FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL Dolce Center Norwalk, Connecticut. October 5-6, 2009 Meeting Agenda

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1 FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL Dolce Center Norwalk, Connecticut October 5-6, 2009 Meeting Agenda Monday, October 5 12:00 1:00 p.m. (OPTIONAL) LUNCH for meeting participants (Candlewood Dining Room) 1:00 1:15 p.m. PUBLIC GENERAL SESSION INTRODUCTION (Publick Room A/B/C) Introductions Discussion of the purpose and objectives for the meeting (D. Chookaszian) 1:15 a.m. 2:30 p.m. PUBLIC GENERAL SESSION FINANCIAL STATEMENTS OF THE FUTURE (Publick Room A/B/C) Discussion of the Financial Statements of the Future Objectives of the primary financial statements and financial reporting Boundaries of the primary financial statements and financial reporting Vision for timing and distribution of the annual and quarterly reporting packages Vision for improving the usefulness and effectiveness of segment reporting Interrelationship between the vision and current projects on the FASB s agenda and other stakeholder s initiatives 2:30 3:45 p.m. CLOSED BREAK-OUT SESSION I: Consideration of Issues Related to Implementing a New Vision A. Priority of financial statements (income statement vs balance sheet) B. Other comprehensive income C. Presentation and disclosure of financial instruments D. Presentation and disclosure of revenue recognition E. Interim reporting F. Segment reporting 3:45 4:15 p.m. BREAK 1

2 4:15 5:45 p.m. PUBLIC GENERAL SESSION IMPLEMENTING A VISION (Publick Room A/B/C) Each break-out group will summarize the discussions and the entire group will discuss the topics. 5:45 p.m. BREAK 6:30 8:30 p.m. DINNER (Candlewood Dining Room) 2

3 Tuesday, October 6 8:30 9:00 a.m. PUBLIC GENERAL SESSION SUMMARIZATION AND REFLECTION (Publick Room A/B/C) Objectives for the remainder of the meeting (D. Chookaszian) Observations or reflections on prior sessions 9:00 10:30 a.m. PUBLIC GENERAL SESSION OVERVIEW OF PROJECTS (Publick Room A/B/C) FASB-IASB Financial Statement Presentation Project Proposed model in the discussion paper Comments received and outreach Recent decisions and future plans Disclosure Framework Project Potential scope and project conduct Prior work Financial Instruments Project Other Projects 10:30 11:00 a.m. BREAK 11:00 12:15 a.m. CLOSED BREAK-OUT SESSION II: Consideration of Issues Related to Current FASB Projects A. IASB vs FASB direction and timing differences B. Organization, presentation, and form of delivery, including disaggregation C. The reconciliation schedule and the use of the direct method to present operating cash flows D. Disclosure framework E. Feasibility and considerations of transitioning to a new presentation and disclosure model: periods of comparable information, systems changes, etc. F. Outreach and change management process 12:15 1:15 p.m. LUNCH (Candlewood Dining Room) 1:15 a.m. 2:15 p.m. PUBLIC GENERAL SESSION CURRENT FASB PROJECTS (Publick Room A/B/C) Each break-out group will summarize the discussions and the entire group will discuss the topics. 3

4 2:15 3:00 p.m. PUBLIC GENERAL SESSION CONCLUSIONS & SUMMARY (Publick Room A/B/C) Prioritization and sequencing of issues and agenda Identification of action steps or direction that can be taken in the near-term. Identification of issues and areas that need further discussion in the future. Meeting Summary and Wrap up 3:00 p.m. ADJOURNMENT 4

5 FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL Dolce Center Norwalk, Connecticut October 5-6, 2009 Meeting Overview Purpose of the Meeting In a time of crisis, financial reporting must focus on both continuous improvement and bringing value to the customers of financial reporting investors while balancing the costs for companies to create that value. On September 22, 2009, the International Accounting Standards Committee Foundation Monitoring Group ( Monitoring Group ) issued a statement on the principles for accounting standards and standard setting, which was endorsed by the Financial Accounting Foundation. 1 The universal principles articulated by the Monitoring Group can be used as a yardstick to measure future improvements. The Monitoring Group describes the principles underpinning accounting standards as follows: The International Accounting Standards Board (IASB) in its Framework and the U.S. Financial Accounting Standards Board (FASB) in its Statements of Financial Accounting Concepts provide objectives of financial reporting and describe the characteristics of accounting standards that support those objectives. These collectively form the foundation on which individual standards are developed. They are universal in that they apply to financial reporting for businesses of all sizes, across all industries. Though each standard setter has presented these objectives and characteristics in its own way, consistent principles can be readily identified. We view the primary objective of financial reporting as being to provide information on an entity s financial performance in a way that is useful for decision-making for present and potential investors. To be considered decisionuseful, information provided through the application of the accounting standards must, at a minimum, be relevant, reliable, understandable and comparable. Relevant: Financial information must be relevant to the decision being evaluated. For purposes of capital markets participants, relevance depends on whether the information enables the user to evaluate past and present events, such that the user can draw inferences regarding future events. Further, information is relevant if it provides the user a basis against which to assess past evaluations. Reliable: Information should be reliable in the sense of providing a faithful representation of the events on which it purports to be reporting. This requires the information to be neutral and to depict fairly the reported transactions. Reliability does not necessarily equate with certainty, as judgment, for example for some measurements or estimates of future outcomes, is an inherent aspect of financial reporting. 1 NEWS RELEASE 09/22/09, Financial Accounting Foundation Endorses Statement of the International Accounting Standards Committee Foundation Monitoring Board, from wspage&cid=

6 Understandable: Financial information is intended to provide a tool for decisionmaking. It therefore should be developed and presented in a way that, with reasonable effort, can be understood and adapted by users into their decisionmaking processes. 2 Comparable: Information used in decision-making is generally evaluated within a context, rather than statically. To facilitate its use, financial information should be prepared and presented with sufficient consistency to enable comparison of the reporting entity s performance over time and against other reporting entities. The FASB and IASB are currently addressing several fundamental financial reporting areas that strive to significantly improve the financial accounting and reporting for revenue, financial instruments, insurance, leases, and certain disclosures. Moreover, there are two projects on the FASB s current agenda that have broad implications for how companies present and disclose their financial reporting results to investors, the Financial Statement Presentation and Disclosure Framework projects. The purpose of this meeting is to focus on comprehensively considering the vision for the Financial Statements of the Future. The discussion will include input on significant areas such as, the objectives of financial statements, the boundaries of financial reporting, the timing and distribution of financial information, and the effectiveness of segment information. The discussion will then focus on specific issues within the Financial Statement Presentation and Disclosure Framework projects and related aspects within other agenda projects, including consolidation; impairment, recognition, and measurement of financial instruments; and hedging. Our meeting has two main purposes: 1. To discuss and describe a vision for the financial statements of the future and how those statements can bring optimize the value to investors and others (a 10 year view) 2. To discuss and provide input on specific issues related to the Board s projects on Financial Statement Presentation, Disclosure, Financial Instruments, and related efforts. Meeting Output Our meeting will result in the preparation of a meeting summary on the issues discussed, as well as the establishment of a direction for FASAC participation in other forums to assist in fostering debate on financial statement presentation and disclosure. Meeting Schedule and Format The meeting will begin on Monday October 5 at 1:00 pm and will conclude on Tuesday October 6 at 3:00 pm. The meeting will include discussions with the full group and also small group breakout sessions for more in-depth discussion of specific issues. The large group sessions will be open to the public; however, the breakout sessions will be closed meetings. Meeting Materials The materials have been distributed in advance of the meeting. While there are a number of documents, some of which are voluminous, the intent is to provide adequate background. The important part of the reading is the FASAC overviews, as well as the summaries/or executive overviews within the longer documents. 2 Statement Of The Monitoring Board For The International Accounting Standards Committee Foundation On Principles For Accounting Standards And Standard Setting, September 22, 2009, from

7 List of Materials FASAC Meeting October 5-6, 2009 Meeting Agenda **Report of the Financial Crisis Advisory Group, issued to the IASB and the US FASB on July 28, 2009 **Getting to the Heart of the Issue: Can Financial Reporting Be Made Simpler and More Useful?, Global Accounting Alliance Report issued in December 2008 **Excerpts from The Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission, as issued on August 1, 2008 **A Response by the Financial Accounting Foundation and the Financial Accounting Standards Board, issued August 1, 2009 in response to the recommendations of the Advisory Committee on Improvements to Financial Reporting FASAC Project Overview Paper on Financial Statement Presentation **Snapshot: Preliminary Views on Financial Statement Presentation, provided by the FASB and IASB in October 2008 **Preliminary Views on Financial Statement Presentation, issued by the FASB and IASB on October 16, 2008 **FASB Initiates "Disclosure Framework" Project Aimed at More Useful, Organized, and Consistent Disclosures, FASB NEWS RELEASE 07/08/09 FASAC Project Overview Paper on Financial Instruments **Snapshot: Preliminary Views on Revenue Recognition in Contracts with Customers, provided by the FASB and IASB in December 2008 A B C D E F G H I J **Available from the FASB, SEC, or other public websites.

8 ATTACHMENT E Introduction FINANCIAL STATEMENT PRESENTATION Financial Accounting Standards Advisory Council October 2009 The financial statement presentation project is a joint project with the IASB. In October 2008, the FASB and IASB (the boards) issued a Discussion Paper, Preliminary Views on Financial Statement Presentation. A summary of the proposals in that paper is included in paragraphs S1-S14 of Attachment G. The comment period ended on April 14, The boards received 227 comment letters. Overview of comment letter responses The majority of those responding to the Discussion Paper support the objectives and basic principles proposed in the paper. Overall, respondents generally agree with: linking information in the primary financial statements providing more detail in the financial statements than may be provided today separating business and financing activities (with the exception of financial services entities) classifying items for presentation in specific sections and categories on the basis of how those items are used by management. However, most respondents are concerned that rigid application of the cohesiveness and disaggregation objectives will result in financial statements that are complex and not understandable. Respondents suggest that line-item cohesiveness not be a goal alignment at the subtotal level may be sufficient and that the notes may be a better place to present disaggregated information. Note: These materials are provided to facilitate understanding of the issues to be addressed at the October 2009 FASAC meeting. These materials are presented for discussion purposes only; they are not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

9 When it comes to application of the cohesiveness and disaggregation objectives to the individual financial statements, the majority of respondents disagree with: presentation of operating cash flows using a direct method disaggregation on the face of the statement of comprehensive income by both function and nature The reconciliation schedule as a whole. Even though many respondents agree a direct method cash flow statement presents useful information, most stated that it wasn t more useful than an indirect cash flow statement and that the costs of applying the direct method do not outweigh the benefits. Therefore, the majority of respondents suggest that the boards retain the status quo, noting that an indirect method is consistent with the cohesiveness and disaggregation objectives. Banks are unanimous in saying that the statement of cash flows (regardless of how presented) is meaningless for them. Respondents acknowledge that information about functional and by nature expenses are useful, but most do not agree with providing information about both in the statement of comprehensive income. Many suggest that detailed information be presented in the notes. Some respondents suggest that the requirement in IAS 1, Presentation of Financial Statements, to present either byfunction or by-nature information on the face be retained (with specific by-nature information in the notes). Others suggest that a management approach be permitted that is, information about expenses should be presented in a manner consistent with how management uses the information and with how information systems gather expense information. Other than a few users of financial statements, most respondents do not support the reconciliation schedule. Respondents cite (a) the excessive detail in the schedule, noting that this was taking line item cohesiveness to an extreme and (b) the lack of information value in most amounts on the schedule. Some suggest that whatever key information about changes in assets and liabilities 10'2009Attach E FSPOverview.doc 2

10 users of financial statements desire should be disclosed in the notes, for example, a reconciliation of key accounts. A summary of the comment letter responses is available on the financial statement presentation project page on the FASB website Field test The staff recently concluded a field test on the proposals in the Discussion Paper. The purpose of the field test was two-fold, to: Determine whether the proposed presentation model improves the usefulness of the information in an entity s financial statements to users in making decisions in their capacity as capital providers Understand the costs of implementing the proposed presentation model and identify any unintended consequences in applying that model. The field test consisted of three parts: Preparer information: recast financial statements, responses to a postcompletion survey, and cost estimates to implement the proposed presentation model. Quantitative information that describes the additions, changes, and movements of line items between the non-recast and recast financial statements. Analyst information: responses to a survey about their review of specific recast and non-recast financial statements. Preparer portion of field test Thirty-one entities participated in the field test. The following tables indicate the industry (using the Fama-French classification system that aggregates standard industry codes [SIC] into broad industry classifications) and geographic representation (based on their primary listing authority or regulator) of the preparer participants. 10'2009Attach E FSPOverview.doc 3

11 Insurance 7 Electrical equipment 1 Pharmaceutical products 3 Machinery 1 Banks 2 Petroleum & Natural gas 1 Business services 2 Retail 1 Computer 2 Utilities 1 Electronic equipment 2 Entertainment 2 Steel works 2 United States 12 Aircraft 1 Europe 11 Automobiles & Trucks 1 Japanese 5 Construction materials 1 New Zealand 2 Consumer goods 1 India 1 The preparer participants recast financial statements for two consecutive years using the principles and guidance in the Discussion Paper and completed a survey about their recasting experience. Results of the preparer portion of the field test were provided to the boards in May In June, the staff provided the boards with quantitative summary information about selected attributes that were tracked between the non-recast and recast versions of the financial statements. The three aspects of the proposed presentation model that the preparer participants found most useful in communicating their financial results are: Management approach to classification Alignment of items in sections and categories across statements Increased disaggregation/information about liquidity and financial flexibility. Analyst portion of field test The analyst portion of the field test consisted of 43 individual analysts. Seventeen of the participants are credit analysts, 11 academics, and 10 are equity analysts. The remaining 5 analysts identified themselves as other. The analyst participants completed a survey about their review of two different versions of an entity s financial statements financial statements as currently presented (non-recast) and financial statements presented in accordance with the proposed presentation model (recast). The survey consisted of multiple choice, ranking, and open ended questions. For many of the questions, there 10'2009Attach E FSPOverview.doc 4

12 was an opportunity to either explain or provide an alternate answer. Analysts were not asked to manipulate any of the financial statement amounts or produce any metrics for the field test. The survey used in the analyst portion of the field test duplicated some questions asked in the preparer survey in order to compare the perceptions of the two groups on particular aspects of the proposed presentation model. The three aspects of the proposed presentation model that the analyst participants found most useful are: Increased disaggregation Separation of business and financing activities Direct method presentation of cash flows. A summary of the field test results is available on the financial statement presentation project page on the FASB website Tentative decisions to date The boards began deliberating the proposed presentation model in July To date, they reached the following tentative decisions: Rewrite the objectives of financial statement presentation as core presentation principles Retain cohesiveness as one of the core presentation principles and modify its application so that cohesiveness is not necessarily required at the line-item level Retain disaggregation as one of the core presentation principles and provide guidance on when an entity may present disaggregated information in the notes to financial statements rather than on the face of the financial statements 10'2009Attach E FSPOverview.doc 5

13 Consider liquidity and financial flexibility in the context of the disaggregation principle, rather than as a separate core presentation principle Explain how the core presentation principles relate to the conceptual framework for financial reporting Retain the requirement that an entity present financial statement items in sections that distinguish between business activities (value-creating activities) and financing activities (funding of that value creation) in each of the financial statements Retain an approach to classification within the business section that is based on how a reporting entity organizes its activities and how it uses its assets and liabilities. However, there would not be an operating or investing category within the business section. Rather, additional groupings of information within the business section (that is, categories) would reflect the facts and circumstances of that entity and would be left to management s discretion. (The boards will discuss application guidance to help management determine meaningful groupings of information within an entity s business section at a future meeting.) Be more specific in defining the financing section. In September, the boards agreed to be more specific about the financial liabilities an entity could include in the financing section. The boards also discussed whether an entity could include treasury assets in the financing section. The boards will continue their discussion of this issue at a future meeting. Retain the requirement that an entity present information about discontinued operations in a separate section in each of its primary financial statements (except the statement of changes in equity) The IASB will pursue a requirement that an entity present information about net debt in its financial statements; the FASB is not interested in doing so. 10'2009Attach E FSPOverview.doc 6

14 In July, the boards noted that the FASB had decided tentatively in its recent work on financial instruments to require a single statement of comprehensive income. The IASB plans to consider that issue in the coming months. Next steps in the project The staff has developed alternatives for presenting information in the statement of cash flows, the statement of comprehensive income, and the notes to financial statements that consider the input received from constituents. The staff discussed those alternatives with its advisory groups (the Joint International Group and the Financial Institution Advisory Group) in London on July 27, The boards will discuss those issues in October. Some of those issues will be addressed at break out sessions during the October 2009 FASAC meeting. Project plan The staff plan to complete deliberations in January Meeting that deadline will keep the boards on target to publish an exposure draft of a proposed statement in March 2010 and a final standard in June Questions for FASAC members 1. Do FASAC members have any questions on the overall response to the Discussion Paper? 2. Do FASAC members have any questions on the field test? 3. Do FASAC members have any questions on the tentative decisions to date? 4. Do FASAC members have any questions on the project plan? 10'2009Attach E FSPOverview.doc 7

15 FINANCIAL INSTRUMENTS Financial Accounting Standards Advisory Council October 2009 These background materials include: 1. An overview of the Boards work to date and timelines 2. A summary of the FASB decisions reached to date (includes decisions reached through September 23, 2009) 3. A comparison of the FASB s Current Guidance and Tentative Approach and the IASB s Current Guidance and Proposed Approach (as of September 2009) 4. The FASB Project Plan and Anticipated Issues for Deliberations (as of September 16, 2009). 1. An Overview of the Boards Work to Date and Timelines In July 2009 the IASB published the exposure draft Financial Instruments: Classification and Measurement. The exposure draft proposes two primary measurement categories for instruments fair value with changes in profit or loss and amortized cost. The exposure draft has a 60-day comment period that ends on September 14, In August the FASB posted to their website a detailed description of its tentative approach to classification and measurement of financial instruments. That approach proposes two primary measurement categories fair value with changes in profit or loss and fair value with changes in other comprehensive income (OCI). Both the IASB and FASB are considering selecting a single impairment methodology for financial assets that are not measured at fair value through profit or loss. The Boards believe that their respective proposed approaches have met the objective set out for the project. Both approaches would reduce the complexity that results from the many categories and related impairment models in IAS 39 and US GAAP and provide a clear rationale for the proposed measurement categories. 10'2009FIOverview.doc

16 Timelines The Boards plan to deliberate the issues relevant to this project separately and then meet subsequently to reconcile differences in their technical decisions. The IASB decided to complete its deliberations on the project in three phases: Phase 1: Classification and measurement The IASB has made tentative decisions about classification and measurement and issued an exposure document in July Phase 2: Impairment The IASB plans to issue an exposure document on impairment in October Phase 3: Hedge accounting The IASB plans to issue an exposure draft on hedge accounting in December The FASB expects to issue one Exposure Draft that addresses the measurement, classification, and impairment of financial instruments, as well as hedge accounting, by the end of this year or early The FASB will consider input received on its tentative model as well as feedback received on the IASB s Exposure Draft as it develops its Exposure Draft. At its Board meeting on September 23, the staff provided the FASB with a summary of the feedback received during the FASB and IASB s financial instrument roundtable meetings in Tokyo, London, and Norwalk and the FASB s discussion of core deposit liabilities with U.S. investors. 2. Summary of the FASB Decisions Reached to Date Scope The scope of the financial instruments project is based on the present definition of a financial instrument in the Master Glossary of the FASB Accounting Standards Codification. That definition is: A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that both: a. Imposes on one entity a contractual obligation either: 1. To deliver cash or another financial instrument to a second entity 2. To exchange other financial instruments on potentially unfavorable terms with the second entity. 10'2009FIOverview.doc 2

17 b. Conveys to that second entity a contractual right either: 1. To receive cash or another financial instrument from the first entity 2. To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. All contractual rights (contractual obligations) that are financial instruments meet the definition of asset (liability) set forth in FASB Concepts Statement No. 6, Elements of Financial Statements, although some may not be recognized as assets (liabilities) in financial statements that is, they may be off-balance-sheet because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity The following financial instruments will be excluded from the scope of the project: 1. Employers and plans obligations for pension benefits; other postretirement benefits, including health care and life insurance benefits, postemployment benefits, employee stock option and stock purchase plans; and other forms of deferred compensation arrangements as defined in the following: a. Topic 715 on compensation (originally issued as FASB Statement No. 43, Accounting for Compensated Absences, and APB Opinion No. 12, Omnibus Opinion 1967) b. Topic 712 on nonretirement postemployment benefits (originally issued as FASB Statement No. 112, Employers Accounting for Postemployment Benefits) c. Topic 715 on compensation for retirement benefits (originally issued as FASB Statements No. 87, Employers Accounting for Pensions, and No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions) d. Topic 960 on plan accounting for defined benefit pension plans (originally issued as FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans) 10'2009FIOverview.doc 3

18 e. Topic 718 on shared-based payment (originally issued as FASB Statement No. 123 (revised 2004), Share-Based Payment). 2. Contracts within the scope of Topic 944 on insurance (originally issued as FASB Statements No. 60, Accounting and Reporting by Insurance Enterprises, No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, and No. 163, Accounting for Financial Guarantee Insurance Contracts), except for deposit-type (investment) contracts issued by insurance entities as defined in that Topic. 3. Noncontrolling interests in consolidated subsidiaries 4. Equity investments in consolidated subsidiaries 5. Equity instruments issued by the entity and classified in stockholders equity, in their entirety, in the statement of financial position. (Financial instruments with equity-like features that are classified as liabilities under U.S. generally accepted accounting principles (GAAP) would be subject to the Board s proposal. The scope also would not apply to equity components of hybrid financial instruments that require bifurcation.) 6. An interest in a variable interest entity that the entity is required to consolidate. 7. Lease assets and liabilities that are accounted for under Topic 840 on leases (originally issued as FASB Statement No.13, Accounting for Leases). Measurement of Financial Instruments and Reporting Changes in their Fair Value All financial instruments would be measured at fair value with all changes in fair value recognized in net income unless the following criterion is met. If an entity s business strategy is to hold debt instruments with principal amounts for collection or payment(s) of contractual cash flows rather than to sell or settle the financial instruments with a third party, certain changes in fair value for those instruments may be recognized in other comprehensive income. For hybrid financial instruments containing embedded derivatives that do not meet the clearly-and-closely related criterion and require separate accounting under Topic 815 of the FASB Accounting Standards Codification, all changes in fair value for the entire hybrid financial instrument would be recognized in net income. For hybrid financial instruments containing embedded derivatives that 10'2009FIOverview.doc 4

19 meet the clearly-and-closely-related criterion under Topic 815 and the entity s business strategy is to hold the instruments for collection or payment(s) of contractual cash flows rather than to sell or settle the financial instruments with a third party, certain changes in fair value for the entire hybrid financial instrument may be recognized in other comprehensive income. The amount of the change in fair value that is permitted to be recognized in other comprehensive income equals the entire change in fair value, excluding current period interest accruals, minus the current portion of the change in fair value attributable to credit losses (only for financial assets and based on the Board s future decision on impairment). In addition, for changes in fair value that have been recognized in other comprehensive income, realized gains or losses from sales or settlements would be recognized in net income. In complying with this guidance for recognizing fair value change in other comprehensive income, an entity s business strategy for a financial instrument would be evaluated based on how the entity manages its financial instruments rather than based on the entity s intent for an individual financial instrument. The entity also would demonstrate that it holds a high proportion of similar instruments for long periods of time relative to their contractual terms. Election of whether changes in fair value of a qualifying financial instrument are to be recognized in net income or in other comprehensive income would be made at the initial recognition of the instrument and could not be subsequently changed. Certain types of an entity s own debt may be measured at amortized cost if the entity s business strategy is to hold the financial liability for payment(s) of contractual cash flows rather than to sell or settle the financial liability with a third party and measuring the financial liability at fair value would create a measurement attribute mismatch. Core Deposit Liabilities The FASB did not make a decision on which measurement attribute should be used to measure core deposit liabilities. However, the FASB did decide on an approach for remeasurement if the Board were to decide at a future date that such information would be useful to investors. The Board agreed to a remeasurement approach that has the following characteristics: 1. A present value of the average core deposit liability amount discounted by the difference between the alternative funds rate and the all-in-cost-toservice rate over the implied maturity. 2. The core deposit liability amount that would be subject to the remeasurement would be determined as an average amount over the 10'2009FIOverview.doc 5

20 implied maturity time period, which would result in the consideration of future deposits. Considering and valuing future deposits would result in an intangible asset being reflected in the valuation. Presentation Entities would be required to include one statement of financial performance with a total for comprehensive income including a subtotal for net income as part of the basic financial statements at each reporting period. Entities would continue to only report basic and diluted earnings per share based on net income. Financial instruments would be displayed separately on the face of the statement of financial position depending on whether changes in their fair value are recognized in net income or in other comprehensive income. Financial Instruments Whose Changes in Fair Value Are Recognized in Net Income An entity would be required to present on the face of the statement of financial position only the fair value amount of financial instruments whose changes in fair value are recognized in net income, except for the entity s own debt. The entity would be required to present the amortized cost of its own debt in the statement of financial position. An entity that so chooses may also present, either in the statement of financial position or in the notes to the financial statements, both the amortized cost and the amount needed to adjust the amortized cost to arrive at fair value for financial instruments whose changes in fair value are recognized in net income. An entity would be required, at a minimum, to present separately on the face of the performance statement an aggregate amount for realized and unrealized gains or losses of financial instruments whose changes in fair value are recognized in net income. An entity that so chooses may also present current period interest income/expense accruals, dividend income/expense accruals, or credit losses (for financial assets and based on the Board s future decision on impairment) as separate line items in the performance statement but separate presentation of those items would not be required for financial instruments whose changes in fair value are recognized in net income. Financial Instruments Whose Changes in Fair Value Are Recognized in Other Comprehensive Income For financial instruments whose changes in fair value are recognized in other comprehensive income, an entity would be required to present as separate line items in the statement of financial position the amortized cost and the amount needed to adjust amortized cost to arrive at fair value. 10'2009FIOverview.doc 6

21 For financial assets, an entity also would be required to present a separate line item for cumulative credit losses (based on the Board s future decision on impairment) on the face of the statement of financial position. Therefore, for financial assets, an entity would be required to separately present the amortized cost, cumulative credit losses, remaining fair value adjustment and fair value on the face of the statement of financial position. An entity would be required, at a minimum, to present separately on the face of the performance statement current period interest income/expense accruals, credit losses (for financial assets and based on the Board s future decision on impairment), and realized gains or losses of financial instruments whose changes in fair value are recognized in other comprehensive income. An entity would not be required to present foreign currency transaction gains or losses on a financial instrument denominated in a foreign currency as a separate line item in the performance statement. Those changes in fair value would continue to be presented in other comprehensive income together with other changes in fair value of financial instruments whose changes in fair value are recognized in other comprehensive income. Financial Instruments for Which the Amortized Cost Option is Elected For an entity s own debt for which the amortized cost option is elected, the entity would be required to present separately in the performance statement both the current period interest accruals and realized gains or losses. 10'2009FIOverview.doc 7

22 COMPARISON OF FASB AND IASB PROPOSED MODELS FOR FINANCIAL INSTRUMENTS SEPTEMBER 2009 The following table provides a side-by-side comparison of the FASB and IASB proposed models for financial instruments. For a complete description of the FASB proposed model, see the Summary of Decisions Reached to Date section above. For a complete description of the IASB proposed model, refer to the IASB Exposure Draft above. Measurement Attributes Classification categories Default category FV-OCI Classification Criteria Fair value Amortized cost FASB Tentative Decisions Fair value through net income (FV-NI) Fair value through other comprehensive income (FV-OCI) Amortized cost (limited option) All financial instruments measured at fair value with changes in fair value recognized in net income Certain changes in fair value may be recognized in other comprehensive income but not required Debt instruments with principal amounts if the entity s business strategy is to hold the debt instruments for collection or payment(s) of contractual cash flows rather than to sell or settle the financial instruments with a third party Fair value Amortized cost IASB Exposure Draft Fair value through net income (FV-NI) Amortized cost Fair value through other comprehensive income (FV-OCI) (limited option) N/A Irrevocable election at initial recognition for equity instruments that are not held for trading

23 Amortized Cost Classification Criteria Fair Value Option Hybrid Financial Instruments Impairment FASB Tentative Decisions Option for certain types of own debt Must meet the FV-OCI classification criteria and measuring the debt at fair value results in a measurement attribute mismatch To be determined Hybrids containing embedded derivatives that do not meet the clearly-and-closely related criterion and require separate accounting under Topic 815 classified as FV-NI Hybrids containing embedded derivatives that meet the clearly-and-closely-related criterion and FV-OCI criterion under Topic 815 may recognize certain changes in fair value in other comprehensive income Impairment model to be determined For financial instruments classified in the FV- OCI category, current period credit impairments recognized as a separate line item in net income (based on the FASB s future decision on impairment) For financial instruments classified in the FV- OCI category, cumulative credit losses (based on the FASB s future decision on impairment) presented on balance sheet IASB Exposure Draft A financial instrument must be carried at amortized cost 1 if 1. It has basic loan features; and 2. It is managed on a contractual yield basis Irrevocable election at initial recognition if measuring at fair value eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) Hybrids with financial hosts would be classified in their entirety based on the overall classification approach for all financial instruments Existing requirements in IAS 39 would continue to apply to hybrids with nonfinancial hosts. The proposals in the exposure draft on classification and measurement would result in an incurred loss model (required by IAS 39) applying to all financial assets measured at amortized cost (and only to those assets). The IASB intends to publish an exposure draft on impairment methodology in Q4 of Unless the fair value option is applied 2

24 Realized gains and losses from sales or settlements Interest and dividend accruals FASB Tentative Decisions Recognized in net income for all financial instruments Recognized in net income for all financial instruments IASB Exposure Draft Recognized in net income for all financial instruments except FV-OCI classified instruments for which gains and losses are recognized in OCI with no recycling Recognized in net income for all financial instruments except FV-OCI classified instruments for which dividends are recognized in OCI with no recycling. Tainting No tainting No tainting Reclassifications Not permitted Not permitted Statement of Comprehensive Income One comprehensive income statement with a subtotals for net income and other comprehensive income One comprehensive income statement optional 3

25 Accounting for Financial Instruments Project Plan As of September 16, 2009 Goals: 1. Issue one comprehensive Exposure Draft by late 2009/early 2010 including all of the following: a. Recognition guidance b. Classification guidance c. Measurement guidance d. Impairment guidance e. Hedge accounting guidance. 2. Issue final Accounting Standards Update by late 3 rd quarter/early 4 th quarter Ongoing efforts: 1. Comparison of FASB and IASB proposed models 2. Website updates 3. Outreach a. Resource group b. Banking and other financial institution regulators c. Financial institutions/insurance d. Non-financial institutions e. Specific issue user outreach (e.g. deposits, loans, etc.) f. Broad user outreach g. SEC staff 4. Coordination of crosscutting issues with other projects 5. Participation in IASB/FASB roundtables 6. Discussions with IASB staff and Board Key issues for discussion: Key Issues 1. Financial statement presentation a. Disaggregation between net income and OCI (recycling, impairment, net interest margin, dividends) b. Disaggregation within net income (trading assets & liabilities) c. Presentation of amortized cost impairment in OCI model (credit) d. Trading assets (show cost on balance sheet?) e. FX component of financial instruments f. Cash flow statement implications Planned Timeframe for Board Meeting Completed Completed Completed Completed Completed October/November 2009

26 Key Issues 2. Deposits a. Measurement attribute (fair value or cost) b. How to determine fair value of demand deposits, if applicable 3. Scope and scope exceptions a. Specific financial instrument types b. Anti abuse provisions c. Interaction with APB 18 for equity method investments Planned Timeframe for Board Meeting September 2009 September 2009 Completed Completed September/October Amortized cost option for certain financial liabilities October Embedded derivatives analysis a. Operationality of decision to eliminate bifurcation and apply clearly and closely related criteria to embedded derivative to determine instrument s classification b. Application to specific financial instruments 6. Impairment model for debt instruments that recognize certain fair value changes in other comprehensive income a. Incurred loss vs. Expected loss vs. Fair Value Based models b. Definition of expected loss impairment model i. Objective and implementation guidance ii. Best estimate vs. probability weighted c. Refinements to current incurred loss model, if selected by the Board as the impairment model d. Operationality October 2009 October Analysis of need for fair value option October Application of proposed model to specific financial instrument types including instruments that are currently off-balance sheet that would now be within the scope of this project 9. Initial measurement a. Day 1 measurement b. Transaction costs c. Recognition principle October 2009 October Disclosures a. Measurement November

27 Key Issues Planned Timeframe for Board Meeting b. Impairment November Deferred tax assets for financial instruments classified in the FV-OCI category 12. Hedging a. Fair Value Hedges b. Bifurcation by risk i. Elimination? ii. Split between earnings/oci? iii. Cash flow hedges c. Hedge effectiveness criteria i. Reasonably or highly effective at inception? ii. Prospective and/or retrospective assessment d. Additional hedging issues November 2009 November Miscellaneous convergence issues December Applicability to certain entities a. Public vs. private b. Specialized industries c. Entity size December Effective Date and Transition November/December Outreach efforts a. Sell/buy side analysts input on decision usefulness and whether the specific guidance is an improvement to financial reporting b. Financial/non-financial institutions input on operationality and cost/benefit c. Auditors input on auditability d. Valuation specialists input on modeling, valuation techniques, and availability of information e. Banking and other financial institution regulators input on loan loss models and deposit valuations Ongoing 17. Additional follow up issues December Develop amendments to Accounting Standards Codification a. Current source literature review b. XBRL implications November/December

28 Key Issues 19. Exposure Draft a. Drafting b. Issuance of Exposure Draft with Codification Update Planned Timeframe for Board Meeting Ongoing December 2009/January Field testing/visits March/April Comment period ends April Begin redeliberations May/June Roundtables June Issue final standard Late 3 rd quarter/early 4 th quarter