 2008, the FASB released Statement No. 163, Accounting for Financial Guarantee Insurance Contracts. This Statement addresses the accounting for financial guarantee insurance contracts issued by insurance companies. Examples of the types of financial obligations that may be covered by financial guarantee contracts include municipal bonds and asset-backed securities. The requirements of Statement 163 make significant changes in the way insurance companies account for premium revenue and claim liabilities.

As shown in Exhibit 1, Statement 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those years. Some disclosures took effect for third quarter 2008.

FASB Statement No. 162 - The Hierarchy of Generally Accepted Accounting Principles
The FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, in May 2008. This Statement redefines the framework for ranking the sources of generally accepted accounting principles in order of authority (i.e., the GAAP hierarchy), and it moves the hierarchy from the U.S. auditing literature to the accounting literature.

The hierarchy established by Statement 162 consists of the following sources, ranked in order of authority from the most authoritative to the least authoritative sources:

Although not specifically mentioned in the hierarchy, SEC rules and interpretive releases are considered sources of category (a) accounting principles for SEC registrants. The SEC staff issue Staff Accounting Bulletins (SABs) that represent practices followed by the staff in administering SEC disclosure requirements, and they use EITF Appendix D Topics and Observer comments in EITF Issues to publicly announce their views on certain accounting issues for SEC registrants. In addition to the SEC staff, the FASB staff have used EITF D Topics to publicly announce their views on certain accounting issues. Both the SEC staff and the FASB staff announcements are considered category (c) accounting principles.

The FASB does not expect that Statement 162 will result in a change in current practice. But transition provisions are provided as a contingency for unexpected circumstances. The Statement was effective 60 days after the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” As indicated on Exhibit 1, the SEC approved the amendments on September 16, 2008.

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FASB Statement No. 161 - Disclosures About Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Statement 161, Disclosures about Derivative Instruments and Hedging Activities to help investors cut through the complexities and better understand the effects of certain derivative instruments on a company’s financial position, results of operations and cash flows. These disclosures are extensive and are required for interim or annual periods beginning after November 15, 2008. Some of the more significant include:

In addition, Statement 161 amends FASB Statement No. 107, Disclosure about Fair Value of Financial Instruments, to make it explicit that the disclosures of concentrations of credit risk should include derivative instruments. As shown on Exhibit 1, these disclosures are required for interim or annual periods beginning after November 15, 2008.

FASB Statement No. 141 (revised 2007) - Business Combinations
In December 2007, the FASB issued Statement 141R, Business Combinations. This Statement makes significant changes to the accounting for mergers and acquisitions. Key areas of change include the definitions of an acquirer and the acquisition date, along with the initial and subsequent accounting by the acquirer for certain items acquired in the business combination and the accounting for goodwill and gains resulting from bargain purchases, as well as amendments to other accounting guidance.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” that generally restores the prior accounting from FASB Statement No. 141 for these items.

Statement 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The effective date of this Statement is the same as that of the related FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements.

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FASB Statement No. 160 - Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB released Statement 160, Noncontrolling Interests in Consolidated Financial Statements. This Statement was issued concurrently with Statement 141R, Business Combinations.

Statement 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations. The changes introduced by Statement 160 will affect two types of entities: (1) those with an outstanding noncontrolling interest in one or more subsidiaries and (2) those that deconsolidate a subsidiary.

Statement 160 requires parent companies to:

The expanded disclosures include a reconciliation of the beginning and ending balances of the equity attributable to the parent and the noncontrolling owners and a schedule showing the effects of changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. BDO has published a separate Client Advisory on Statements 141R and 160.

FASB Statement No. 158 - Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued Statement 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.

Statement 158 requires that companies with single-employer defined benefit pension plans or other postretirement benefit plans recognize the funded status of their plans as a net asset or net liability. Prior to Statement 158, these amounts were reported in the footnotes to the financial statements. It also introduces added disclosure requirements.

The funded status is one of the most important pieces of information about retirement plans. It represents the difference between the fair value of a plan’s assets and its benefit obligation. Under the preceding balance sheet guidance in FASB Statements (No. 87 for defined benefit pension plans and No. 106 for other postretirement benefit plans), the prepaid asset or accrued liability on the balance sheet represented the cumulative difference between the expense under generally accepted accounting principles and the cash disbursements for funding a plan or paying benefits.

Because of the way expense was computed under Statements 87 and 106, the difference between the funded status and the amount on the balance sheet is made up of three items that may seem difficult to understand and less important than the funded status. The three items are:

Statement 158 requires that these three items be shown instead on the balance sheet as adjustments to shareholders’ equity. A summary of the other key provisions and requirements of Statement 158 is provided in Table 1.

Subsequent Guidance
In February 2007, the FASB issued FSP FAS 158-1, Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88 and No. 106 and to the Related Staff Implementation Guides. This FSP is effective as of the effective date of Statement 158. It does not change any provisions of Statement 158 or provide any additional implementation guidance. However, it updates the illustrations in the appendices of Statements 87, 88 and 106 to conform with the requirements of Statement 158 to recognize the funded status of defined benefit postretirement plans in an employer’s balance sheet. It also amends and supersedes the following Special Reports.

Portions with Delayed Effective Dates
For employers without publicly traded equity securities, the requirement to recognize the funded status of a benefit plan and the disclosure requirements took effect in calendar year 2007.

The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position (paragraphs 5, 6 and 9) is effective for fiscal years ending after December 15, 2008.

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Statement No. 157 - Fair Value Measurements 
FASB Statement No. 157, Fair Value Measurements, was issued in September 2006. Both before and after the Statement was issued, the use of fair value in financial statements has fostered much controversy over the why’s, how’s and what’s of its use. Statement 157 introduced a major change in mindset about how to measure fair value. This change has had far-reaching effects because it crosses many areas of accounting and financial reporting for which accounting standards permit or require fair value accounting.

Statement 157 does not extend the use of fair value to additional assets or liabilities beyond those required or permitted under other existing accounting standards. Examples of assets and liabilities for which measurement at fair value is currently required (or permitted) include the following:

Items not covered include share-based payment transactions and revenue recognition transactions that are measured based on vendor-specific objective evidence of fair value.

At the core of the new mindset is a uniform definition of fair value as the amount that would be received upon selling an asset or paid to transfer a liability (an exit price). Within this definition, there are gradations of subjectivity and reliability. To help investors identify the level of subjectivity, Statement 157 requires that companies categorize fair value measurements according to a hierarchy of inputs. The three tiers are:

The Statement uses these levels as the basis for added disclosures about the reliability of fair value measures. It also introduces and redefines a number of key terms and adds a hierarchy of inputs to fair value measurement. This guidance forms the basis for the new disclosures about the reliability of the measures.

The key terms include fair value, market participants, orderly transaction and measurement date.

The new definition of fair value has some surprising effects on measurement, in particular immediate gains and losses on certain transactions. Under an “exit value” approach, fair value excludes transaction costs, so for assets measured at fair value, transaction costs are generally charged to expense as incurred rather than added to the asset. On the other side, a dealer in derivatives might enter into a derivative with a corporate customer based on pricing in the “retail” market and be able to receive a fee from assigning the derivative to another dealer in the dealer (“wholesale”) market. Under certain circumstances, the dealer could record an immediate gain from adjusting the derivative to the price at which it could be settled with another dealer.

Subsequent Guidance
As companies began to prepare to apply this new standard, a number of implementation issues surfaced, leading to subsequent deferrals and amendments that scale back the scope of the standard and partially defer its effective date.

The FASB provided the following guidance and deferrals in 2007 and early 2008:

On September 30, 2008, in response to the deepening credit crisis, the SEC staff and FASB staff released an announcement acknowledging that the current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors and users of financial information. In response, the two bodies issued a series of questions and answers (Q&As) designed to address practice issues where there is a need for immediate additional guidance.

The Q&As include the following:

The Q&As were intended as a source of immediate guidance until the FASB could issue additional interpretive guidance on the application of fair value. The announcement concludes by emphasizing that fair value measurements and the assessment of impairment may require significant judgments. As a result, clear and transparent disclosures are critical to providing investors with an understanding of the judgments made by management. In addition to the disclosures required under existing U.S. GAAP, including Statement 157, the SEC’s Division of Corporation Finance recently issued letters in March and September to provide realtime guidance for issuers to consider in enhancing the transparency of fair value measurements to investors.

The Q&As are available at http://www.fasb.org/news/2008- FairValue.pdf. The letters are available at http://www.sec.gov/divisions/corpfin/g uidance/fairvalueltr0308.htm and http://www.sec.gov/divisions/corpfin/g uidance/fairvalueltr0908.htm.

The FASB issued the additional guidance in October 2008 as FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This FSP stresses the need for judgment and describes the key considerations in measuring the fair value of a financial asset when there is little or no market activity at the measurement date. The expectation is that the guidance will reduce the differences in opinion that have developed in the face of financial markets described as inactive, disorderly, dislocated and/or dysfunctional. It also provides interpretive guidance on consideration of observable transaction prices, acceptability of Level 3 inputs, and consideration of third-party pricing quotes.

In addition, in early 2008, the FASB had proposed changes to address concerns about the measurement of a liability in the absence of any observable markets or inputs. (Proposed FSP FAS 157-c, “Measuring Liabilities Under FASB Statement No. 157.”)

Despite the added guidance, the use of fair values remains a work in progress as it continues to stir controversy and to result in reporting challenges, particularly in inactive markets.

The current status is that Statement 157 is effective for fiscal years beginning after November 15, 2007, (i.e., 2008 for calendar year companies). The effective date of Statement 157 was deferred for one year for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis, such as those acquired in a business combination. The Statement takes effect for these types of assets and liabilities for fiscal years beginning after Nov. 15, 2008. (See FSP FAS 157-2, “Effective Date of FASB Statement No. 157” as discussed above.) For more information, please read BDO's letter on Fair Value Measurements.

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FASB Interpretation No. 48 - Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

FASB Interpretation 48 defines a tax position as any position taken (or not taken) in a tax return (either previously filed or future) that affects the accounting for income tax assets and liabilities (either current or deferred).

Prior to the issuance of Interpretation 48, there was diversity in the way companies accounted for uncertain tax positions. Interpretation 48 (known as FIN 48) brings more consistency. It requires that companies recognize the benefit of a tax position only if it is “more likely than not” that the position will be sustained in a determination based solely on the technical merits of the position by a taxing authority with full knowledge of all relevant information.

FIN 48 also introduces added disclosure requirements.

Effective Date and Subsequent Guidance
For public companies, the Interpretation is effective for years beginning after December 15, 2006. For nonpublic companies, the Interpretation is effective for years beginning after December 15, 2008, with early adoption permitted. Subsequent to the issuance of Interpretation 48 the FASB issued several FSPs related to the standard:

FSP FIN 48-1
In June 2006, the FASB released FSP FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48.” This FSP replaces the original FIN 48 term “ultimately settled” with the new term “effectively settled” and clarifies its meaning. The FSP provides three conditions that should be met for a tax position to be considered effectively settled with the taxing authority:

  1. The taxing authority has completed its examination procedures, including all appeals and administrative reviews that the taxing authority is required and expected to perform for the tax position.

  2. The company does not intend to appeal or litigate any aspect of the tax position included in the completed examination.

  3. The likelihood is remote that the taxing authority would examine or reexamine any aspect of the tax position.

In addition, the FSP reminds companies that if a taxing authority completes an exam and fails to identify an uncertain tax position in that year’s tax return, the potential settlement of the tax position for that tax year provides no new evidence about the technical merits of similar tax positions in other years’ tax returns. This guidance is effective upon initial adoption of FIN 48.

FSP FIN 48-2
In February 2008, the FASB released FSP FIN 48-2, “Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises.” This FSP deferred the effective date of Interpretation 48 for nearly all standalone nonpublic companies until annual periods beginning after December 15, 2007.

FSP FIN 48-2 was effective upon issuance, and the effective date of Interpretation 48 was further extended by FSP FIN 48-3.

FSP FIN 48-3
In December, 2008, the FASB released FSP FIN 48-3, “Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises,” This FSP delays the effective date of Interpretation 48 for nonpublic companies within its scope to annual financial statements for fiscal years beginning after December 15, 2008. The scope excludes nonpublic companies that are consolidated entities of a public company that applies US GAAP and those that have issued a full set of annual financial statements before the issuance of the FSP using the recognition, measurement and disclosure requirements of Interpretation 48.

Companies that elect to take the deferral made available by the FSP must disclose this fact and their accounting policies for evaluating uncertain tax positions for each set of financial statements to which the deferral applies. The intent of the deferral is to give the FASB time to develop additional guidance on the application of the Interpretation to pass-through entities and not-for-profit organizations.

Once effective, Interpretation 48 should be applied as of the beginning of the nonpublic company’s fiscal year. This includes the application of the Interpretation to acquired income tax positions in Statement 141, Business Combinations. 

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EITF Issues and Topics

This section contains summaries of EITF Issues and Topics that: (a) were issued in 2008 or the first quarter of 2009, or (b) are effective for periods beginning after December 15, 2008 or later and (c) are not discussed elsewhere in this Financial Reporting  letter.

Issue No. 07-1, “Accounting for the Conversion of an Instrument That Became Convertible upon the Issuer’s Exercise of a Call Option”
This Issue addresses the accounting for arrangements in which entities seek partners to jointly develop and commercialize intellectual property. Such collaborative arrangements are common in the biotechnology and pharmaceutical industries and also exist in other industries, such as the motion picture, software and computer hardware industries.

Included in the scope of this Issue are collaborative arrangements that are conducted without the creation of a separate legal entity for the arrangement. For these types of arrangements:

The Issue also establishes annual disclosure requirements regarding such matters as the nature and purpose of a company’s collaborative arrangements, its rights and obligations under these arrangements, and the stage of the life cycle of the underlying endeavor, as well as information about income statement classification and amounts attributable to transactions between participants to the collaborative arrangement.

Issue No. 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships”
This Issue addresses questions that arise when calculating earnings per share (EPS) for master limited partnerships (MLPs) using the two-class method. The two class method is a formula for allocating earnings. Under this formula, EPS are determined for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.

Today’s publicly-traded MLPs often issue multiple classes of securities that may participate in partnership distributions according to a formula specified in the partnership agreement. Typically, the capital structure for an MLP consists of publicly-traded units held by limited partners, a general partner interest, and incentive distribution rights (IDRs).

A key issue is how the current period earnings of an MLP should be allocated to the general partner, limited partners, and, when applicable, holders of  IDRs.

Issue 07-4 establishes these principles:

EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock”
This Issue addresses questions that can arise when determining whether an instrument (or an embedded feature) is indexed to an entity's own stock. This determination is important because it is one of several conditions that, when taken together, could result in a conclusion that an instrument or embedded feature is not a derivative. As compared to prior guidance, the consensus on Issue 07-5 will result in fewer instruments being classified as equity and more being classified as derivatives and as liabilities.

The Issue establishes that  certain types of instruments are not considered indexed to the entity’s own shares, (i.e., instruments with a strike price denominated in a currency other than the issuer’s functional currency and market-based employee option valuation instruments, such as ESOARS.)

For other types of instruments, the EITF reached a consensus that entities should apply a two-step approach for determining whether the instrument or embedded feature is indexed to an entity's own stock.

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Issue No. 08-3, “Accounting by Lessees for Maintenance Deposits Under Lease Arrangements”
This Issue addresses the accounting for certain lease arrangements that require the lessee to pay maintenance deposits to ensure that it properly maintains the leased asset. The maintenance deposits in the scope of this Issue are refunded to the lessee if the specified maintenance activities are performed.

The consensus reached by the EITF indicates that maintenance deposits in the scope of this Issue should be accounted for as a deposit asset. When the underlying maintenance is performed, the costs should be expensed or capitalized consistent with the lessee’s maintenance accounting policy.

Any amounts on deposit that are less than probable of being returned should be recognized as additional expense.

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Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5”
This Issue amends EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” for changes made by EITF Issue No. 00-27, “ Application of Issue No. 98-5 to Certain Convertible Instruments,” and FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.

While Issue 00-27 and Statement 150 were issued several years ago, Issue 98-5 was never updated to reflect the effect of those two standards and some entities continued to apply the superseded guidance in Issue 98-5.

Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement”
This Issue addresses questions about how to measure the fair value of debt instruments with inseparable third-party credit enhancements. For example, a company may issue debt with a contractual guarantee by a third party to meet the payment obligations of the issuer, if the issuer defaults. These guarantees are typically purchased by the issuer who then combines them with the debt and issues the combined securities to investors.

At issue is whether the fair value of the instrument should take into account the third-party credit enhancement--or if it should consider only the issuer’s risk of non-performance. Issue 08-5 establishes the following guidance:

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Issue No. 08-6, “Equity Method Investment Accounting Considerations”
This Issue addresses questions about the accounting for equity method investments. The questions arose following the issuance in 2007 of FASB Statements No. 141R, Business Combinations, and No. 160, Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51.

Statements 141R and 160 do not directly address the accounting for equity method investments, but questions arose because the standards amended, (i.e., Statement 141 and ARB 51), contained certain provisions that were used in applying the equity method. Issue 08-6 provides the following clarifications:

Issue No. 08-7, “Accounting for Defensive Intangible Assets”
This Issue addresses questions that have arisen in anticipation of the complexities involved in applying Statements 141R and 157, Fair Value Measurements, to certain types of intangible assets (known as defensive intangible assets) acquired in a business combination or asset acquisition.

Defensive intangible assets are intangible assets that are not being actively used, but are held to prevent another entity from using them. An example might be a trade name of an acquired entity that the acquirer does not intend to use itself. An asset of this type is defensive because it is a “locked-up” asset. Such an asset is likely contributing to an increase in the value of other assets owned by the acquiring entity.

Typically, in the past, when a company acquired an asset of this type, it allocated little or no value to the asset. However, this practice will change when Statements 141R and 157 become effective and intangible assets must be recognized at a value that reflects the asset’s highest and best use based on market participant assumptions. The new standards have raised questions about how defensive assets should be accounted for subsequent to their acquisition. Issue 08-7 provides the following guidance:

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Issue No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount that is Based on the Stock of an Entity’s Consolidated Subsidiary”
This Issue addresses questions that have arisen about the accounting for certain financial instruments following the issuance of Statement 160. At issue are instruments (and embedded features) for which the payoff to the counterparty is based, in whole or in part, on the stock of a consolidated subsidiary. An example would be warrants to purchase shares of a consolidated subsidiary.

The questions relate to consistency with current guidance. Currently, EITF Issue No. 00-6, “Accounting for Freestanding Derivative Financial Instruments Indexed to, and Potentially Settled in, the Stock of a Consolidated Subsidiary,” indicates that instruments issued by an entity based on the equity of one of the entity’s consolidated subsidiaries are not equity instruments of the consolidated entity, with the result that they are typically treated as derivatives and recognized at fair value each reporting period.

Some accountants have questioned whether the guidance in Issue 00-6 is consistent with that provided in Statement 160. After the effective date of Statement 160, the noncontrolling interest in a subsidiary’s stock will be classified in the equity of the consolidated entity. Therefore, instruments in the scope of Issue 08-8 will no longer be treated as derivatives, provided they are not required to be classified as liabilities, (e.g., under Statement 150 or Issue 00-19.) Issue 08-8 provides the following clarifications:

As a result of these clarifications, certain instruments linked to subsidiary stock that were previously accounted for as derivatives may be included in equity consistent with FASB Statement 160, if they meet other requirements to be classified as equity, such as EITF Issue 00-19, and if the subsidiary is substantive.

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Topic No. D-98, “Classification and Measurement of Redeemable Securities”
During 2008, the SEC Observer made several announcements resulting in revisions to Topic D-98. The revisions explain the interaction between the SEC staff’s views on the classification and measurement of redeemable securities (codified as EITF Topic D- 98) and FASB’s releases on noncontrolling interests (Statement 160) and certain convertible debt instruments (FSP APB 14-1). 

(1) Noncontrolling Interests
The SEC staff revised Topic D-98 to conform with FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Statement 160 requires noncontrolling interests in consolidated subsidiaries to be classified and accounted for as equity in the consolidated financial statements. The revisions clarify that Topic D-98 applies to redeemable noncontrolling interests and requires them to be classified outside of permanent equity (temporary equity or mezzanine).

As revised, Topic D-98 provides guidance for situations where classification of an equity security in temporary equity is no longer required, (e.g., when the redemption feature expires or the terms of the security are modified). When this classification is no longer required, the equity security should be reclassified to permanent equity at its carrying amount on the date of reclassification. Reversals of previous adjustments to the carrying amount of the equity security would be inappropriate.

Additionally, the SEC staff revised Topic D-98 to provide guidance on measuring the gain or loss that is recorded when a parent deconsolidates a subsidiary. Previous adjustments to the carrying amount of noncontrolling interests should be eliminated by recording a credit to the parent’s equity (because the previous adjustments to the carrying amount were recorded as debits to the parent’s equity). This will have the effect of reducing the gain, or increasing the loss, upon deconsolidation. The SEC staff encourages disclosure of the amount credited to equity.

Finally, the SEC staff provided the following guidance for calculating the effect of redeemable noncontrolling interests on earnings per share:

(2) Convertible Debt
The SEC Observer announced the SEC’s views on the interaction between Topic D-98 and the FASB’s recent guidance on certain convertible debt provided in FSP APB 14-1, “Accounting for Convertible Debt Instruments that may be settled in Cash upon Conversion (including Partial Cash Settlement).”

If the equity-classified component of the instruments covered by the FSP is considered redeemable, then a portion of it would be classified as temporary equity. That portion is calculated as the excess of: (1) the amount of cash or other assets that would be required to be paid to the holder upon redemption or conversion, over (2) the current carrying amount of the liability-classified component of the convertible debt instrument.

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FASB Staff Positions

This section contains summaries of FASB Staff Positions (FSPs) that: (a) were issued in 2008 or the first quarter of 2009, or (b) are effective for periods beginning after December 15, 2008 or later, and (c) are not discussed elsewhere in this Financial Reporting letter.

FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”
The FASB released FSP APB 14-1 on May 9, 2008. This FSP changes the accounting for convertible debt instruments that permit or require the issuer to pay cash upon conversion.

Under the FSP, the issuer will no longer account for the convertible debt entirely as a liability. Instead, the issuer will allocate the proceeds from the issuance of the instrument between liability and equity. The resulting debt discount, (i.e., the difference between the principal amount of the debt and the amount allocated to the liability component), is subsequently amortized to earnings over the instrument’s expected life using the interest method, (i.e., the discount is charged to interest expense).

In effect, this accounting treatment eliminates the perceived accounting benefits these instruments have enjoyed compared with similar instruments, namely lower interest expense and a less dilutive effect on earnings per share.

FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”
FSP EITF 03-6-1 was released on June 16, 2008. It clarifies the conditions under which instruments granted in share- based payment transactions can meet the definition of participating securities prior to vesting. Instruments that meet this definition need to be included in the earnings allocation under the two-class method of computing earnings per share (EPS).

Participating securities are defined in FASB Statement No. 128, Earnings per Share, as “...securities that may participate in dividends with common stocks according to a predetermined formula…” The FSP clarifies that a share-based payment award could meet this definition prior to the requisite service having been rendered if it contains nonforfeitable rights to dividends or dividend equivalents. In contrast, awards would not meet the definition of a participating security if the holder will forfeit the rights to dividends or dividend equivalents if the award does not vest.

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FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20”
The FASB released FSP EITF 99-20-1 on January 12, 2009. This FSP addresses concerns about losses recorded in illiquid markets by companies with beneficial interests in securitized financial assets subject to EITF Issue 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets.”

A key concern is the lack of comparability with the accounting for other instruments. In some cases, companies may have taken impairment losses that would not have been recorded if the securities had been subject to the impairment test in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.

This FSP is likely to affect banks more so than other companies.

FSP FAS 117-1, “Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds”
FSP FAS No. 117-1 was released on August 6, 2008. It affects not-for-profit organizations. The FSP provides guidance on the net asset classification of donor-restricted endowment funds under the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). It also requires enhanced disclosures by all not-for-profit organizations that have endowments (whether donor restricted or not). These disclosure requirements apply regardless of whether the organization is currently subject to UPMIFA, a model act that has not yet been adopted by all states.

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FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”
FSP FAS 132(R)-1 was released on December 30, 2008. It requires additional disclosures by employers that sponsor defined benefit pension or other postretirement plans. The disclosures provide more information about plan assets, investment decisions and related risks. The specific added disclosure requirements include the following:

  • Information about how investment allocation decisions are made, including factors that provide an understanding of investment policies and strategies.

  • Information about asset categories, including significant concentrations of risk within plan assets.

  • Information about the fair value measurements of plan assets, including their levels within the fair value hierarchy and the effect of fair value measurements using significant unobservable inputs (level 3 measures) on changes in plan assets for the period, (that is, a roll forward of level 3 assets).

FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161”
As the credit crisis deepened in 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees,” on September 12, 2008. This FSP requires companies to provide more information about events that will trigger payouts by sellers, and it aligns the requirements for two similar kinds of contracts involving guarantees: (a) contracts that meet the definition of a derivative or embedded derivative, and (b) guarantee contracts that do not meet the definition of a derivative. The specific disclosure requirements include:

  • An indication of the current status of the payment and performance risk associated with credit derivatives and guarantees.

  • Descriptions and explanations of events and circumstances that will trigger payments by sellers of derivatives in accordance with contractual requirements.

  • Information about the maximum amount of potential future payments, the fair values of the instruments and any related recourse or collateral provisions that would allow sellers to recover amounts previously paid in connection with credit derivatives.

The FSP also clarifies that the disclosures required by Statement 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008.

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FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”
FSP FAS 140-3 was released on February 20, 2008. It addresses questions that have arisen about the accounting for a repurchase agreement that relates to a repurchase financing. Repurchase financings are repurchase agreements that relate to a previously transferred asset, are between the same counterparties, and are entered into contemporaneously with, or in contemplation of, the initial transfer.

The FSP discusses transactions in which the initial purchase and repurchase agreements are treated separately and others in which the two transactions are linked and may meet the definition of a derivative under FASB Statement 133.

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FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities”
FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” was released on December 11, 2008. It increases the disclosure requirements for public companies. The full list of requirements is extensive. Among other things, companies must provide information about:

  • The assumptions used and judgments made in deciding whether to consolidate a variable interest entity (VIE).

  • The nature of any risks associated with the company’s involvement in VIEs, including information about events or circumstances that could expose a company to a loss and how the company calculates its maximum exposure to such losses.

FASB Staff Position FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”
The FASB released FSP FAS 142-3 on April 25, 2008. This FSP revises the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.

A key concern involves the useful lives of longer-lived intangible assets with renewal or extension terms, particularly when the terms are not explicit in the arrangement.

The FSP indicates that companies should consider their own historical experience in renewing or extending similar arrangements. If there is no track record, then the company should consider the assumptions that market participants would make about renewal or extension. In either case, the results should be adjusted for certain company-specific factors outlined in Statement 142. The expectation is that this will result in greater 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, Business Combinations.

The FSP also establishes additional disclosure requirements.

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FSP SOP 07-1-1, “Effective Date of AICPA Statement of Position 07-1-1”
The FASB issued FSP SOP 07-1-1 on February 14, 2008 to delay the effective date of SOP 07-1 for an indefinite period of time. The purpose of the deferral is to allow more time for the resolution of implementation issues.

The FSP does not affect FSP FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment Companies.” FSP FIN 46(R) is effective only upon initial adoption of SOP 07-1.

FSP SOP 90-7-1. “An Amendment of AICPA Statement of Position 90-7”
The FASB released FSP SOP 90-7 on April 24, 2008 to resolve this conflict in the accounting literature between AICPA Statement of Position (SOP) 90-7-1, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” and the growing number of accounting standards that expressly prohibit early adoption.

The FSP removes the requirement that entities must adopt concurrently with their adoption of fresh start accounting any changes in accounting principles that will be required within the twelve months following their adoption of fresh start accounting.

FSP SOP 94-3-1 and AAG HCO-1, “Omnibus Changes to Consolidation and Equity Method Guidance for Not-for-Profit Organizations”
FSP SOP 94-3-1 and AAG HCO-1 was released on May 19, 2008. It makes several changes to the guidance on consolidation and the equity method of accounting in AICPA Statement of Position (SOP) 94-3, “Reporting of Related Entities by Not-for-Profit Organizations,” and the AICPA Audit and Accounting Guide, “Health Care Organizations.”

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Summaries of Other Technical Resources

In addition to the pronouncements summarized herein, other technical resources may be helpful for purposes of financial reporting. Noteworthy resources issued in 2008 and the first quarter of 2009 are summarized below. This section includes documents issued by the Financial Accounting Standards Board (FASB), American Institute of CPAs (AICPA), Center for Audit Quality (CAQ), XBRL US organization, and Governmental Accounting Standards Board (GASB).

FASB Codification
The FASB’s Accounting Standards Codification is expected to go live on July 1, 2009. The Codification reorganizes the thousands of US GAAP pronouncements into approximately 90 topics. This new online system will supersede the existing collection of FASB Statements, Interpretations, Staff Positions, and Technical Bulletins, APB Opinions, AICPA Statements of Position, EITF consensuses, and related literature and will be recognized as the single source of authoritative nongovernmental U.S. GAAP, (excluding guidance issued by the SEC). While the substantive requirements will be the same, the form and organization will be radically different. Once the Codification is live, all accounting standards (other than SEC guidance to be included in the content) will be superseded and any accounting literature not included in the Codification will be considered nonauthoritative (with the exception of the SEC and any grandfathered guidance). To review the Codification, register at http://asc.fasb.org.

FASB Convergence - 2008 Update of FASB Memorandum of Understanding with IASB
In September 2008, the FASB and the International Accounting Standards Board (IASB) published an update of their 2006 Memorandum of Understanding (MoU). The update provides a progress report on projects completed since 2006, and it sets a goal of completing the Boards’ major projects by 2011.

The MoU is based on these principles:

  • Convergence of accounting standards can best be achieved through the development of high-quality, common standards over time.

  • Trying to eliminate differences between two standards that are in need of significant improvement is not the best use of the FASB’s and IASB’s resources. Instead, the Boards should focus on the development of new common standards.

  • Replacing standards in need of improvement with new jointly developed standards will serve the needs of investors.

The MoU contains a listing and status report of major projects and estimated completion dates. It is available at http://www.fasb.org/intl/MOU_09-11-08.pdf.

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AICPA Guides - Airlines Audit and Accounting Guide
In December 2008, the AICPA issued a new edition of the “Audit and Accounting Guide for Airlines.” This Guide addresses a number of new transactions and issues that have emerged over the years, including frequent flyer programs, electronic ticketing, revenue breakage, power-by-the-hour maintenance arrangements, amendable labor contracts and airline intangible assets, just to name a few.

The Guide also includes separate chapters dedicated specifically to air cargo and regional carriers.

AICPA Technical Practice Aids

TIS 1100.15. Liquidity Restrictions
This TPA provides examples of potential accounting implications that may arise as a result of the placement of restrictions by a fund or its trustee on an entity’s ability to withdraw funds from a money market fund or other short- term investment vehicle. The accounting implications include a potential change in the balance sheet classification of the assets and the triggering of additional disclosure requirements.

TIS 1900.01 Condensed Interim Financial Reporting by NonIssuers
This TPA states that, in the absence of established accounting principles for form and content in preparing condensed interim financial statements, nonissuers may analogize to the guidance in Article 10 of SEC Regulation S-X. The condensed interim financial statements should include a note saying the financial information should be read in conjunction with the entity’s latest annual financial statements, and the latest annual financial statements should either accompany the condensed statements or be made readily available by the entity.

TIS 6300.36. Prospective Unlocking
This TPA states that insurance companies are not permitted to “unlock” certain assumptions made in FASB Statement 60, Accounting and Reporting by Insurance Enterprises, except in the premium deficiency situations described in Statement 60.

In response to a specific question about premium rate increases, the TPA indicates that such increases after the inception of the contract would not be a valid reason to unlock the assumptions.

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TPA 6910.25-.28. Investment Companies TPAs
In May 2008, the AICPA issued a series of TPAs related to Investment Companies. The TPA numbers and titles are as follows:

TPA 6910.29. Allocation of Unrealized Gain (Loss), Recognition of Carried Interest, and Clawback Obligation
This TPA deals with financial statements of investment partnerships in which capital is reported by investor class. The TPA indicates that, if a nonregistered investment partnership reports capital by investor class, cumulative unrealized gains (losses), carried interest, and clawback provisions would be reflected in the equity balances of each class of shareholder or partner at the balance sheet date, as if the investment company had realized all assets and settled all liabilities at the fair values reported in the financial statements, and allocated all gains and losses and distributed the net assets to each class of shareholder or partner at the reporting date consistent with the provisions of the partnership’s governing documents.

TPA 6995. Credit Unions
TPA 6995.01 addresses accounting questions related to certain actions taken by the National Credit Union System and National Credit Union Share Insurance Fund in January 2009. The actions were taken to stabilize the corporate credit union system. Among other things, these actions involve the assessment of an insurance premium. The TPA considers when and how the obligation for the insurance premium should be recognized for financial reporting purposes.

TPA 6995.02 addresses how a corporate credit union should evaluate its membership capital shares and paid-in capital in the U.S. Central Federal Credit Union for other-than-temporary impairment at December 31, 2008.

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Other AICPA Releases

Draft Issues Paper on Valuation of Interests in Alternative Investments
In January 2009, the AICPA’s Accounting Standards Executive Committee and the Alternative Investments Task Force issued a nonauthoritative draft Issues Paper on FASB Statement No. 157, Valuation Considerations for Interests in Alternative Investments. The paper focuses on issues related to estimating fair value for investments that are not traded in active markets, including how the following should be considered in estimating fair value:

CAQ Alerts

The Center for Audit Quality (CAQ) was created in January 2007 as a policy and information forum to foster confidence in the audit process and to aid investors and the capital markets. The Center is affiliated with the AICPA and issues periodic alerts, some of which are available to the general public. For more information, visit http://thecaq.aicpa.org/.

Highlights of the CAQ’s publicly available alerts are summarized below.

CAQ Alert No. 2009-08. Frequent SEC Comment Letter Issues for Smaller Registrants
In January 2009, the CAQ issued an Alert describing aspects of financial reporting that are frequently incorporated in SEC comment letters to smaller registrants. According to the alert, the areas of accounting that are frequent subjects of comment letters include:

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XBRL US

US GAAP Taxonomy
In November 2008, the XBRL US organization released for public comment a draft of the 2009 release of the US GAAP Taxonomy. The first release was issued in April 2008.

XBRL stands for eXtensible Business Reporting Language, a computer format that facilitates a form of reporting the SEC calls interactive data. The US GAAP Taxonomy is intended for use with the SEC requirements for XBRL reporting.

The SEC’s final rule, “Interactive Data to Improve Financial Reporting,” was released on January 30, 2009 and will take effect in 2009 for certain public companies according to a phased-in schedule.

The US GAAP taxonomy will enable public companies to make quarterly and annual financial reports available in interactive data form instead of text form. This will allow investors and analysts, as well as the companies themselves to more easily locate and analyze desired information. The comment period for the 2009 US GAAP taxonomy ended on January 15, 2009.

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GASB Pronouncements

This section contains selected releases of the Governmental Accounting Standards Board (GASB).

GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
Statement 43 establishes accounting guidance for OPEB plans that are included as trust funds in the financial reports of plan sponsors or employers, or issued in standalone financial reports.

GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions
Statement 45 provides guidance on how to account for and report the costs and obligations related to postemployment healthcare and other forms of OPEB. The accounting requirements are based on actuarial-determined amounts similar to requirements for pensions. The OPEB cost is generally the actuarial-determined amount that, if paid on an ongoing basis, would provide sufficient resources to pay benefits as they come due.

GASB Statement No. 47, Accounting for Termination Benefits
Statement 47 establishes accounting standards for termination benefits. Key points:

GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations
Statement 49 provides guidance on the accounting for pollution remediation obligations. These are obligations to address the current or potential detrimental effects of existing pollution by participating in remediation activities, such as site assessments and cleanups.

The Statement establishes five events and circumstances that obligate the government to analyze its expected future outlays for pollution remediation and consider which components should be set up as liabilities.

The triggering factors include being compelled to take action because of an imminent endangerment, violating a pollution prevention-related permit or license, being named as a responsible party or potentially responsible party, being named in a lawsuit to compel participation in pollution remediation, and commencing or legally obligating itself to commence pollution remediation.

Pollution remediation outlays may be capitalized in limited circumstances under the standard, but most pollution remediation outlays will not qualify for capitalization and should be accrued as a liability.

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GASB Statement No. 50, Pension Disclosures—an amendment of GASB Statements No. 25 and No. 27
Statement 50 more closely aligns the financial reporting requirements for pensions with those for other postemployment benefits (OPEB) and requires the disclosure of additional information in notes to financial statements or in a presentation of required supplementary information (RSI) by pension plans and by employers that provide pension benefits. The disclosure requirements include the following information:

GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets
Statement 51 establishes accounting and financial reporting requirements for intangible assets to reduce diversity in practice. It requires that:

Statement 51 also establishes guidance for amortization of intangible assets, including guidance on determining the useful lives of intangible assets whose lives are limited by contractual or legal provisions. If there are no factors that limit the useful life of an intangible asset, the Statement provides that the intangible asset should be considered to have an indefinite useful life. Intangible assets with indefinite useful lives should not be amortized unless their useful life is subsequently determined to no longer be indefinite due to a change in circumstances.

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GASB Statement No. 52, Land and Other Real Estate Held as Investments by Endowments
Statement 52 establishes consistent standards for the reporting of land and other real estate held as investments by essentially similar entities. It requires endowments to report their land and other real estate investments at fair value. Governments also are required to report the changes in fair value as investment income and to disclose the methods and significant assumptions employed to determine fair value, as well as other information that they currently present for other investments reported at fair value.

GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments
Statement 53 addresses the recognition, measurement and disclosure of information regarding derivative instruments entered into by state and local governments. Its main requirements:

GASB Concepts Statement No. 5, Service Efforts and Accomplishments Reporting
Concepts Statement 5 amends Concepts Statement No. 2, Developing Reporting Standards for SEA Information, to reflect the results of research conducted by the GASB and others into the practice of reporting service efforts and accomplishments (SEA).

SEA reporting refers to the communication of selected measures of a government’s performance results. The reporting of SEA performance information is viewed as an important method of demonstrating accountability for the resources raised by a government. Currently, such reporting is voluntary rather than required. Proponents of SEA say it does a better job than traditional financial statements of providing decision-useful information about a government’s efficiency and effectiveness in providing services to its citizens.

The GASB expects this updated Concepts Statement will be helpful in establishing proposed suggested guidelines for voluntary reporting of SEA performance information by state and local governmental entities.

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GASB Technical Bulletin No. 2004-2, Recognition of Pension and Other Postemployment Benefit [OPEB]
Expenditures/Expense and Liabilities by Cost-Sharing Employers
Technical Bulletin 2004-2 provides guidance on questions that may arise in applying GASB Statements 27, Accounting for Pensions by State and Local Governmental Employers, and 45 to cost-sharing employers. Cost-sharing refers to the practice of pooling by employers of their benefit obligations and assets under a pension or OPEB plan.

GASB Technical Bulletin No. 2006-1, Accounting and Financial Reporting by Employers and OPEB Plans for Payments from the Federal Government Pursuant to the Retiree Drug Subsidy Provisions of Medicare Part D
Technical Bulletin 2006-1 provides guidance on questions that may arise in connection with the accounting for a retiree drug subsidy (RDS) received under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The payments are made by the federal Department of Health and Human Services to the employer (in the case of a single- employer plan) or the plan (in the case of a multiemployer arrangement). The Technical Bulletin clarifies that an RDS should be accounted for as a voluntary nonexchange transaction, with an asset and revenue recognized in accordance with GASB Statement No. 33, Accounting and Reporting for Nonexchange Transactions.

GASB Technical Bulletin No. 2008-1, Determining the Annual Required Contribution Adjustment for Postretirement  Benefits
Technical Bulletin 2008-1 clarifies the requirements for calculating the annual required contribution adjustment under GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers and GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions.

Guide to Implementation of GASB Statements 43 and 45 on Other Postemployment Benefits
This GASB’s Implementation Guide on Statements 43 and 45 on Other Postretirement Benefits provides the answers to over 250 questions. Topics include:

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Financial Reporting News is provided by Somerset’s Assurance Team for our clients and other interested persons upon request. For additional information on the issues discussed, please contact us. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. 

These articles were written by and published herein with the permission from professionals of BDO Seidman, LLP.  Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.

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News / Resources
May 2009