Lecture Notes for Acct 592Prof. Teresa Gordon
FASB Up-Date FAS145-153
SFAS No. 145: Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (April 2002)
1.Gains and losses from early extinguishment of debt will not longer be classified automatically as an extraordinary item.
This does away with FASB No. 4 and makes FASB No. 64 unnecessary since it was an exception to FASB No. 4 related to extinguishments of debt made to satisfy sinking-fund requirements.
2.FASB 44 is obsolete since all intrastate operating rights have been deregulated and the transition provisions of the laws are complete.
3.FASB 13 – Sale-Leaseback provisions now apply to situations in which the change in lease provisions of a capital lease gives rise to a new agreement classified as an operating lease.
- The list of technical corrections are largely to fix things that have been modified by subsequent standards but were missed earlier. They should all appear already in your “current text” of the FARS CD-ROM
SFAS No. 146 – Accounting for Costs Associated with Exit or Disposal Activities (June 2002)
Related case = 04-5 Alchemist, Inc.
Scope:
Applies to costs associated with an “exit activity” that is NOT related to a business combination and that is NOT covered by the provisions of FASB No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets.
Exit activity includes but is not limited to a “restructuring” as defined in IAS 37 as “a programme that is planned and controlled by management, and materially changes either (a) the scope of a business undertaken by an enterprise; or (b) the manner in which that business is conducted.”
INCLUDES:
a.One-time termination benefits
Termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement
b.Costs to terminate a contract that is not a capital lease
c.Costs to consolidate facilities or relocate employees
Recognition and measurement
WHEN – Recognized when the liability is incurred (or rarely, when its fair value becomes measurable)
An exit or disposal plan does not, by itself, create a present obligation to others for costs expected to be incurred under the plan
HOW TO MEASURE – measured at its fair value
Fair value = amount at which that liability could be settled in a current transaction between willing parties (not a forced or liquidation transaction)
If quoted market prices are not available, discounted present value techniques will be used with a “credit-adjusted risk-free rate”
EXPENSE RELATED TO PASSAGE OF TIME
Changes in the liability due to the passage of time shall be recognized as an increase in the liability and as an expense (for example, accretion expense). This change shall NOT be treated as interest expense for purpose of capitalization of interest cost (FASB 34).
SUBSEQUENT CHANGES IN ESTIMATE
Changes in estimate related to something other than the passage of time shall be measured using the original credit-adjusted risk-free rate
Special rules on one-time termination benefits
Comes into existence when it meets all four criteria below and has been communicated to employees (the communication date)
a.Management comes up with a plan of action
b.Plan identifies the number of employees, their job classification, location and expected completion date
c.Terms of the benefit arrangement is sufficiently detailed to enable employees to determine the type and amount of benefits they will receive if terminated
d.Actions required to complete the plan indicate that it is unlikely that significant changes will be made or that the plan will be withdrawn
Liability recognition date:
At communication date if
Employees are NOT required to render services until they are terminated in order to receive the benefit
Initially at communication date with changes in estimate
Employees are required to render service until they are terminated in order to receive the benefits
In this case, the expense is spread over the future service period.
Contract Termination Costs
Cost to terminate contract before the end of its term – recognized at fair value when the entity terminated the contract
Liability for costs that will continue to be incurred under a contract – with no economic benefit will be recognized when the entity ceases to use the right conveyed by the contract
EXAMPLE: operating lease
Liability at the “cease use date” is determined based on the fair value of the remaining lease rentals to be paid REDUCED by estimated sublease rentals that could be reasonably obtained for the property, even if the entity does not intend to enter in a sublease.
Note that the future payments would never be reduced below zero.
Disclosures
Normally the cost is included in continuing operations unless the rules on discontinued operations are met.
In period the exit or disposal activity is initiated and up until the activity is completed:
a.A description including the facts and circumstances leading to the activity and the expected completion date
b.For each major type of costs associated with the exit activity:
1.Total amount incurred in the period, cumulatively, and total expected
2.Reconciliation of the beginning and ending liability balances
3.Explanation for any adjustments to the liability
c.The line item in the income statement where the costs are reported
d.For each reportable segment, the three information items as listed in (b)
e.If a liability is not recognized because the fair value cannot be reasonably estimated, disclose that fact that the reasons the estimate cannot be made.
SFAS No. 147 – Acquisitions of Certain Financial Institutions (October 2002)
I incorporated these changes regarding measurement of intangible banking assets into the notes on FASB 141 and 142 and the update fro FASB 144.
SFAS No. 148 – Accounting for Stock-Based Compensation – Transition and Disclosure (December 2002)
I believe that SFAS No. 123(Revised 2004) supersedes this standard which was about voluntarily changing from the intrinsic value method (APB Opinion 20) to the fair value method under the original version of SFAS No. 123.
SFAS No. 149 – Amendment of Statement 133 on Derivative Instruments and Hedging Activities (April 2003)
Derivatives has been a topic of Acct 415/515 in our curriculum. Without a thorough understanding of SFAS No. 133, comments on the changes made in this statement will not be particularly useful. Some of the changes were issues that had arisen through the DIG (Derivatives Implementation Group) and include the meaning of underlying and initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market practices. The main thing to remember is to use the “current text” or the SFAS No. 133 as amended version for research on derivatives.
SFAS No. 150 – Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (May 2003)
Certain types of mandatorily redeemably preferred stock were previously presented in the “mezzanine level” of the balance sheet: between liabilities and owners’ equity but included in neither total. FASB has been working on a project for quite awhile to provide a better definition of what constitutes a liability (which would be an amendment to Concept Statement No. 6. In the meantime, it has offered this guidance.
Freestanding mandatorily redeemable financial instruments will now be classified as a liability if the terms require the issuer to redeem the shares at a specified or determinable date(s) or upon an event that is certain to occur.
Example of events that are certain to occur:
Death of the holder
Exception: If redemption is required only upon liquidation or termination of the entity, the instrument will be classified as equity
If the redemption feature is contingent on an event that is NOT certain to occur, the shares are classified as equity initially. If the event later becomes certain to occur (i.e., the condition is resolved), the redeemable financial instrument is reclassified to the liability section.
Types of financial instruments that would fall under this standard:
Mandatorily redeemable preferred stock
Trust-preferred securities
Monthly-income-preferred securities
Trust-originated-preferred securities
Obligations to repurchase the issuer’s equity shares by transferring assets
Written put options that require physical or net cash settlement
Forward purchase contracts that require physical or net cash settlements
Combination of written put option and purchased call option issued in a
freestanding instrument
Certain obligations to issue a variable number of shares
Obligation to issue shares with monetary value based on a fixed monetary
amount known at inception
Obligation to issue shares with monetary value based on something other
than changes in the fair value of the issuer’s equity
Obligation to issue shares with monetary value based on variations
inversely related to changes in the fair value of issuer’s equity shares
Unconditional obligation that must be either redeemed for cash or settled
by issuing shares
Embedded features in a financial instrument that is not a derivative in its entirety are NOT covered by this standard – for example, convertible bonds (???)
Disclosure on Financial Statements
The “dividends” paid on mandatorily redeemable securities will be recognized in the financial statements as interest cost.
Mandatorily redeemable financial instruments classified as liabilities will use the following description: Shares subject to mandatory redemption and there will be a related footnote
Key terms – from Glossary to SFAS No. 150
Financial instrument – a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. A freestanding financial instrument is one that is entered into separately and apart from any of the entity’sother financial instruments or equity transactions, or that is entered into in conjunctionwith some other transaction and is legally detachable and separately exercisable.A mandatorily redeemable financial instrument is issued in the form of shares that embody an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event that is certain to occur.
Monetary value - What the fair value of the cash, shares, or other instruments that a financial instrumentobligates the issuer to convey to the holder would be at the settlement date underspecified market conditions.
Net cash settlement - A form of settling a financial instrument under which the party with a loss delivers to theparty with a gain cash equal to the gain.
Net share settlement - A form of settling a financial instrument under which the party with a loss delivers to theparty with a gain shares of stock with a current fair value equal to the gain.
Shares, as the term is used in SFAS No. 150, indicates various types of ownership interests that are not necessarily securities such as a partnership interest. In contrast, the term equity shares refers only to shares that are accounted for as equity.
SFAS No. 151 – Inventory Costs – An Amendement of ARB No. 43, Chapter 4 (November 2004)
Part of the “international convergence” project. Clarifies that abnormal costs of idle facilities should not be capitalized as product costs. Companies should use “normal capacity” for the allocation of overhead. Any unallocated overhead is expensed during the period in which they are incurred. Other abnormal handling costs or abnormal levels of spoilage might also need to be expensed.
SFAS No. 152 – Accounting for Real Estate Time-Sharing Arrangements (December 2004)
Amends SFAS Nos. 66 & 67
Special industry accounting practices are clarified.
SFAS No. 153 – Exchanges of Nonmonetary Assets – an Amendment of APB Opinion No. 29 (December 2004)
APB Opinion No. 29 generally required that exchanges of nonmonetary assets would be based on the fair values of the assets exchanged but it had exceptions for exchanges of similar productive assets. This standard changes the exception so that gains and losses are not recognized only when the nonmonetary exchange does not have commercial substance.
Commercial Substance
A nonmonetary exchange has commercial substance if the entity’s future cash flowsare expected to significantly change as a result of the exchange.
A significant change in future cash flows is defined to be meeting one or both of the following two conditions:
a.The configuration (risk, timing, and amount)of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred.
b.The entity-specific valueof the asset(s) received differs from the entity specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged.
Nonmonetary exchanges are recognized at the fair value of the nonmonetary asset relinquished UNLESS:
1.Fair Value Not Determinable. The fair value of neither the asset(s) received nor the asset(s) relinquished is determinable.
2.Exchange Transaction to Facilitate Sales to Customers. The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
3.Exchange Transaction That Lacks Commercial Substance. The transaction lacks commercial substance
If any of these three conditions are met, the exchange is measured based on the book value (adjusted for impairment if appropriate) of the nonmonetary asset(s) relinquished and no gain or loss is recognized for the exchange.
Unfortunately, there is no implementation guidance included in the standard
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